Traditional management strategies — hunkering down behind a few defensible competitive barriers, or avoiding the regions of frequent storms — are blown away by this hurricane. Major companies fail with increasing frequency, eliminating workers’ jobs and often their retirement savings. Of the 1,000 companies with the highest stock market value in 1992, 380 fell from the list a decade later because of bankruptcy, acquisition, or declining market value. In the 1,000 largest companies in North America, the frequency of CEO turnover increased from 10 percent per year in 1995 to 16 percent per year in 2000 and 2001. (See “Why CEOs Fall: The Causes and Consequences of Turnover at the Top,” by Chuck Lucier, Eric Spiegel, and Rob Schuyt, s+b, Third Quarter 2002.) The increase in CEO turnover was even more rapid in Europe and Australia. Such departures are often preceded by significant and painful losses for investors, the firing of senior executives, and employee layoffs. People are frequently left without the support of mentors because many experienced personnel lose their jobs.
Does this turmoil mean that the upward pressure on performance has gone too far? We don’t think so. Fifteen years ago, complacent CEOs could be satisfied with delivering the market’s expectations, confident that a friendly board of directors would allow them to remain in office. For example, in 1987 the CEO of a then leading (now bankrupt) steel company told us that he wouldn’t launch an aggressive counterattack on the Nucor Corporation because it was too risky. “I play golf every weekend with the three former CEOs of my company, and I couldn’t look them in the eye if we tried something like that and it failed,” he said.
Today, because of the power of the investor, complacent CEOs presiding over the steady decline of public corporations are an endangered species. Between better-performing companies taking over weaker firms and boards of directors exercising their fiduciary responsibility to investors, CEOs unable to improve their company’s performance have no place to hide. That a few CEOs cheat because they can’t meet the market’s exacting demands shouldn’t surprise us any more than the fact that some students cheat on tough exams. Cheating by a few companies shouldn’t blind us to the extraordinary efforts and success of the people at the vast majority of companies who are creating superior returns for their shareholders.
So how are these companies avoiding the turbulence and achieving better and better performance? They are placing themselves in the eye of the storm, both sheltered from and managing the creative destruction in their industries. In the computer industry, Hewlett-Packard Company and Gateway Inc. are buffeted by the tumultuous conditions created by the Dell Computer Corporation. The post–September 11, 2001, downturn in the airline industry, which has already pushed United Airlines Inc. into Chapter 11, threatens American Airlines Inc. far more than Southwest Airlines Company.
The Storm Is Here to Stay
Defending the limited role the Federal Reserve Board played during the irrational exuberance of the dot boom–dot bomb bubble, Chairman Alan Greenspan observed that the United States made the choice “between economic growth with associated potential instability and a more civil … way of life with a lower standard of living and chose the former.” In short, collectively, we understand we’re better off with higher returns despite the greater risks because we benefit from increasing productivity, more rapid growth, faster creation of new jobs, and a better standard of living.