business

Ce Os With The Outside Edge

When Louis V. Gerstner Jr. abruptly quit RJR Nabisco Inc. in March for IBM, he left the RJR Nabisco directors in a tough spot. For a time, they tried co-CEOs: Lawrence R. Ricciardi oversaw administrative matters, while Karl M. von der Heyden supervised finance and operations. But the board wanted a powerhouse who could stabilize RJR's troubled tobacco business and beef up Nabisco's food brands. Not seeing any home-grown talent to fit the bill, directors started looking outside. In May, they settled on former ConAgra Inc. Chairman Charles M. Harper.

From the start, Harper, 66, didn't let his lack of experience at RJR slow him down. He has been hammering out a new strategy for the food-and-tobacco giant. Instead of the debt- and cost-reduction emphasis of the Gerstner years, Harper is concentrating on brand-building and, he hopes, earnings growth. "We are shifting the culture of this company," says Harper. The fact that he has no vested interest in the old culture, Harper believes, may make it easier for him to initiate change.

Call 1993 the Year of the Outsider. Companies ranging from giants such as IBM, Westinghouse, RJR, and Eli Lilly to the more obscure Star Banc, Alza, and Scientific-Atlanta have reached outside their organizations and even their industries to make the big hire. Fully 35% of the 51 new CEOs hired in the first half of 1993 were outsiders--the highest level since Michigan State University professor emeritus Eugene E. Jennings began tracking such things in 1949.

FRESH EYE? What's the allure? For starters, many directors believe outsiders breathe fresh air into organizations. Without any allegiances, the thinking goes, outsiders can shake a company out of its rut. "I don't have some hidden agenda. I don't bring any emotional baggage," says Randall L. Tobias, who was hired away from American Telephone & Telegraph Co. in June to become CEO of Eli Lilly & Co.

Hiring an outsider is also a good way to calm restive shareholders. "The outsider symbolically represents the decision by the board [for] strategic change," says Stewart D. Friedman, professor of management at the Wharton School. And there's usually a quick payoff: A recent study by Mitchell & Co. of several large companies shows that the stock price jumps an average of 68% in the first 18 months of an outside CEO's tenure. For example, three months after restless media mogul Barry Diller took over the reins at QVC Network in January, its stock price was up 21%.

Of course, Wall Street often cheers outsiders because it figures they'll coldly slash costs and boost profits. And that was certainly the agenda of many newcomers in recent years. But these days, boards seem to be looking for more, and many of 1993's newcomers are hardly hatchet men. Harper, for one, is more of an empire-builder than a cost-cutter. He built up ConAgra from a commodity-food processor to a branded-goods giant. He plans to unveil his stra- tegic plan to revitalize RJR in October.

At QVC, Diller is already in the midst of an aggressive expansion plan. In September, he bid $9.9 billion for Paramount Communications Inc., a much larger media conglomerate. And at General Instrument Corp., former MCI Communi-

cations President Daniel Akerson is leading a push into multimedia ventures.

Some of the ax-wielding outsiders haven't done too shabbily, though. Consider Lawrence A. Bossidy at AlliedSignal Inc. and Stanley C. Gault at Goodyear Tire & Rubber Co., who joined their respective companies in 1991. Both immediately took aim at the bloated costs and bad habits that were hobbling their industrial companies.

STILL SLASHING. Bossidy laid out a broad restructuring that included extensive layoffs, plant closings, and asset sales soon after starting work in July 1991. The payoff: Profits were up 22% to $319 million in this year's first half, though sales dropped 2%, to just under $6 billion. Even better for shareholders, AlliedSignal's stock price has more than doubled, to 711 4, on Bossidy's watch.

At Goodyear, Gault quickly lightened the company's heavy debt load, picked up the pace of new-product introductions, and added new distribution while continuing to ratchet down costs with job cuts. In the first half of this year, Goodyear continued to make gains, increasing its income before accounting charges by 30%, to $225 million, on flat sales because of divestitures. The stock price under Gault is up 167%, to 443 8.

Among this year's crop of outsiders, Lou Gerstner at IBM is also running a tighter ship. Three months into his new job, Gerstner announced 35,000 new job cuts and widespread office closings. And while he is getting up to speed on IBM's technology, customers, and markets, IBM will lose an estimated $8.3 billion this year, mostly in restructuring charges, according to Salomon Brothers analyst John B. Jones Jr. Still, Jones sees IBM climbing into the black next year, with an estimated profit of $1.4 billion.

