How the mighty have fallen! The cult of the American superstar chief executive officer has taken plenty of knocks in recent years, but never before in U.S. history have so many big names in the corporate world been humbled so utterly at one time. The resignation last month of Maurice (Hank) Greenberg, the chief executive who personified global insurance giant American International Group for decades, represents by far the biggest scalp claimed by New York State’s crusading attorney general, Eliot Spitzer, in his crackdown on abuses in the U.S. insurance industry. Within days of Greenberg’s resignation, former WorldCom CEO Bernard Ebbers was convicted of fraud for his role in the collapse of the telecommunications company. Indeed, no fewer than a half dozen ex-CEOs of major American corporations have either been convicted of wrongdoing lately or await trial.
European CEOs may shake their heads at this all-American rogues’ gallery. But they too face much tighter regulatory scrutiny following the excesses of the bull market: That is simply part of any international chief executive’s job description these days. Yet if bosses take their eyes off performance for too long to concentrate on compliance, they risk being punished not by regulators but by shareholders -- who are becoming increasingly assertive in Europe.
Werner Seifert can attest to that. The Deutsche Börse chief executive spent several years strengthening his Frankfurt-based exchange with the express purpose of making a renewed takeover offer for the London Stock Exchange. As soon as he bid, however, he faced a revolt from his own shareholders, led by U.S.- and U.K.-based hedge funds and institutional investors that had built up sizable positions in the company. Not only did these investors object to the economics of the proposed deal, they rebelled against a German corporate tradition that allows managements to strike deals without consulting shareholders. M&A in Germany, and in the rest of continental Europe, may never be the same.
European chief executives may not have to wear court-ordered ankle bracelets like American style guru and former CEO Martha Stewart does, but they must contend with real constraints. Growth in the 25-nation European Union is forecast to remain sluggish again this year, at just under 2 percent, according to the European Commission, far short of the 3.5 percent-plus growth rate that most economists forecast for the U.S. And generating growth overseas is getting harder because of the continued strength of the euro versus the dollar, which takes a big bite out of the foreign earnings of many European companies.
Intense regulatory oversight, demanding investors, a tough operating climate -- Europe’s CEOs face no shortage of challenges. And yet the region boasts plenty of top executives who are more than up to the task. To find out who the leaders are, Institutional Investor surveyed two groups of voters: about 700 research analysts and portfolio managers at more than 250 money management firms investing in European equities, and almost 620 sell-side analysts at more than 90 brokerages.
The winning CEOs come from a variety of companies, from blue chips like telecommunications equipment maker Telefon AB L.M. Ericsson to upstarts like Swiss biotechnology outfit Actelion. Some have spent their careers climbing the ladder in their companies, like Denis Waxman of British recruiting firm Hays and Jürgen Hambrecht of German chemicals company BASF. Others, such as Crispin Davis of publisher Reed Elsevier, were brought in to shake up companies that had fallen on hard times.
Whatever their provenance, the top CEOs excel at defining strategic visions for their companies and motivating managers and rank-and-file employees to turn them into reality.
Two years ago, Carl-Henric Svanberg took over Ericsson as the Swedish company was in the midst of a wrenching restructuring that would slash its payroll by more than 50 percent over three years. Morale was at rock bottom. So Svanberg, who ranks No. 1 in Telecommunications Equipment, set out to transform the company’s culture from one that focused on technological excellence to the exclusion of almost all else to one that also emphasizes efficiency and responsiveness to customers.
The chief executive convened his top 250 managers in workshops to discuss the strategy, then dispatched them to their business units to figure out with line employees how to implement the plan in daily operations. “If your staff is well motivated, you can move mountains,” says Svanberg. “You can’t do that with slogans. You really have to have a strategic process.”
Like Svanberg, most top CEOs stress a consistent strategy as the key to improving performance. They may be measured by their quarterly results, but they believe the key to delivering is to focus on the medium- to long-term horizon.
UBS launched a program five years ago to meld its private banking and investment banking businesses so that managers would share information and pursue synergies rather than seek to enhance their private fiefs. That job still ranks at the very top of CEO Peter Wuffli’s priorities.
“It takes time, and it takes leadership” to develop the firm’s culture, says Wuffli, top-ranked in Banks. “There are no shortcuts. We are five years in, and I feel we are probably halfway there. You need consistency. If you replace your people every six months, you will never get there.”
Investors certainly like Wuffli’s style. “It’s a great management culture,” says Gregor Greber, head of research at Lombard Odier Darier Henstch in Zurich. “What management has understood is the need to set up the best platform for people to perform well.”
Regulatory compliance is a major focus for Europe’s top CEOs. Most expect their companies to be in conformance this year with the reporting requirements of America’s corporate-scandal-inspired Sarbanes-Oxley Act, so they will not need the additional year’s grace granted by the U.S. Securities and Exchange Commission to foreign companies.
That isn’t to suggest there isn’t plenty of grumbling about the time and expense involved in complying with the U.S.'s rules-based rather than principles-based approach to corporate governance. As Ericsson’s Svanberg puts it, “A strong culture with fewer controls is better than strong controls with a weak culture.”
Still, for the most part, European CEOs are reconciled to the law. “With a reform as major as this, you can always find individual elements to complain about,” observes Reed Elsevier’s Davis, who ranks first in Media. “But overall, I think Sarbanes-Oxley is improving corporate governance and will continue to do so. Of course it is adding to the workload for us, but companies with sound reporting systems and transparency can easily handle the extra demands.”
Hays’s Waxman (No. 1 in Business & Employment Services) shares that opinion: “People moan and groan about the burden of compliance and being in the spotlight as the CEO of a listed company. I do this job because it is fun, and any decently run company, public or private, should have good disciplines in place.”
None of the chief executives who spoke with Institutional Investor is considering giving up his company’s U.S. stock exchange listing, even though European Commission officials have made easier delisting a priority in negotiations with U.S. regulators. For most of the companies, the size of their U.S. shareholder base and the importance of the U.S. market effectively rule out this option.
One exception to this reliance on the American market is Actelion. The company is the only one of Europe’s major biotech companies that doesn’t have a U.S. listing. CEO Jean-Paul Clozel (No. 1 in Biotechnology), a doctor and cardiovascular researcher who helped found the company, says Actelion has always been able to find sufficient financing at home in Switzerland. Even so, Clozel plans to have the company ready to comply with Sarbanes-Oxley by next year, and Actelion began reporting in accordance with U.S. generally accepted accounting principles last year, to keep its options open.
“Because of the U.S.'s status as a leading market, many aspects of the new U.S. requirements will eventually be adopted by Swiss and European regulators,” Clozel says. “But whether that happens or not, and whether or not we ever decide to seek capital in the U.S., it is better to adapt to complex regulations like this as early as possible. This is especially true since you have to apply rules like this going back retroactively two or three years.”
Some companies, though, find it harder to adapt to the demands for increasing transparency. In Germany the government introduced legislation last month that would require listed companies to disclose the compensation of individual board members; currently, they must disclose only board members’ collective compensation.
Justice Minister Brigitte Zypries contends that the bill would give investors important information about the inner workings of companies and help restore confidence in stocks. The German stock exchange has fallen more than any other major bourse in Europe since the collapse of the bull market, and the number of German shareholders has fallen by about one quarter. Many Germans were outraged by the huge payments made to CEO Klaus Esser and other former managers of Mannesmann after its acquisition by Vodafone Group in 2001.
BASF’s Hambrecht (No. 1 in Chemicals), however, is adamantly opposed to the new legislation. “This is not a topic that would bring progress to Germany, just envy,” he says, adding that BASF surveyed its shareholders, and only a handful requested compensation details. “We outperform the market, and investors are more interested in that,” he contends.
Shareholder-rights groups strongly support the legislation, though. “If managers don’t like the law, there are plenty of other fields to work in,” says a spokesman for Düsseldorf-based DSW, a group that represents some 28,000 small shareholders. And some companies aren’t waiting for the legislation to bolster their transparency. Utz-Hellmuth Felcht, CEO of specialty-chemicals maker Degussa, disclosed last month that he earned a salary of E593,800 ($810,181) plus E850,000 in stock options in 2004.
