Bill George, former chief executive of Medtronic, says today's boards are too willing to fire their CEOs and should resist short-term demands for better performance. He serves on the boards of Exxon Mobil, Novartis and Goldman Sachs and teaches at Harvard Business School. Here are highlights of a conversation:
Is there a risk that boards are pulling the trigger on CEOs too fast?
I think there's definitely a risk. In the old days, I thought that CEOs stayed too long. When they got up around a 15- to 20- year period in terms of tenure, they started to think they were the institution and were spend legacies than they were building the company for the next decade. In some cases, they were just hanging on until they reached 65. But today, there is a tendency for CEO tenure to be too short. In any major corporation, it takes five to seven years to make major changes.
Why do you think boards are so willing or eager to cut short a CEO's tenure?
In many cases, there is perhaps an overreaction to pressures from the stock market. The stock market has become very short term in its orientation. It's getting more so, with the bulk of the hot money being held by hedge funds, who are demanding short-term results. A lot of boards are getting very nervous if their CEO is not achieving those results.
Which particular CEO departures have been premature?
One that was clearly premature, but it was not for performance, was Steve Reinemund at Pepsi. He'd only been there five years. He's a terrific individual, and I'm very sorry to see him go out. He clearly made that call, I'm sure. It was clearly not for performance. In other cases, we have short-term moves because individuals have gotten involved in embarrassing situations where they were shooting themselves in the foot, like the situation at Bristol-Myers Squibb.
So some CEOs bring it on themselves?
That's very true. Clearly, that was the situation at Hewlett- Packard. There are cases where a board has to act. In those cases, I commend boards for acting.
What can boards do short of pulling the trigger on the CEO?
Boards have to do a far better job on selection of CEOs, and that means a much better job on the succession process. I feel that many boards are not doing a good job of that. There's been a clear shift, which I certainly salute, away from searching for the savior from outside to focusing on inside candidates and inside succession. Boards need to spend a lot more time on that, as a board like General Electric already does, in order to ensure the proper selection.
But short-term market pressures seem to be intensifying, and many directors seem worried about having their personal wealth on the line.
I don't think it's a question of their financial liability. I think it's more a question of responding to public pressures. But in my opinion, that's not what they're elected to do. They are elected to serve the corporation and all its shareholders for the long term. They need to be clear that the corporation and all its shareholders are best served by long-term plans, well-executed. Those cannot be accomplished in the short term. There is no such thing as changing the culture of a significant corporation in six to 12 months. It takes much longer than that.
What is the key to helping boards resist short-term pressures?
I think having a strong board culture and strong board chemistry are part of the answer. Board members should be clear about the long-term objectives and track their progress against those objectives. They should not look to analysts and shortterm investors for their inputs about how things are going. Back in my Medtronic days, if I had followed what the analysts wanted me to do, we would have split off the neurological business and the cardiovascular business, and some investment bank would have made some money, but we would never have built Medtronic.
I don't hear many people talking about "board culture." What do you mean by that?
Not enough people talk about board culture or board chemistry. That has to be built over time. Each board has its own culture. The question is, is it positive or negative? Do board members spend any time outside the board meeting getting to know each other? Do you build a clear understanding with the CEO of the expectations? Do you get to know the management enough that you really know the corporation?
I'm a strong advocate for having offsite board meetings to talk about company strategy. This builds a much stronger culture. All three of the boards I'm on have been observing this practice for several years. It does take a lot of time.
You've been working on a new book about leadership. What are your latest findings on how boards groom talent?
Any board that fails to groom internal succession candidates is not doing its job. There are of course times, as there were at IBM, when they brought in [outsider] Lou Gerstner to save the company. But if you look at Xerox, they went outside, and the person was a huge failure. Ann Mulcahy, the internal candidate who had been passed over, saved the company. We tend to look at a résumé of an outside candidate as being superior to that of the inside candidate, where we know all their warts. But that's a huge mistake.
At Procter & Gamble, directors go out on field trips and meet high-potential candidates. Is that one of the keys?
That's one of the keys. You should get to know the up-andcoming senior executives in settings that are little more informal than the boardroom. You don't see the full person in the boardroom making a presentation for half an hour.
You seem to be suggesting that many directors want to go to six or eight meetings a year, and that's all they want to do. Is that part of the problem?
It is. And too much of the time in those six to eight meetings is spent on Sarbanes- Oxley and asking, "Are we hewing to the latest accounting rules or regulations?" rather than asking, "Are we building the organization for the long term?" I think boards are changing. I think they're becoming much more conscientious about their jobs. In the post-Enron era, the problems have got their attention. And even having a couple of boards being sued has everyone's attention. That's not necessarily good—it's much harder to recruit directors today. Boards are earnestly trying to do a better job, but there is this danger of overreacting to Wall Street.
What do think went wrong at Hewlett-Packard?
HP has been my role model of a company for 30 to 40 years. I have enormous respect for Dave Packard and Bill Hewlett. I think they were just giants of leaders. In fact, maybe that's part of the problem. Maybe it started way back then. They were so strong and so capable that they never built a board like a General Electric did or an Exxon did. Everyone relied on them. Plus, they've had a tendency for many years of taking executives who had retired from the company and keeping them on the board. I think that is a bad practice.
That's part of the problem. Good governance produces good long-term results. Boards that don't put it in place are putting themselves at risk of being too dependent on one, two or three people. The tragedy of HP was that they had so many outstanding executives, yet they felt they had to go outside the company to hire Carly Fiorina, and then they brought in Mark Hurd. There was no one under Fiorina ready to step up. Hurd has done an outstanding job. It's amazing at how quickly he has picked up the HP culture and is carrying it forward. He's toughminded. He's taking out costs that are excessive and getting it back to being a more competitive company, like it was 10 years ago.
Was the board so flawed that a meltdown was inevitable?
A [company] like HP should never be in a situation where it is investigating its own board members, even if it does do it legally. You just don't do that. That's a sign of a board failure.
What would your advice be to him now, as CEO and chairman of the board?
Hurd needs to bring in a lot of new blood. One or two new directors would not change the culture of the board. He needs to put together a 12-person board where he's got five or six new people who are really outstanding and totally independent and who've had no prior connection with Hewlett-Packard but are well thought of in the business community. They should have a reputation for understanding how you build a company for the long term. They can be technical, probably not from the financial community. It's a major rebuilding job.