Though he hasn't provided any details, Wall Street expects new CEO Michael H. Jordan to embark on a similar strategy at Westinghouse Electric Co. Jordan, who has hinted at possible cuts, prides himself on the "ruthless logic" he brings to his new job. A veteran of McKinsey, PepsiCo, and the Clayton Dubilier & Rice leveraged buyout firm, Jordan regards himself as a turnaround artist. His specialty: "how to cut through emotions and people's opinions and get down to the facts."

Like plenty of previous management trends, of course, outsider mania is starting to raise the sort of dust associated with thundering herds. Directors, knowing they'll win applause from Wall Street, "impulsively turn to the outside, disparaging inside candidates too quickly," says Emory University management professor Jeffrey A. Sonnenfeld. In so doing, they may drive away seasoned top managers--the ones with critical knowledge of the company, its products, and markets. And those alienated executives are themselves moving on to other companies as outsiders, joining the great corporate diaspora of itinerant managers.

MORALE BUSTER. Whether they're empire-builders or cost-busters, those roving executives aren't necessarily the cure-all for corporate ills. Sometimes, there is no quick fix. Though Westinghouse has shed its troubled financial arm, which long bore the blame for the company's poor performance, it is stuck with a tired portfolio of mature businesses, such as nuclear power plant construction. Rather than making promises of quick results, a somber Jordan informed shareholders in September that Westinghouse's third-quarter earnings would be down 50% from dismal year-earlier results. Worse, he acknowledged that a turnaround will require a good deal more corporate pain.

The introduction of an outsider may also create new challenges for companies. Naturally, an outside CEO has to build the trust of his lieutenants and other employees. Jerry A. Grundhofer, who left his job as BankAmerica vice- chairman and was named CEO of Cincinnati's Star Banc Corp. in May, notes that "when I talk to someone, they don't know me. They're evaluating me: Am I a demagogue, or am I fair?" Grundhofer, who was chosen over two insiders, is trying to inject a more aggressive sales culture into the already solid company. But he doesn't care for the outsider label. "I hate that word. It's like Clint Eastwood coming in with guns blazing. [Employees] start off being intimidated. I don't like that."

FREE AGENTS? Like it or not, key executives who were passed over to make room for the outside CEO often leave, sapping the company of crucial talent. For example, when Campbell Soup Co. hired outsider David W. Johnson as CEO in 1990, it passed over both its CFO and its executive vice-president, who had been co-CEOs of the company before Johnson arrived. CFO Edwin L. Harper quit 19 months afterward; Herbert M. Baum, Campbell's ace marketer who shares some of the credit for engineering Campbell's turnaround, left in June to become an outside CEO himself. He now heads Quaker State Corp.

And outsiders feeling their way around in new markets can often make disastrous moves. When Martin F.C. Emmett joined Tambrands Inc. as CEO in 1989, the former boss of International Nabisco Brands Inc. promised shareholders annual earnings growth of more than 15%. He delivered--for a time--by drastically raising the price of Tampax, the company's only remaining product, while slashing marketing spending. But it was a fatal misstep. Tambrands' market share sank from 60% to 51%. Emmett was ousted by the board on June 1. The company is now CEO-less while the board searches for a replacement.

They will probably have little trouble finding one. Thanks to the current rage for outsiders, top executives are more and more willing to jump from company to company. "This is not unlike star players switching teams," says Jeffrey Heilpern of Delta Consulting Group Inc., which counsels companies with new leaders. "We're starting to have the equivalent of a free-agency system. People are realizing that their capabilities are portable."

Unfortunately, the new fickleness of CEOs may mean some second-tier companies will be repeatedly jilted. Take Stride Rite Corp., the Cambridge (Mass.) shoe company that has seen a string of CEOs brought in to succeed longtime Chairman Arnold S. Hiatt. Ronald J. Jackson, now head of Fisher-Price Inc., was hired twice to run the company but each time left within six months to take better jobs. The most recent CEO, Ervin R. Shames, left after a year to run Borden Inc. Meanwhile, Stride Rite is suffering: Revenues and earnings have been slipping--although not as fast as the stock price, which is down 37% so far this year, to 14.

How long will the outsider craze last? As the economy picks up and sales eventually rise, management experts say directors won't feel as much pressure to overhaul top management. But if this year's crop of empire-builders fare as well as the ax-wielders of a couple of years ago, boards aren't likely to shake the outsider bug. Indeed, top executives may have to get used to keeping one eye on the bottom line and the other on the open road.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE