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“Anybody who has a job like mine and isn’t totally in love with what they’re doing ought to be looking for something else.” So says Jeffrey Immelt, chief executive officer of General Electric Co. He’s right, of course: Running a big public company has never been more demanding -- or, potentially, more gratifying.
A host of recent events -- some would say traumas -- have transformed the chief executive post. The bursting of the 1990s stock market bubble and revelations of corporate malfeasance ignited a new shareholder activism. Out billions of dollars and mad as hell, stockholders are using their clout to force changes in company strategies, seek representation on boards of directors and, in some cases, campaign to oust CEOs.
Meanwhile, regulators, having failed to detect fraud at companies such as Enron Corp. and WorldCom, and wanting to make amends (and perhaps score some political points), have dramatically stepped up enforcement. Politicians, of course, have clambered onto this rolling bandwagon. Congress in August 2002 passed the Sarbanes-Oxley Act, establishing strict corporate reporting and governance requirements. Even boards, once the preserve of sympathetic fellow CEOs, have become more independent-minded, at times acting downright hostile toward management.
“I remember when Enron happened, I said to somebody, ‘Enron is going to be to corporate America what Watergate was to the public sector. It’s going to change everything,’” recalls Richard Parsons, CEO of New York media and entertainment giant Time Warner. “And it really has. And the change will last for decades. People feel as if corporate America abused their trust, so now there’s a profound suspicion, just like there was a profound suspicion of politicians back then.”
The biggest change? Life has simply gotten much harder for CEOs. Johanna Schneider, external affairs director of the Business Roundtable, a Washington, D.C.based lobbying group for the nation’s biggest companies, asserts that “in the past three years, the job of CEO has gotten extraordinarily more complex -- CEOs today have many more worries than they did in the past.”
For a start, their jobs are constantly on the line. If the CEO position were ever a sinecure, it’s not now. Consulting firm Booz Allen Hamilton reports that the number of public company CEOs who were fired in 2003 for poor performance was 170 percent higher than in 1995. The average tenure of a sitting chief executive dropped 23.2 percent during the same period, from 9.5 years to 7.3 years.
When they aren’t dodging flak, CEOs have had to contend with an uncertain business environment. What should have been a straightforward recovery story following the postbubble recession quickly got complicated. The September 11, 2001, terrorist attacks hit the economy and capital markets especially hard, delaying recovery and creating a costly headache for multinationals in stepped-up security. The war in Iraq, the rise of China’s economy, soaring commodity prices and a falling dollar have added to CEO stress levels.
Sums up David Nadler, head of Mercer Delta Consulting, a New Yorkbased firm that advises chief executives on strategy and governance, “CEOs today have less job security, more pressure for shareholder return and more threats from global competitors, regulators and outside constituencies than ever before.”
And yet the CEO’s job has never been more important, as corporations strive to win back investor confidence and navigate through a far more challenging environment. To find out which chief executives are doing the best work under such tough conditions, Institutional Investor surveyed portfolio managers and analysts at the world’s leading financial institutions. In all, nearly 1,700 investment professionals at close to 500 firms responded to the magazine’s third annual CEO poll. We present winners in 62 industry sectors that correspond to those we used to rank securities analysts in our 2004 All-America Research Team survey (see rankings on pages 58 and 60; for more on methodology, see box on page 72).
What characterizes the winners? Some are notable for their highly sophisticated knowledge of their customers’ needs, which allows them to custom-tailor products; others stand out for their ability to seize growth opportunities with well-considered -- and -integrated -- acquisitions. Survey respondents particularly value that rare knack among chief executives for recognizing when their company is headed in the wrong direction and altering its course.
Few CEOs are better authorities on their customers than Lewis Frankfort of luxury handbag maker Coach, who leads the Apparel, Footwear & Textiles sector, (see box, page 64) or Richard Fairbank of credit card giant Capital One Financial Corp., who tops the Specialty Finance sector. Frankfort and his team at Coach conduct thousands of one-on-one interviews with consumers to glean information about their tastes and buying habits. After learning that Coach’s best customers visit one of its stores every four to five weeks, the New York company began releasing new styles on that same schedule. Now many loyal customers buy multiple handbags each year; before, most bought one or two bags annually.
“It lets us give consumers a fresh experience,” says Frankfort. “Because we want to surprise them. We want them to have some adventure.”
At Capital One, Fairbank, a onetime industry consultant, has helped to transform credit card marketing from one-size-fits-all to a much more nuanced approach in which customers are presented with products geared specifically to their needs and circumstances through intensive data-mining. McLean, Virginia-based Capital One test-markets 60,000 permutations of its basic credit card formula each year, varying interest rates, payment plans, reward incentives and other features. This has led to innovative products such as variable-rate credit cards pegged to the prime rate (see box below).
Plenty of the CEOs on our list made a mark through shrewd deals. Buying or merging with another company is probably the riskiest move a chief executive can make. Studies show that most corporate combinations fail; and even those that work out over the long haul eat up time, money and goodwill. Yet they can also produce those fabled synergies, energizing growth.
Thus, CEOs who can pull off mergers win fans on Wall Street. Take Yahoo!'s Terry Semel, voted tops in the Internet sector. The former co-head of the Warner Bros. Entertainment film and TV empire has skillfully scooped up small technology companies to enhance Sunnyvale, Californiabased Yahoo!'s Internet-search and content service. Two of these -- Inktomi Corp. and Overture Services, purchased in 2003 -- have made Yahoo!'s Web sites more attractive to online advertisers by improving its consumer- and sponsored-search technology and helped to fend off challenges from competitors like Google (see box, page 68).
“Larger companies have more things to offer to advertisers and therefore attract more advertisers,” says Semel, referring to combinations of big portals like Yahoo! and smaller providers of search technology and content. “It’s probably a good time for certain companies to sell and for others to buy.”
Making deals has also allowed Immelt to position GE to resume its traditional strong growth. Since taking over from Jack Welch in September 2001, the CEO has refashioned GE’s portfolio of businesses, making multibillion-dollar bets on fast-growing industries like security systems, health care technology and water treatment services. Moreover, he arranged a megadeal in entertainment, winning a bidding war for film- and TV-production company Vivendi Universal.
Although some shareholders of the Fairfield, Connecticut, company gripe that Immelt paid hefty premiums for certain of these assets, they appear to be as confident as ever in the company’s vaunted ability to integrate acquisitions. Immelt has rewarded that faith by putting GE on track for a return to double-digit earnings growth, following a four-year drought (see box, page 62).
“We’ve had a pretty good strategic compass over the past three years,” notes Immelt.
One of the voters’ preferred CEOs is probably better known for a deal he didn’t make last year than for the ones he did. Comcast Corp. shareholders groaned at CEO Brian Roberts’s audacious unsolicited bid for Walt Disney Co. last February, and by the end of April he had withdrawn it. Roberts, however, remained convinced that marrying Comcast’s giant television- and video-distribution platform with proprietary content -- Disney’s or someone else’s -- was a compelling strategy. So in September he forged a deal with Sony Corp.: Comcast, based in Philadelphia, provided equity financing for the Japanese company’s takeover of the fabled Metro-Goldwyn-Mayer film studio, in return gaining the exclusive right to feature Sony-MGM content on Comcast’s video-on-demand cable service (see box, page 67).
“The ‘a-ha’ moment when I realized the true appeal of our scale was our deal with Sony-MGM,” says Roberts. “Sony came to us and said, ‘We get it.’ They saw the value of combining our 21 million customers and unparalleled distribution with one of the world’s greatest content libraries. It’s a great partnership for Sony, Comcast and, most of all, our customers.”
A more difficult way of gaining recognition among investors is by turning around a company. To begin with, if a CEO had a hand in setting a strategy that needs overhauling, it takes guts to admit a potentially career-ending mistake. What’s more, investors exert considerable pressure on CEOs to keep short-term earnings steady. That can hamstring chiefs who want to implement drastic measures that might hurt near-term performance but improve a company’s long-term health. In any event, it’s extraordinarily difficult to steer a big enterprise with thousands of employees and long-established traditions in a bold new direction.
That is why the volte-face at Time Warner engineered by CEO Parsons is so impressive: It was done on the largest scale possible, at a company with 80,000 employees and nearly $3 billion in annual profits. Parsons inherited the detritus of what has been called the worst-performing corporate combination in history -- the January 2000 merger of Time Warner, the entertainment and publishing titan, and Internet pioneer America Online. Dropping starry-eyed visions of synergies between the two companies, he focused on maximizing the performance of the individual units while slashing debt and revamping management. Having posted losses for two years following the merger, Time Warner turned a profit of $2.6 billion in 2003 and is growing earnings again (see box, page 61).
“All of us underestimated the difficulties of blending AOL and its culture, you know, young, New Economy, brash -- some like to say arrogant -- with the Old Economy, staid -- some might say somnolent -- adults at Time Warner,” explains Parsons. “It’s not as easy to put these big things together as it might seem. It’s hard work. We learned that lesson, and I think the market also learned that lesson. There haven’t been many more deals of that magnitude, that scale.”
Irwin Jacobs, the founder and CEO of Qualcomm, who ranks first in Telecom Equipment/Wireless, faced a different sort of strategic dilemma. Five years ago, Qualcomm depended on making mobile phones for a large proportion of its revenues. Yet its handset-manufacturing unit was struggling, falling behind competitors like Motorola and Nokia because of technical bugs and production problems. Jacobs, in a tough personal decision -- his son Paul ran the division -- decided to sell the handset operation to South Korea’s Kyocera in 2000 and refocus the San Diego-based company on selling the semiconductors and software that power third-generation wireless communications. Qualcomm shares have nearly quadrupled in the past two and a half years (Paul now runs the company’s wireless Internet group) (see box, page 69).
“We said, ‘Where can we focus our energies and have the best results going forward?’,” remembers Jacobs. “It was difficult to sell the business, but it was also clear that if we focused on chips and software and sold to many manufacturers, that would be the best way to leverage innovations.”
C. John Wilder, another restructurer, behaved as if he had received a jolt of electricity. No sooner had he taken over troubled power utility TXU Corp. last February than he began dumping flagging divisions, outsourcing back-office operations and getting TXU back into energy trading. The new CEO, who ranks first in the Electric Utilities sector, viewed that business, which has stabilized following blowups earlier this decade, as a way to drive earnings growth. TXU, based in Dallas, has paid off $6 billion of debt and recently announced a 350 percent hike in its dividend and a 50 million-share buyback. Third-quarter earnings were up 70 percent year-over-year. Most gratifying of all to shareholders: TXU’s stock climbed 177.7 percent last year (see box, page 70).
Wilder says his plan for TXU focuses on the “three Rs -- rationalize, restructure and restore financial strength.” With much of that work complete, the utility can pause to dole out some cash. “Now it is time to return some of the capital from asset sales to our shareholders,” the CEO says.
In addition to appreciating CEOs who have been able to deliver earnings and stock price appreciation, respondents to II’s survey say they value executives who clearly and honestly communicate the truth -- whether it’s positive or negative -- about corporate performance. But even the smartest portfolio managers and analysts can miss the mark. Indeed, several of the CEOs who rank highly in the survey have confronted hard times since the voting closed. Fannie Mae CEO Franklin Raines, ranked second in Mortgage Finance, was forced out in December amid allegations that the government-sponsored lender fudged its accounting. Maurice (Hank) Greenberg, chief of insurance giant American International Group, who was voted tops in the Insurance/Nonlife sector, has had to deal with investigations into the company’s practices by the Justice Department, the Securities and Exchange Commission and New York State Attorney General Eliot Spitzer. In November, AIG agreed to pay $126 million to settle federal probes into whether it helped two companies fraudulently overstate their earnings. And voters’ choice for best CEO in the Pharmaceuticals/Major sector, Pfizer’s Henry McKinnell Jr., has spent much of the past several weeks defending his company’s decision to keep arthritis remedy Celebrex on the market despite warnings that it may contribute to an increased risk of heart complications and stroke.
Managing a business, however, is only part of running a company these days. In addition to pleasing shareholders, employees and customers, chief executives must increasingly contend with a wider constituency: Everyone from hyperaggressive regulators to class-action attorneys to activist groups of one stripe or another tries to -- and often does -- have an impact on corporate behavior.
Food companies, such as McDonald’s Corp. and Kraft Foods, have been scrambling to provide healthier fare, largely in response to criticism by advocacy groups and lurking class-action attorneys (who seem to view food purveyors as the next deep corporate pocket to pick). PepsiCo CEO Steven Reinemund, voted tops in Beverages, has sought to stay ahead of the bulging curve on fatty foods by emphasizing products from the Quaker Oats and Tropicana brands it has acquired in recent years to offset PepsiCo’s traditional reliance on salty snacks and soda.
In addition, the Purchase, New Yorkbased company has voluntarily removed trans-fatty acids from many of its snack foods and unveiled lighter, baked versions of Cheetos and Lay’s potato chips. PepsiCo now thinks of its products as fitting into one of three health categories: “good,” “better” and “fun” -- the last being those high-calorie indulgences.
“Reinemund is looking forward and trying to anticipate what’s going to happen rather than waiting for it to happen,” says Mercer Delta’s Nadler, who has worked with the CEO on strategy. “Today you can’t just say you’re not doing something wrong according to the current standards. You have to position yourself to be ahead of the way corporate behavior and standards are changing.”
Nowhere have standards changed more than in regulation. Sarbanes-Oxley requires CEOs and chief financial officers to sign off on financial statements, adding a new level of personal legal liability. The law also mandates that the majority of directors be independent, meaning that they cannot work for or even have significant relationships -- business or personal -- with the company and its executives. That has made for a delicate feeling-out process between newly appointed independent directors -- who are under intense pressure to represent shareholders and ask tough questions of management -- and CEOs.
Sarbanes-Oxley’s most onerous provision requires that companies certify and document the effectiveness of their internal financial controls. The official name -- Section 404 -- is spoken like a curse word in many executive suites. Companies are having to spend millions and devote months of manpower to comply with 404. Public companies must include these internal-control reports in their annual and quarterly financial reports filed with the SEC.
Yet a few companies have somehow extracted benefits from the compliance rigmarole. Qualcomm was among the first to have auditors certify its controls under 404, and CEO Jacobs attests that the company’s quarterly audits have gone much more smoothly as a result. (One reason: Having improved its controls, Qualcomm required fewer so-called journal entries explaining its complex accounting methods.)
Most corporations, however, find little to like about 404. Time Warner reports that it has spent $50 million on documenting and certifying its internal controls. That may be just 0.1 percent of the company’s annual sales, but as Parsons notes: “Where I come from, 50 million bucks is 50 million bucks. It just creates a huge administrative burden that it’s not clear to me will have the salutary effect its creators intended.”
Not so surprisingly, given the competing demands on their time, CEOs are delegating more operating responsibilities. But some tasks can’t be passed down. “The reality of being a CEO today is that you can’t delegate financial reporting and dealing with the board,” points out the Business Roundtable’s Schneider. “Those tasks are too important. So people are just working harder and handing off other tasks to other managers.”