For all of regulators’ and investors’ preoccupations with corporate governance, CEOs first and foremost have to deliver earnings growth. European chief executives find that task all the harder because of a dreary economic climate. Germany, for example, is forecast to grow by only about 1 percent this year. “We don’t have growth in Germany,” says BASF’s Hambrecht. “One percent is nothing. You can’t achieve anything with that.”
When he took over as CEO nearly two years ago, Hambrecht set a target of outearning the company’s cost of capital, something BASF hadn’t achieved since the mid-'90s. As a result of strict cost-cutting and the elimination of unprofitable product lines, the company’s earnings before interest and taxes exceeded its cost of capital by E1.82 billion last year. Net income more than doubled, to E1.88 billion from E910 million a year earlier.
Hambrecht is remarkably self-effacing about the results, saying his predecessor, Jürgen Strube, who today serves as chairman, deserves much of the credit. “Strategy is not for today or tomorrow,” he says. “Strategy is long term. What we have today basically was implemented years ago.” Hambrecht himself is implementing an ambitious Asia strategy and recently opened a $2.9 billion plant in Nanjing, China.
To spark growth at Reed Elsevier, CEO Davis made heavy investments in Internet delivery platforms for the group’s business, scientific and legal publications. “Davis has the best growth rates in a morose publishing industry because he’s led the way on Internet spending when more quarter-to-quarter-minded business leaders have been cutting back,” says John Clark, a media analyst at London-based Brewer Dolphin Securities, which oversees £15 billion ($29 billion).
Davis aims to grow earnings per share at a double-digit pace over the next three years and increase organic sales by at least 5 percent a year. “One of the things I’m most proud of is that we have created a company that consistently grows above market averages,” he says. “We do not look at our business in terms of quarters. Our growth is fueled by long-term investment, and we have to maintain that going forward.”
Paradoxically, Hays expects to generate strong growth in continental Europe precisely because of the region’s economic difficulties and the changes they’re bringing about. “There are signs that labor markets in France and Germany are deregulating, and that will be the catalyst for our future growth,” says Waxman. Hays’s European revenues grew by 32 percent in the second half of 2004.
The weak dollar, of course, compounds the challenges facing European chief executives, but it isn’t causing most of them to alter their fundamental strategies. Reed Elsevier derives almost 50 percent of its revenues in dollars, notes CEO Davis, but the impact is largely one of translation, because a similar percentage of its costs are dollar-based. “We operate all around the world, so it has depressed our results but not affected our ability to be competitive,” he says. The company is keeping the vast bulk of its £2.5 billion debt in dollars as a partial hedge against further weakness, though, he adds.
Actelion, by contrast, is much more exposed to currency risk. Almost all of its development expenses are in Swiss francs, which have risen nearly 5 percent against the U.S. currency over the past year, while roughly half of its revenues are in dollars. Nevertheless, Clozel keeps his hedging to a minimum. “Our business is pharmaceuticals, not finance,” he explains. “We don’t want to take currency risks by locking ourselves into particular rates.”
There are no hedges against bad corporate performance. European chief executives have to remain vigilant about keeping costs down while continuing to look for growth wherever they can. “Operational excellence,” as Ericsson’s Svanberg calls it, is the only way to maintain profit margins in a global market. “It’s just an endless game,” he says. “It goes on and on.”
And don’t Europe’s best CEOs know it.
Telefon AB L.M. Ericsson
Year named CEO: 2003
Company employees: 50,534
12-month stock performance: +3.6 percent
Compensation: 22.3 million Swedish kronor ($3.4 million), including Skr12.7 million in salary and Skr9.6 million in variable compensation
Stock options awarded in 2004: None
One voter: “He’s an optimistic person. He has reenergized the company and boosted morale.”
Carl-Henric Svanberg has achieved something that seemed almost unthinkable two years ago when he took over as the chief executive officer of Telefon AB L.M. Ericsson. He has put the Stockholm-based company back on the growth track.
