Beware the Superstar Chief Executive

My Financial Times column 09/13/10

The fascination of the Mark Hurd drama is that it contains all kinds of mysteries. A month after he was pushed out of Hewlett-Packard, we still don’t really know why. Was it because he fudged his expenses? Was it because there were questions about an inappropriate relationship with a female contractor? Or was the company looking for a reason to dump a chief executive whose advocates on Wall Street were far outnumbered by HP’s demoralised employees? After five years of violent cost-cutting, had he outlived his purpose?

And then there is Larry Ellison’s decision to hire him as co-president of Oracle. Is it because he genuinely believes in his friend’s executive gifts and is lining him up as a successor? Or is it simply another example of Ellisonian trouble-making? Is he using the whole affair to stick one in the eye of a rival? It certainly seems as if he has HP dancing to his tune, filing a lawsuit to block the hiring of its former chief and looking Big Brother-ish in the process.

What we do know, however, is that in hiring Mr Hurd, Mr Ellison has hired a very particular form of CEO, who, aside from his intimate knowledge of a rival, may be entirely the wrong man for Oracle.

It comes down to the nature of Mr Hurd’s skills and record as a manager. At the two organisations where he has served as CEO, HP and NCR, he has been a cost-cutter. He arrived at flabby organisations that he was able to slash down to size. It is not work for the squeamish, and Mr Hurd proved himself a ruthless sacker, salary cutter and benefit trimmer. Margins improved, shares rose and Wall Street cheered.

At Oracle, he arrives at a company already in rude financial health. His main challenge, assuming HP’s lawsuit fails, is said to be completing the integration of Sun Microsystems into Oracle and building the overall company’s strength in hardware so it can fight head-on with HP. It is a growth and expansion challenge that is very different from any Mr Hurd has faced in the past.

Boris Groysberg, a professor at Harvard Business School, has written extensively on the distinction between cost-cutting and growth-minded CEOs, and the risk of hiring a “superstar” at one to do the other. In an article in 2006, co-written with Nitin Nohria and Andrew Maclean, he wrote: “The strategic skills required to control costs in the face of fierce price competition are not the same as those required to improve the top line in a rapidly growing business or balance investment against cash flow to survive in a highly cyclical business.”

They studied the CVs of managers in different divisions of General Electric and categorised them as “cost controllers”, “growers” or “cycle managers” on the basis of their experience. They then followed 20 of them into new jobs. They found that when the managers were hired to do what they had done before, cost controller job to cost controller job, for example, the companies they ran saw annualised abnormal returns of 14.1 per cent. When they were hired to do something else, say grower to cost-controller, the returns were negative 39.8 per cent.

A prime example was Paolo Fresco, a great success leading GE’s growth in Europe, who proved disastrous at Fiat when he took over as chairman in 1998. As a grower, at Fiat he focused on investments and acquisitions while the company’s liquidity problems piled up, leading to his eventual resignation in 2003.

By contrast, Carlos Ghosn, a non-GE manager, moved successfully from Michelin to Nissan because both jobs required cutting costs and streamlining the organisation. Hence, his nickname at Renault, Nissan’s partner – “le cost killer”.

The great rarity is the CEO who can cut costs and expand the business. Steve Jobs achieved it at Apple after he returned in 1997, stripping down a bloated company on the point of bankruptcy and then patiently rebuilding its entire product line and organisation.

Mr Groysberg’s other key insight emerged from studying star Wall Street analysts. In his book Chasing Stars: The Myth of Talent and the Portability of Performance, he wrote that star analysts at one business struggled when they were hired away to work at another. What recruiters and the stars themselves underestimate is the importance of the support networks that make them successful in the first place, the colleagues and contacts who enable their work. Unless they can be transplanted too, the superstar will often fade in a new setting.

If, once the hullabaloo of his firing fades, Mr Hurd can succeed in the very different setting at Oracle, he will have joined an extremely small executive super-group.

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