But some executives are so frustrated with the new regulatory environment that they’re challenging it. Emboldened by President George W. Bush’s and his fellow Republicans’ victories at the polls last November, some business leaders have mounted a quiet campaign to oust SEC chairman William Donaldson. A former CEO himself and a longtime friend of the Bush family, Donaldson has pursued an activist agenda, frequently allying with the agency’s two Democratic commissioners on key policy initiatives. It is mostly smaller companies, however, that appear to be behind the effort to oust Donaldson, say corporate lobbyists. The costs of complying with new regulations are proportionately larger for many of these firms.
CEOs at big public companies, by contrast, seem to be content to wait patiently for regulatory equilibrium to be restored as the scandals surrounding Enron and its ilk fade further into the rearview mirror.
“This is my second time seeing this particular movie,” confides Parsons, who became CEO of Dime Bancorp in 1991, at the peak of the savings-and-loan scandal. “What’s going on now is very similar to what happened then. The pendulum swung from regulators being too lax to an overreaction where they became too tough. I think we’re still in the overreaction stage, but ultimately it goes back to some center point.”
Richard PARSONS
Time Warner
Age: 55
Year named CEO: 2002
Number of employees: 80,000
2004 stock performance: +8.1 percent
Annual compensation: $9.78 million
Stock options: $7.33 million
Parsons: “It’s easy to underestimate the difficulty of blending cultures.”
One voter: “He’s definitely helped people start to forget about what a bad deal AOLTime Warner was.”
Talk about tough assignments: For the past two and a half years, Richard Parsons has had to make the best of what might have been the worst merger in corporate history, the $146 billion combination in January 2000 of media and entertainment giant Time Warner and overhyped Internet start-up America Online. Cultures clashed. Hoped-for synergies failed to materialize. Shares fell by 84 percent in two years.
Out went the pair that negotiated the deal -- Time Warner CEO Gerald Levin and AOL chief Steven Case, who had become chairman of the combined company (he remains a director). In came Parsons, a former Ford administration White House aide and Dime Bancorp CEO, then serving as Time Warner president. He stabilized the company, revamping its management team, slashing its debt and boosting its cash hoard. He streamlined the New York company’s corporate structure, abandoning bubble-era dreams of vast synergies and cross-selling in favor of managing each business to be best-in-class and selectively exploiting opportunities for collaboration. Last month he also took a major step toward ending two federal government investigations into AOL’s premerger accounting practices by announcing pending settlements totaling $510 million with the Department of Justice and the Securities and Exchange Commission.
“It’s been a tough climb for us,” says Parsons. “But the clouds are beginning to lift, and people can start to see a bright future ahead.”
The company turned a profit in 2003 for the first time since the merger. Earnings for the first nine months of 2004 rose by 11.8 percent over the year-earlier period, to $2.24 billion, and Time Warner shares ended the year at $19.45, up from a four-year low of $9.64 in July 2002.
Much remains to be done. AOL’s dial-up service is shrinking in the face of competition from cable and digital-subscriber-line connections. Time Warner’s cable television and high-speed Internet businesses must fend off intense competition from satellite and DSL providers, not to mention cable giant Comcast Corp. (see box, page 67), which owns one fifth of Time Warner Cable and, with 21 million subscribers, dwarfs all rivals.
Parsons aims to manage the dial-up business like the low-growth utility it has become, minimizing costs and reinvesting the cash it generates elsewhere. He wants to build free Internet services and content that will attract advertising revenue. “We need to become, frankly, more like open-architecture Internet companies Google and Yahoo!,” he says (see Yahoo! box, page 68). Parsons is also trying to buy back Comcast’s stake in Time Warner Cable, possibly as part of a deal in which the two would pair up to buy cable systems from troubled Adelphia Communications Corp.
“We’re not where we want to be on the shareholder front, but we’re making progress,” says Parsons. “Next year is going to be a whole lot more fun than this year has been, I’ll tell you that.”
-- Justin Schack
Jeffrey IMMELT
General Electric Co.
Age: 48
Year named CEO: 2001
Number of employees: 305,000
2004 stock performance: +20.7 percent*
Annual compensation: $7.40 million
Stock options: $20.24 million
Immelt: “If you like business, running GE is like painting the Sistine Chapel. It’s an unparalleled opportunity.”
One voter: “Jeff’s done a great job repositioning GE into businesses that will get the earnings growth back into the double-digit territory we’ve come to expect of them over the years.”
Jack Welch may have been a legend, but he left Jeffrey Immelt, his successor as CEO of General Electric Co., in something of a bind. After six straight years of double-digit earnings growth from 1995 to 2000, GE began to sputter in 2001, when Welch retired. Earnings rose by a disappointing 7.5 percent, even as the Fairfield, Connecticut, conglomerate’s revenues declined for the first time in a decade. GE’s industrial businesses -- such as the manufacturing of aircraft engines and power-generating turbines -- had become too dependent on economic cycles for growth. As investors started to worry that the company had grown overly reliant on acquisitions to drive bottom-line gains, GE’s share price declined by 47 percent in 2001 and 2002. Immelt, a 22-year GE veteran who previously ran its $12 billion-in-revenues medical systems business, knew that retooling was in order.
“We decided we needed to invest to get a faster-growing set of industrial businesses and a higher-returning set of financial businesses,” says the CEO, a Dartmouth College graduate who has a Harvard Business School MBA.
So Immelt went on a deal-making spree. In October 2003 he doubled down on the entertainment business, snapping up film studio Vivendi Universal for $14 billion (GE already owns the NBC television network). He also deepened the company’s investment in the health-care technology industry, with a $9.5 billion deal for U.K. medical-imaging concern Amersham and the $2 billion purchase of Finland’s Instrumentarium, both in 2003. And he has bet big on the security business, acquiring last year both airport-screening equipment maker InVision Technologies, for $900 million, and Edwards Systems Technology, a unit of capital-goods conglomerate SPX that specializes in fire prevention and security systems, for $1.4 billion. More recently, Immelt has pushed into the water-treatment business by acquiring Ionics for $1.1 billion in November. He also spun off GE’s slow-growth insurance subsidiary, Genworth Financial, in a May IPO, raising $2.8 billion.
GE’s reconstituted portfolio is designed to better weather economic ups and downs. Last month, Immelt forecast a return to double-digit annual earnings growth for 2005 and the foreseeable future beyond it.
Still, some shareholders fret that the company may be overpaying for higher-growth properties and coming up short on its pledge to reduce its dependency on acquisitions for growth. The even-tempered Immelt counters, “We’ve paid pretty much representative multiples for the businesses we’ve acquired.” He forecasts organic revenue growth of 8 percent in 2005, up from the 5 percent GE turned in last year and for much of its recent history. Immelt’s supporters on Wall Street say that GE excels at integrating acquisitions and will be able to maximize the value of what it has acquired. Its share price reflects that belief, rising 20.7 percent last year.
That has Immelt breathing a little easier. “I love this job,” he exults. “It is a treat, a joy, a passion.” -- J.S.
* Adjusted for splits and dividend payments.
Daniel DIMICCO
Nucor Corp.
Age: 54
Year named CEO: 2000
Number of employees: 10,500
2004 stock performance: +90.8 percent*
Annual compensation: $1.10 million
Stock options: $540,644
DiMicco: “We’ve had a philosophy all along that you either lead or get out of the way.”
One voter: “He waits for the right opportunity and doesn’t overreact.”
“Those who say it cannot be done should not interrupt those who are doing it,” reads the sign on Daniel DiMicco’s desk. The CEO of Nucor Corp., the biggest steel manufacturer in the U.S., can back up his bluster. DiMicco’s savvy management -- aided by a healthy boost from a weak dollar and rising demand for steel in China -- has helped Charlotte, North Carolinabased Nucor thrive in what many expected just last year would be continued hard times for the steel industry.
As chairman of the American Iron and Steel Institute, DiMicco led the protest against President George W. Bush’s decision in December 2003 to repeal year-old tariffs on imported steel. The CEO and other industry moguls felt that U.S. makers would be swamped by cheaper imports. To be sure, the falling dollar soon helped to cushion the blow of disappearing tariffs by making U.S. steelmakers’ exports more attractive than foreign competitors’. And DiMicco was also wisely positioning Nucor to maximize its gains.
One bold tactic: He instituted surcharges on some of the company’s products to help offset rising scrap-steel costs. DiMicco correctly figured that customers would value Nucor’s high quality and reliability more than they would chafe at slightly higher prices. He also engineered a series of plant acquisitions last year, all financed with cash, which allowed Nucor to boost production and meet rising demand from Asia without diluting shareholder equity or taking on new debt.
The company’s shares were changing hands for about $26 when the tariffs were withdrawn. Since then they have doubled to end the year at $52.34, helped by the falling dollar.
DiMicco believes that a disciplined approach to spotting growth opportunities is critical to keeping shareholders happy. “Growing for the sake of getting bigger is not the job of the CEO,” he says.
Before rising to CEO in 2000, DiMicco spent ten years managing Nucor’s plant in Blytheville, Arkansas. A 23-year veteran of the company who started as an engineer, he visits that plant -- and each of Nucor’s 31 others -- every year. “It helps me stay grounded,” he says. -- Tim Catts
* Adjusted for splits and dividend payments.
Lewis FRANKFORT
Coach
Age: 58
Year named CEO: 1995
Number of employees: 4,200
2004 stock performance: +49.4 percent
Annual compensation: $2.36 million
Stock options: $138.87 million
Frankfort: “The most successful executives are able to walk seamlessly between strategy and tactics.”
One voter: “He turned the handbag from a commodity that you bought once or twice a year into a must-have item that you buy eight times a year, with margins that I didn’t think could exist for any product.”
To commemorate CEO Lewis Frankfort’s 25th anniversary with Coach last year, a group of executives gave him an antique Patek Philippe pocket watch, inscribed “Logic and Magic.” The phrase sums up how Frankfort has transformed Coach from a $6 million-in-revenues, family-owned maker of sturdy leather briefcases into a $1.3 billion purveyor of ultratrendy women’s handbags and fashion accessories. The logic: Coach’s relentless analyses of consumers’ tastes and habits -- more than 15,000 customers were interviewed last year. The magic: a creative team, led by former Tommy Hilfiger whiz kid Reed Krakoff, that designs handbags that fashion-conscious women around the world simply must own.