Ericsson was in freefall from the collapse of the technology stock bubble when Svanberg, then CEO of lock maker Assa Abloy Group, was recruited in 2003 to be the first outsider to run the telecommunications equipment maker. Ericsson’s sales had fallen by more than half between 2000 and 2003, as debt-plagued telecom operators slashed orders. The company posted Skr51.1 billion of losses between 2001 and 2003, and it was in the midst of a traumatic restructuring that slashed Ericsson’s payroll by nearly 55,000, or 52 percent, when Svanberg came on board.
The executive’s first move was to clamp down even harder on costs. He ordered a fresh round of cuts to lower Ericsson’s breakeven point by a third, to Skr80 billion in annual sales. He continues to keep up the pressure by emphasizing what he calls “operational excellence” -- designing efficiency into equipment, reducing the number of components and standardizing parts. The aim is to lower costs by 10 to 15 percent a year.
“We have come very far in getting acceptance for that,” he says. “Without a crisis, we wouldn’t have turned it around so quickly.”
Svanberg, who earned a civil engineering degree from Sweden’s Linköping Institute of Technology, also has been preaching the need to get closer to customers to understand their needs. That may sound like a page out of Management 101, but for Ericsson -- which invented the global system for mobile, or GSM, communications and had an arrogant belief in its technology prowess -- putting the customer first has required a cultural shift.
Those efforts paid off last year as Ericsson rebounded to post net income of Skr19 billion on a 12 percent rise in sales, to Skr132 billion. The market, anticipating the good news, pushed the stock up by 111.5 percent in 2003.
Now the company is poised to benefit from an upturn in orders for third-generation network equipment, which can deliver broadband Internet connections to mobile handsets. Ericsson has a leading 35 percent share of the global market for the 3G technology, WCDMA, and has signed contracts in recent months with half a dozen operators, including Cingular Wireless in the U.S. and Australia’s Telstra Corp. Svanberg says this is the year when the mobile Internet finally becomes reality.
Svanberg believes the biggest challenges will involve the technological switch to IP, or Internet protocol, telecommunications networks and the rise of Chinese competitors such as Huawei Telecom Co. “Asian suppliers are critical to watch. In ten years I’m sure they will have a strong position,” he says. Ericsson is ready for the challenge, he insists. It already sources 75 percent of its equipment in China. -- T.B.
Year named CEO: 1999
Company employees: 35,000
12-month stock performance: +13.5 percent*
Compensation: £1.95 million ($3.76 million)
Stock options awarded in 2004: £4.22 million
One voter: “Davis knows how to cut costs but never loses sight of the need to invest.”
When Crispin Davis took over Reed Elsevier five and half years ago, the company was the product of a completed but never quite consummated 1993 marriage between Dutch science publisher Elsevier and British trade-book and magazine publisher Reed. The group had two chief executive officers, dual boards and overlapping managements, one in Amsterdam, the other in London. Reed Elsevier suffered from decision paralysis: The English CEO, Nigel Stapleton, and the Dutch CEO, Herman Bruggink, kept vetoing each other’s initiatives. Worse, this bickering bunch was losing market share to aggressive rivals.
Davis, therefore, would need to be a turnaround artist as well as a corporate clinical psychologist. He had the proper training. After earning his master’s in modern history from Oxford University in 1970, he had joined Procter & Gamble Co. as an assistant brand manager and risen to become U.K. marketing director in 1978. His greatest coup: establishing Pampers as Britain’s leading diaper brand. Other top jobs at P&G followed, but in 1990, Davis quit to run Guinness’s key United Distillers unit. Unfortunately, he wanted to try to spur sales by cutting prices and alcohol content, while thenGuinness CEO Anthony Greener preferred a premium-brands approach.
Davis resigned in 1993 and, with his highflier image dimmed, took a job as CEO of down-on-its-luck Aegis Group, a barely profitable London-based European media buying firm. He turned it into a fast-growing global business by expanding into the U.S. and Asia and recruiting clients looking to consolidate their global advertising budgets. In five years profits doubled.
Reed Elsevier saw in Davis the company’s salvation. The magazine trade is cliquish, but the new CEO (who’s based in London) didn’t regard his outsider status as a problem. “What was crucial for the Reed Elsevier job,” he says, “was turnaround experience and understanding where the growth opportunities were, not a career spent in publishing.” He administered shock treatment, cutting 4,000 jobs and slashing annual costs by £500 million in his first three years.
