CEO Interview: Harold McGraw III of McGraw-Hill Cos.: Money manager manqué

This CEO has an affinity for capital markets that they fully reciprocate. His key investments: financial services and education.

When Harold (Terry) McGraw says he admires portfolio managers, he’s not just sucking up to the McGraw-Hill Cos.’ largest shareholders. He used to run money himself. McGraw’s first job at the New York publishing company his great-grandfather founded more than a century ago was assistant vice president of pension investments. Before that he worked in GTE Corp.'s pension department. McGraw says he loved investing so much that he’d probably be a money manager today if he hadn’t gotten drawn into the family business. The McGraw clan still owns roughly 20 percent of the company.

Born Harold McGraw III -- his mother nicknamed him Terry “out of spite,” he confides, after his dad’s side of the family christened him Harold -- the 55-year-old CEO has put his financial markets know-how to good use at McGraw-Hill. The first MBA (Wharton School, ’76) to head the company, McGraw has transformed it in a decade from a traditional business publisher dependent on the cyclical advertising market for most of its revenue to a full-blown global information company, by expanding its financial services and education businesses. Today only 16 percent of McGraw-Hill’s sales (and 10 percent of operating profits) come from the media unit, which includes BusinessWeek and several trade titles, compared with about 60 percent in the 1980s.

Sixteen years ago, when McGraw became head of financial services, his unit was the company’s smallest, consisting chiefly of bond rater Standard & Poor’s Corp. Revenues were just $83 million, less than one fifth of the company’s total. Today financial services generates 37 percent of McGraw-Hill’s $4.8 billion in annual sales and 61 percent of its $688 million operating profit. The education division, which produces textbooks and testing materials, contributes 47 percent of sales and 29 percent of operating profits.

CEO McGraw has aligned the company with two big global trends: the spread and growth of capital markets and the not-unrelated desire of many countries to better educate their workforces. He began implementing his strategy when he became president and COO in 1993 (he became CEO five years later). Since 1993 revenue has grown 122 percent and net income has more than sextupled. McGraw-Hill shares, meanwhile, have soared some 870 percent -- nearly six times the gain of the company’s own S&P 500 index.

When McGraw joined the business in 1980, no one expected such high-powered performance. After thwarting a hostile bid by American Express Co. in 1979 (Terry took a leave from GTE to help his father, Harold McGraw Jr., with the defense), McGraw-Hill fell victim to a devastating advertising recession. It also embarked on an ill-fated reorganization along industry sector lines under CEO Joseph Dionne, the first non-McGraw to run the company.


Having turned his family business around, the father of two now wants to concentrate more on international markets. He’s also intrigued by opportunities in online and alternative learning.

McGraw recently chatted with Institutional Investor Senior Writer Justin Schack at the company’s New York headquarters.

Institutional Investor: Have you finished transforming your financial services business?

McGraw: The overarching trend in the capital markets has got a lot of legs. Standard & Poor’s used to be very small. It provided credit analysis and information, but as the capital markets grew, it shifted from providing support and information to helping companies access these markets. That’s a huge transformation, and we’re about 32 years into a 75-year trend.

Why will it last so long?

Many overseas markets are just beginning the transformation you saw in the U.S. Banks still control the economies of some regions. That’s starting to change as those markets develop. For S&P, about 35 percent of revenues come from outside the U.S. By around 2008 or 2010, we’ll be closer to 50 percent. After that it will flip even more.

What’s your take on China?

We’ve got a lot going on there -- joint initiatives, partnerships. There’s a lot that we can do in helping on the capital markets side as well as in the education market. There’s no country in the history of the world that has transformed itself toward a market economy faster than China has.

But what about potential pitfalls?

There is no capital markets system or market accountability in China yet. There’s a big problem with copyright, patent and trademark infringements. You can go anywhere you want in China and get a knockoff of anything -- Louis Vuitton bags, Burberry coats -- for five bucks. We have issues with our engineering, science and medical books.

What’s the outlook for educational publishing?

There’s a strong growth trend there. A couple of years ago, when we passed the No Child Left Behind legislation, we recognized the link between our educational system and economic growth. The rest of the world is starting to realize this, too. In Mexico we’ve had conversations with President [Vicente] Fox about his desire to develop a technology and service sector in the Monterrey area. That’s aspirational, but where are those skilled workers coming from? If you start today putting an emphasis on math and science, maybe in 20 years you’ll start having some of that capability. We’re in a good position to participate in that.

What impact is the No Child Left Behind Act having on your business?

By holding schools to a performance standard, it has put pressure on some of the weaker [education] players in the private sector. That’s caused some consolidation, and now the private sector has more size and scale and can develop research-based products that are proven to work. It has gone from a fragmented, no-results business to a fabulous business.

How do you feel about Sarbanes-Oxley and other capital market reforms?

The biggest issue is that the image of big business is a horrible one. In one sense, business has earned the problem. You get enough Enrons and Tycos and WorldComs and Parmalats, and that has an impact on the trust and confidence of investors. But there has also been this reaction that all businesses behave this way. I work with the Business Council and the Business Roundtable, and I’ve seen people wanting to go to blows over this stuff.

Are the reforms hurting business?

Public policymakers need to make sure that the few wrongdoers get found out and punished without tarnishing the whole system. Some of the legislation has gone too far. But again, in some sense we’ve earned the problem. So now we have to embrace the changes. And if you take a positive attitude, the reforms can help you manage your business even better. The new internal-controls requirements in section 404 of Sarbanes-Oxley are a good example. They force you to go in and look at the way you do things and at processes and procedures that are more efficient.

Which CEOs do you admire?

There’s a long list. When you think about somebody like [former Citigroup CEO] Sandy Weill and what he achieved under so many different conditions, you’ve just got to be impressed. I’m on the board of United Technologies, and George David has taken a company with some tremendous strengths and some strategic challenges and has done an incredible job. I have high regard for [J.P. Morgan Chase & Co. CEO] Bill Harrison and what he’s been able to pull off; and for the intensity of an Ivan Seidenberg at Verizon Communications. There are some very strong up-and-coming managers like J.T. Battenberg at Delphi and [General Motors Corp. CEO] Rick Wagoner.

Is it important that a McGraw run the company when you step down?

That would depend on that person’s capabilities. I’m enormously proud to be a McGraw. But when you’re running a public company, you can’t take your eye off your responsibilities for a moment. If you do, you’ll be gone. If I didn’t think that I could do it, I would find something very exciting, challenging and worthwhile to do with my life.

Such as?

Maybe being a politician or a teacher. Or maybe a portfolio manager.

Why a portfolio manager?

The best money managers have insight into what makes something tick. My worst fear is getting on a plane and being seated next to a very talented money manager, because that person is going to ask me about a thousand and a half questions, and I can’t put enough headsets on and blankets over my head to escape.