In the decade since New Yorkbased Coach was spun out of Sara Lee Corp., Frankfort and Krakoff, the company’s president since 1999, have created an entirely new consumer-accessories market that they call “accessible luxury.” Sensing a threat from high-end brands like Louis Vuitton that make more fashionable bags, Coach introduced new styles, such as tiny wristlets good for nightclubbing and larger carry-alls suitable for the office and weekend trips. Frankfort and his team also mixed more affordable materials with Coach’s signature, high-quality leather, keeping prices manageable while maintaining an aura of trendiness and exclusivity. Instead of buying two bags per year, women started purchasing seven or eight, as Coach transformed the handbag from a staple to a fashion accessory.
“Women are buying handbags the way they used to buy shoes,” says the casual, chatty Frankfort, a native of New York’s Bronx borough. “We see unlimited longevity in being a model brand offering accessible luxury accessories.”
And Coach has performed stunningly well. Earnings for the 2004 fiscal year, which ended June 30, reached $261.7 million, up an astonishing 1,467 percent from $16.7 million just five years earlier. Its shares soared to $56.4 by year-end 2004, adjusted for two splits, since it went public at $4 in October 2000. Frankfort thinks Coach can double its annual revenues, to some $2.6 billion, within five years even as it increases its already impressive 34 percent pretax operating margin.
Frankfort joined Coach in 1979 from the municipal government of New York City, where he helped turn around day care and Headstart programs that were mired in scandal and mismanagement. A colleague there introduced him to Coach founder Miles Cahn. Frankfort joined as head of business development and became CEO 16 years later.
Coach has grown exponentially since then, but Frankfort strives to preserve its collegial workshop culture. “We’ve evolved into a performance family culture,” he explains. “We care about each other greatly, but everyone understands that to remain part of the family, they have to perform.” -- J.S.
Richard FAIRBANK
Capital One Financial Corp.
Age: 53
Year named CEO: 1994
Number of employees: 17,000
2004 stock performance: +37.6 percent*
Annual compensation: $67,544**
Stock options: $356.85 million
Fairbank: “We do the right thing. We don’t make decisions because they are what’s in vogue or what Wall Street wants us to do.”
One voter: “It’s noteworthy to see a financial services CEO thinking longer term and not just looking at quarterly results.”
Richard Fairbank doesn’t sweat the details. A former consultant, the urbane, articulate goal-setter self-consciously eschews what he calls “the old CEO model of sitting around and making decisions all day.” Rather than micromanage, the chief of credit card marketer Capital One Financial Corp. prefers to set a course for his employees and rely on them to get there. Fairbank’s approach and vision -- mass marketing through intensive consumer research and product customization -- has guided McLean, Virginiabased Capital One from initial public offering to industry powerhouse in little more than a decade.
“Mass customization is an oxymoron, but that’s our endgame,” he explains. “We like to think that each customer takes a unique journey through our company.”
In credit card loans, Capital One has climbed from 12th in the U.S. at its IPO in 1994 to sixth today, behind Citigroup, J.P. Morgan Chase & Co., MBNA Corp., Bank of America Corp. and Discover Card. Capital One’s third-quarter return on equity, 25.93 percent, exceeded that of its closest specialty-lending rival, MBNA, by 251 basis points, and its stock price appreciation in 2004 was more than double MBNA’s 15.5 percent.
Fairbank and Capital One’s recently retired vice chairman, Nigel Morris, who had worked together as consultants at Washington-based Strategic Planning Associates, joined the credit card division of Signet Bank (now owned by Wachovia Corp.) in 1988. They convinced management to pursue their concept of highly scientific and individualized product design and testing. In 1991 the duo hit pay dirt: Among the 300 products they test-marketed that year was a low-interest balance-transfer offer, which has since become a staple of credit card marketing. In November 1994, when it had $7 billion in card loans, Signet took the renamed unit public at a split-adjusted $4.57. At the end of December it traded at $84.21.
Fairbank has defied skeptics who doubted that Capital One could replicate its success outside its credit card programs. Through the first nine months of 2004, the company earned $323 million from auto, installment, small-business and other noncard lending as well as from international expansion, primarily in the U.K. That was double the full-year 2003 figure and almost one third the $1.19 billion it earned from the core U.S. card business. Seeking to grow noncard revenue further, Fairbank in November agreed to acquire U.K. home equity loan broker HFS Group for $117 million.
Since 2001, Fairbank has taken no cash salary or bonus. Virtually all of his compensation has been performance-based stock options, in addition to nominal noncash items like retirement-plan contributions and travel allowances. “We want to ensure the continuity of the entrepreneurial spirit that got us here, and I wanted to set an example,” he says. “Our shareholders in a sense are putting their money where my mouth is. I should be doing the same thing.”
-- Jeffrey Kutler
* Adjusted for splits and dividend payments.