More important for the long run, he has boosted subscription sales by investing an annual average of £180 million over the past five years in Internet platforms that allow Reed Elsevier to reach a wider audience for its scientific, legal, educational and business reviews than any of its competitors. Since Davis took over in September 1999, Reed Elsevier’s profits have turned around dramatically, from a loss of £63 million in ’99 to a gain of £303 million last year -- while the company’s stock has climbed by one third. “One of the things I am most proud of is that we have created a company that consistently grows above market averages,” says Davis. -- David Lanchner
Year named CEO: 2000
Company employees: 921
12-month stock performance: 12.1 percent
Stock options awarded in 2004: Undisclosed
One voter: “Unlike most biotech companies, this is no seat-of-the-pants operation riding one hot product. Clozel is creating a full-fledged pharma company.”
Seven years ago, Jean-Paul Clozel and his wife, Martine, both medical doctors doing cardiovascular research at Hoffman La Roche & Co., quit the Swiss pharmaceuticals outfit and mortgaged their house to help finance a biotechnology start-up -- Actelion. Founded with two other Roche researchers, the Allschwil, Switzerlandbased company has revolutionized treatment of a rare and poorly understood but often fatal disease, pulmonary arterial hypertension, which is characterized by dangerously high blood pressure within the pulmonary artery.
Actelion’s Tracleer, developed from compounds Martine discovered at Roche -- the pharma giant gets 15 percent of the profits from the drug -- has slashed fatalities from the disorder, which has often been misdiagnosed as asthma. Three years ago 50 percent of PAH sufferers died; today only 16 percent do. (Actelion has achieved a coup in winning initial regulatory clearance for Tracleer in Japan.)
“It’s immensely satisfying to participate in what can legitimately be called a medical miracle,” says Actelion chief executive officer Clozel, a Frenchman who earned an M.D. in cardiovascular medicine from the University of California at San Francisco in 1976. Before joining Roche he practiced medicine for ten years. His French wife, who heads pharmacology at Actelion, is a pediatrician who had specialized in neonatal intensive care.
Actelion is itself something of a medical marvel. Although a biotech start-up typically takes more than a decade to record its first profit (if it ever does), Actelion reported net earnings of Sf87.2 million ($77.1 million), on sales of Sf471.9 million after just seven years. Indeed, after going public in April 2000 on Zurich’s SWX New Market, Actelion ranks as the second-biggest biotech company in Europe. As of mid-March 2005 its share price had doubled, to Sf123.5, since the initial public offering, and its market capitalization stood at almost Sf3 billion.
“Clozel combines passion with practical focus, which is really effective when it comes to motivating people and creating a remarkably efficient company,” says Lawrence McGrath, a portfolio manager at Pioneer Investment Management in Dublin, which has E130 billion ($177 billion) under management.
Under Actelion co-founder and initial CEO Thomas Widmann, Clozel set up a research and development lab that is considered one of the most impressive in biotech. Although the company derives almost all its profits from Tracleer, it has seven drugs in late-stage development to treat such maladies as hypertension and Alzheimer’s disease. “Our aim is to become the largest biotech company in Europe,” declares Clozel, who predicts that Actelion sales will reach Sf1 billion by 2010. -- D.L.
Year named CEO: 2004
Company employees: 7,700
12-month stock performance: +21.8 percent*
Compensation: £428,000 ($824,585)
Stock options awarded in 2004: None
One voter: “Waxman has done a good job communicating the changes at Hays to shareholders. It has been a consistent message for the past two years.”
As any executive recruiter can attest, MBA diplomas tend to be valued as much as hands-on business experience these days. By that standard, Denis Waxman is something of a throwback: He lacks the benefit of a management education -- he trained as an accountant -- but no one would ever accuse the chief executive officer of London-based recruiting firm Hays of not knowing his business. “Sad to say,” he jests, “it is the only business I know, and I still love it.”
