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Lou Gerstner Takes the Gloves Off

Q: In part, you credit your success to the acquisitions you didn't make. Why?

A: If life was so easy that you could just go buy success, there would be a lot more successful companies in the world. Successful enterprises are built from the ground up. You can't assemble them with a bunch of acquisitions. [That brings] huge integration problems.

There were few PC companies that we weren't offered at some point. Why would we want to double up in the PC business, ever? Telecommunications companies all over the world proposed joint ventures, affiliations. There were people who suggested we get in the content business. We turned them all down. We made lots of acquisitions, but they [fit] the strategy we already had.

Q: You describe executives in this industry as "remarkably detached from their customers." What's your beef?

A: The process of integrating this technology and achieving the benefit is unbelievably painful for companies. The industry has been all about faster, faster, more function, more function. Most devastating from a customer point of view are the lack of standards and the lack of interchangeability. It is truly a mess. You wouldn't deliver steel to General Motors in a different form than every other steel company.

We're going to have to deliver products to customers in this industry consistent with an open-standards-based model of computing. Companies are going to have to learn to compete on that.

Q: Why do you believe Wall Street is too preoccupied with revenue growth as the measure of corporate success?

A: The value that some analysts put on revenue vs. what they put on profit is out of whack. If you can grow real cash earnings, that's 80% of what you ought to do, and the revenue component is 20%. People overvalued revenue during the time when a lot of companies were generating revenue in unsustainable ways.

Sure, I'd love to have more revenue growth. But I took the position that we were building a new IBM, and it was going to take 5 to 10 years. It was all about a new strategy. It was all about a new culture. I was not going to get distracted because somebody said: "Gee, we'd like to see your revenue a little higher this year."

Q: Critics have questioned the quality of IBM's earnings, suggesting that IBM's turnaround is due to slick financial ploys. Why didn't you use the book to respond?

A: Those discussions were not relevant to a book that deals with a 10-year history. We've responded in the last year with a lot more disclosure. We've always told people that we made money on intellectual property, and we always gave them the number. But they wanted to see it put in the income statement, so we moved it to the income statement and broke it out.

We've always told people in the footnotes what the pension assumptions were, but they wanted it more frequently and more visibly. So we now give them more frequent and more visible discussion. For the most part, the issues for IBM were disclosure. They were never accounting. A couple of the issues that people have thrown into the bucket of financial engineering I find strange.

Q: Such as?

A: First, taxes. When I arrived, IBM was paying a huge tax bill every year. Over an eight-year period, we brought the tax rate down. That's as much a responsibility of management as bringing down the cost of information technology, real estate, and anything else. It's an expense of running the business. But for some reason, people think that's financial engineering.

Secondly, share buyback. There is a huge difference between what we hear from our owners and from people in the analyst and media sector. Every single time I have met with owners, they have said to me: "Please don't take the cash and go make stupid acquisitions."

What we did with cash is, we funded our growth. We never cut back funding research. Next, we gave our employees huge increases in compensation. We pulled down company debt, too.

After we went through that process, we had some cash left. We gave it back to the shareholders in the most efficient way we could, which is not through dividends. It's through share buyback. We did it for 10 years. We always bought, right through thick and thin. If you were talking about financial engineering, then you would buy at certain times and not buy at other times.

Q: What do you think about efforts to police corporate behavior?

A: I'm leery of legislative solutions to what is morality. Look at the Sarbanes-Oxley Bill. It sweeps up every company in the world that issues debt or lists a stock on the New York Stock Exchange. It says, you have to have independent audit committees.

You have companies in Europe and Japan that are not organized this way. The concept of independence in some cases flies in the face of the law -- for a German company, for example. It has become a trade issue with the eu. Why would the U.S. want to drive foreign companies out of our capital markets? Our capital markets are a strategic advantage for us from a geopolitical and trade point of view.

Q: How do you protect investors and ensure that corporations follow the rules?

A: The real mechanism for corporate governance is the active involvement of the owners. We have very large owners in the form of institutional shareholders who could exert substantial influence on what goes on in corporations. But the markets are so liquid here that when they see problems, they sell. If they had to stay in over a period of time because the cost of getting out was prohibitive, then maybe you would see a little more oversight. One way is to make it far more advantageous for people to be long-term rather than short-term shareholders.

Q: Your $127 million compensation package in 2001, along with that of a few other highly paid CEOs, has been criticized as outrageously generous. Do we need a change in CEO compensation?

A: Compensation needs to be predominately performance-driven. If CEO compensation was performance-driven, which I believe it was in IBM's case, nobody would ever argue. If the shareholders didn't make billions and billions of dollars, I wouldn't make millions of dollars. My salary was the same for 10 years. It was all performance-based.

What is the most outrageous is the compensation that has gone to people who have been fired, forced out, whose companies didn't perform well. The American people have no problem paying great athletes and great actors lots of money if they're the best and if they perform well. I hope we're going to see a much tougher set of standards by directors that get compensation tied specifically to corporate performance.

Q: What's next for you?

A: I'm going to focus a lot on public education reform. I'm in the process of trying to set up a commission on the teaching crisis in America. I have a number of people who have agreed to serve on this commission. I'm trying to raise some money.

Secondly, I'm going to keep my hand in business with a private equity or small venture company. Then I want to go back to school.

Q: School?

A: I've been accepted at Cambridge University. I want to study Chinese history and archaeology. I want to become a student. I want to read Chinese history and go on a dig.

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