** Fairbank took no salary or bonus for 2003; figure represents travel allowances, retirement plan contributions and other noncash compensation.
Michael ESKEW
United Parcel Service
Age: 54
Year named CEO: 2002
Number of employees: 357,000
2004 stock performance: +16.4 percent*
Annual compensation:$1.23 million
Stock options: $4.29 million
Eskew: “We are a 97-year-old company that has innovated every year.”
One voter: “Eskew is very credible. He’s optimistic without being promotional.”
When Michael Eskew joined UPS 32 years ago, fresh from earning a bachelor’s degree in industrial engineering from Purdue University, he had to shell out $900 -- one month’s salary -- to the employment agency that landed him the job. “I had to borrow the money, but it was the best investment I ever made,” says Eskew, who rose from being an engineering supervisor in Indiana to succeed James Kelly as chairman and CEO nearly three years ago.
Praised for improving profitability at UPS, the world’s biggest package-delivery company based on volume of parcels, Eskew boosted operating margins by more than 1 percentage point, to 14.15 percent, for the first nine months of 2004, without a major change in strategy or an expensive acquisition. Earnings were up by 20.8 percent during the same period, surpassing UPS’s ten-year average annual growth rate of 13.2 percent. The company’s signature brown trucks and planes handled shipments equivalent to 6 percent of U.S. gross domestic product during the past two years, and operate in more than 200 countries.
Eskew’s success stems in good part from overseas expansion. Revenues from international package shipments grew by 23.1 percent last year through September, driven by a 29 percent increase in exports from Asia. Chinese export volume alone more than doubled; UPS recently announced that it is taking over the local delivery network of its former Chinese distribution partner, Sinotrans.
“From a strategic standpoint the company is positioned well globally. It’s a productive, efficient, well-run name-brand company,” says one analyst for an investment manager.
Atlanta-based UPS’s domestic package-delivery business remained the biggest of the company’s three segments, accounting for 73 percent of revenues and 68 percent of earnings in the first nine months of 2004. During that same period average daily package volume in this line grew by 3.9 percent, with revenues up by 6.3 percent and operating earnings rising by 9.3 percent.
Eskew, who also sits on the boards of 3M Co. and IBM Corp., sees additional opportunities for UPS in helping companies manage warehouses and supplier networks. Its Supply Chain Solutions grew by nearly 10 percent in last year’s first three quarters. Eskew anticipates that the operation will grow from 6.4 percent of the company’s revenues last year to about 15 percent over the long term. The supply-chain business essentially offers outsourcing of freight forwarding, customs brokerage and service parts logistics.
What can brown do to improve its business? Says Eskew, “We can expand our customers’ markets so they can go places they never went, differentiate their products and improve customer service -- and allow them to focus on what they do well.” -- Stephen Taub
* Adjusted for splits and dividend payments.
Brian ROBERTS
Comcast Corp.
Age: 45
Year named CEO:2002*
Number of employees: 68,000
2004 stock performance: +1.5 percent
Annual compensation: $8.62 million
Stock options: $82.83 million
Roberts: “I don’t think there has ever been a more intellectually stimulating time in this business.”
One voter: “He doesn’t let his ego get in the way of forging relationships and reaching deals with other companies -- including competitors. That’s critical in an industry like cable that’s undergoing convergence with other sectors.”
Shareholders of cable giant Comcast Corp. didn’t exactly throw a party when CEO Brian Roberts made a run at acquiring the Walt Disney Co. in February. Roberts reasoned that he could create the dominant electronic media empire by marrying Comcast’s 21 million cable television subscribers, far and away the country’s largest distribution base, with Disney’s programming -- including movies as well as the ABC and ESPN television networks. Investors didn’t see it that way. Fearing another megamerger debacle along the lines of America OnlineTime Warner (see box, page 61), they sent Comcast shares tumbling from about $34, when speculation of a deal first surfaced in early February, to $29.97 on April 27, the day before the Philadelphia company withdrew its hostile bid.
But Roberts, the son of Comcast founder Bert Roberts, is nothing if not flexible. Five months after failing to win Disney, he struck a distribution deal with Sony Corp., as part of the Japanese company’s $3 billion acquisition of Hollywood movie studio Metro-Goldwyn-Mayer. Comcast became a minority equity partner in the merged Sony-MGM, which agreed to distribute its vast film and television programming library through Comcast’s popular video-on-demand service. The two companies also created a joint venture to launch new cable channels that will showcase Sony-MGM content. For a fraction of the cost of acquiring Disney -- and with far less execution risk than an outright merger with a large content provider -- Comcast went a long way toward satisfying its thirst for in-house programming.
“We think that content and distribution can work well together, and so we put out a proposition,” says Roberts. “That’s why we made our proposal to Disney and why we got this amazing agreement with Sony and MGM.”
