I was thinking this week that a CEO of a company such as Lucent Technologies (NYSE: LU), Nortel Networks (NYSE: NT), or Cisco Systems (Nasdaq: CSCO) should have a technical background in order to understand what is going on. However, John Chambers of Cisco is an exception. He is not an engineer and his background is in marketing. He has done an excellent job, which begs the question, "What makes a good CEO?" I came up with some criteria. Feel free to post in the Drip Companies board what you think.
- The CEO should understand the business. There is a school of thought that a "manager is a manager" and once you've managed one business, you can manage any business. I disagree. Let's say you were an executive with a company like Scott Paper and went over to Sunbeam. How would you understand the appliance business enough to make the right decisions? You might cut too deeply, make bad acquisitions, and try things that have already been tried. As I said, you need to understand the business. In the case of John Chambers with Cisco, he was a marketing type, but he had extensive background with IBM and Wang before he came over, and really understood the business.
- The CEO should not be a hatchet man or woman. A strong trend in the 1990s was to downsize companies, which does make sense, sometimes. Aging plants need to be shut down, divisions spun off or closed, extra staff cut. It's painful but often necessary. However, in many cases this downsizing occurred with no thought as to what it would do to the operation of the company. It was only to make the stock price jump by cutting costs. This kind of thinking introduces a culture of fear into the company that brings us to the next important criterion.
- The CEO should not intimidate employees. In researching this column, I found some interesting articles on "Chainsaw Al" Dunlap, former CEO of Sunbeam (NYSE: SOC). This one from Slate caught my attention. It seems as if this guy's staff was afraid to tell him the truth. Instead, it looks to me like they stuffed inventory into the channels, and did some other neat little tricks to provide the boss with numbers he wanted. They had motivation to do so. Al liked to fire people, and had already cut quite a few at Sunbeam.
- The CEO needs to have a vision. Perhaps there was a time when a CEO could operate a company like it had been run for the past 20 years, but today things change too rapidly. Any individual that refuses to change things because "we've done it this way for 20 years" probably needs to be shown the door. Some of the more successful CEOs show remarkable vision and foresight, such as Intel's (Nasdaq: INTC) Andy Grove. He made the decision to concentrate on the microprocessor and drop the memory chip segment, and look where Intel went.
One of the best books I've ever read is Only the Paranoid Survive, in which Andy Grove writes about the changes Intel went through. Mr. Grove talks about "inflection points," where things change. A CEO needs to have the vision to distinguish when an inflection point has been reached, and have the foresight to take the right steps to profit from it.
Bad management has run many good companies into the ground. A case in point is Commodore Computer. Commodore was once the leader in home computers, but is no longer in existence (it went bankrupt). The four criteria above are somewhat subjective, but it's my opinion that in our long time frame as Drip investors, we need to find companies that have a management team in place that will take us where we need to go. The place to start is at the CEO.
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