Waxman has been finding other people jobs for more than 35 years. Always a reluctant accountant, he put away his calculator for good in 1969 to found Accountancy Personnel, a City recruiting firm for the sharp-pencil set. He sold the business, by then 90 branches nationwide, to Hays in 1986 but continued to run it. Last summer, Hays’s board tapped the veteran recruiter to become CEO and guide the company on its new course: After a strategic review, Hays had decided to spin off its corporate postal business, DX Services, and concentrate on recruiting.
Waxman has spent most of his short tenure as the company’s CEO explaining the new Hays to shareholders and analysts. “What people still perhaps do not understand is what drives the business and how we differ from the competition,” says Waxman. “We are well balanced between temporary and permanent recruitment and have a growing international presence.”
Hays’s latest results are eye-catching. Operating profits rose 28 percent year-on-year in last year’s second half. The company’s shares were trading in mid-March at a two-year high of 138p. “Hays is the best-managed business in the recruitment sector,” says Karl-Mikael Syding, an analyst at Stockholm-based fund manager Futuris Asset Management, which has E400 million ($546 million) under management. “The management team is doing a great job and is delivering exactly what they promised to shareholders.”
Syding hands a lot of the credit to Waxman. “He knows the recruitment business inside out,” he says. Analysts point to the CEO’s strong track record in building new businesses. Continental Europe accounted for next to nothing in fees for Hays four years ago; now it delivers 11 percent of net fees. And Waxman believes that the 32 percent rise in net Europe fees in the second half of 2004, versus the year-earlier period, can be sustained for the next few years.
“Our growth in Europe has outstripped other areas because, at last, structural change in labor markets is starting,” he says. -- Andrew Capon
* Adjusted for dividend payments.
Year named CEO: 2003
Company employees: 67,400
12-month stock performance: +11.0 percent*
Stock options awarded in 2004: Undisclosed
One voter: “UBS has been the only European investment bank to have managed the cost line really well.”
UBS encountered more than the usual difficulties in building a global banking franchise. The product of the 1998 merger of Union Bank of Switzerland and Swiss Bank Corp., it immediately ran into trouble over exposure to collapsed hedge fund Long-Term Capital Management. That mistake forced its chairman, Mathis Cabiallavetta, to resign. Two years later many rivals derided UBS’s purchase of U.S. brokerage PaineWebber as another blunder.
UBS’s performance has silenced critics, however. “We have a quality of earnings over the past five to six years which is unmatched,” contends current UBS chief executive officer Peter Wuffli. The bank boosted net income last year by 30 percent, to Sf8.1 billion ($7.2 billion); operating income jumped 11 percent while costs rose just 5 percent.
Wuffli’s strategy for UBS is exceptionally focused. “What we do is wealth management, asset management and investment banking and securities,” says the CEO. “We opted against the bancassurance model.” Last year the private banking division, which Wuffli headed before becoming president of the group executive board four years ago, added nearly Sf60 billion of new wealth -- a sum equal to the total assets of many smaller Swiss banks. The bank manages a total of Sf2.25 trillion for private banking and institutional clients.
The investment banking division, meanwhile, has gained market share, especially in the U.S. UBS advised Gillette Co. on its $57 billion takeover by Procter & Gamble Co., the biggest M&A deal so far this year. For Wuffli, that mandate was extrasweet because it challenged competitors’ claims that a foreign firm couldn’t handle a strictly U.S.-based merger. “It was the first purely domestic U.S. ‘elephant’ deal where we were in a lead position with one of the parties,” he notes. “You can’t get bigger than Gillette and P&G.”
The much-mocked PaineWebber acquisition turned out to be important in establishing that UBS intended to attract top banking talent in the U.S. “We knew you could not be half pregnant in investment banking,” Wuffli says. “No serious investment banker will join you when your stated objective is to be No. 7.”
Under Wuffli, a former McKinsey & Co. consultant who joined Swiss Bank Corp. as chief financial officer in 1994, UBS has stuck doggedly to its strategy of wealth management and investment banking, and the CEO has been just as dogged in selling it. “You have to consistently articulate the UBS story to clients and to shareholders until you are sick of hearing it,” he says. -- T.B.
* Adjusted for dividend payments.