Roberts has been making the most of Comcast’s unparalleled distribution network, built in large part through his bold acquisition of AT&T Corp.'s cable unit in November 2002. Margins are declining in the core cable business, but Comcast is rolling out more-profitable products like digital video recorders, high-definition television, high-speed Internet connections and voice-over-Internet-protocol phone service. Roberts has used Comcast’s scale to extract more programming -- including on-demand content -- at better rates from the likes of Viacom, Disney and Time Warner. All in all, the company is generating tons of cash and is well positioned for continued convergence in the media world. Revenues rose 10.8 percent in the first nine months of 2004, compared with the year-earlier period. Operating income soared 81.3 percent.
“Brian is a tough businessman,” says Richard Parsons, CEO of Time Warner, whose HBO, CNN, Turner Broadcasting and other channels collectively are Comcast’s single biggest content supplier (see box, page 61). “He’s trying to use the leverage distributionwise, to pound down programming costs. My cable guys are cheering him on, but my network guys are like, ‘Wait a minute, Brian, what’s up with that? We’ve got to make a living, too.’” -- J.S.
* Roberts was formally named CEO in 2002 when Comcast Corp. created the title. From 1990 until 2002 he was president but performed both functions.
Terry SEMEL
Yahoo!
Age: 61
Year named CEO: 2001
Number of employees: 7,000
2004 stock performance: +67.4 percent*
Annual compensation: $601,980
Stock options: $289.54 million
Semel: “We are a technology company and an Internet-media company. The integration of those two is what’s going to give us extraordinary advantages.”
One voter: “Yahoo! is the best-positioned company in Internet services because they have a user-friendly search site, everyone knows about Yahoo!, and its brand image has already been established.”
Terry Semel took a leap of faith in 2001, jumping from the co-CEO job at entertainment powerhouse Warner Bros. Entertainment to become CEO of Yahoo!. Not long after he left Los Angeles and arrived in Silicon Valley, the Internet-media company’s share price slumped to below 5, less than one 20th of its dreamy January 2000 peak.
Like many other onetime high-flying Internet concerns, Yahoo! needed a jump start. Semel began by bolstering its search and advertising-delivery capabilities. With two key acquisitions, he helped the company bring in more ad dollars from its user base, which continued to grow even after the technology-finance bubble burst, making Yahoo! the most trafficked Internet destination in the world.
First, in March 2003 he bought powerful search engine services provider Inktomi Corp. for $290 million in cash. Seven months later Semel purchased Overture Services, an Internet ad distributor, for about $1.8 billion in stock and cash. The deals have allowed Yahoo! to operate its own search and ad-delivery engines, ending outside licensing arrangements for these services with the likes of archrival Google. In September, Yahoo! commanded a 32 percent share of U.S. Internet searches, up from 26 percent a year earlier. Its gains came largely at the expense of Time Warner’s (see box, page 61) America Online service.
“Search is one of our mainstreams,” says Semel, who during 24 years with Warner Bros. presided over such hit movies as Batman and The Matrix, diversified the company and grew revenues more than tenfold. “But to me it’s how we integrate search with personalization, community and content. We’ve done a lot in the past year, and we’re just starting.”
Adds Deutsche Bank Securities analyst Jeetil Patel, “He’s been ahead of the curve in a lot of these key initiatives, and as the market takes off, Yahoo! is well positioned.”
In the third quarter of 2004, Yahoo!'s revenues jumped 154 percent, compared with the year-earlier period, to $907 million. Earnings rose by 91 percent, to $124 million. In September, 325 million unique users had visited Yahoo! sites globally, up from 237 million in March 2002. Registered users, who more actively use Yahoo! content, had grown by 60 percent, to 157 million, and paid subscribers had increased by a factor of 11, to 7.6 million.
That growing audience makes Yahoo! more attractive to advertisers. Overall, online advertising jumped 29 percent in 2004, to $9.4 billion, and will rise by an additional 20 percent in 2005, estimates EMarketer, a New York research firm. Deutsche Bank’s Patel reckons Yahoo! will continue to command an industry-leading 20 percent of all online ad dollars in 2005, ahead of AOL and Microsoft Corp.'s MSN.
Yahoo!'s once-depressed shares have responded. They were changing hands for $37.68 each at the end of December, a 67 percent gain on the year.
Now that he has reinvigorated Yahoo!, Semel is by no means content to just surf along. Last year he expanded the company’s global reach by partnering with Chinese Internet portal Sina Corp. to run an auction site in China and by acquiring Kelkoo of France, Europe’s biggest e-commerce site, for about E475 million ($577 million). Yahoo! also deepened a partnership with SBC Communications to make Yahoo! the primary content provider for SBC’s Internet and Cingular wireless service customers. And Semel’s looking to make acquisitions this year in Asia and Europe, which are increasing users faster than the U.S. “We’ll see a lot more emphasis on Europe this coming year,” he says. “We see opportunities to get much stronger there.” -- Steven Brull
* Adjusted for splits and dividend payments.
Irwin JACOBS
Qualcomm
Age: 71
Year named CEO: 1985
Number of employees: 7,600
2004 stock performance: +58.6 percent*
Annual compensation: $2.79 million
Stock options: $215.50 million
Jacobs: “The most important things a CEO must do are work hard, select the right people and encourage innovation.”
One voter: “Qualcomm is rapidly becoming for wireless communications what Microsoft has been for personal computing.”
Irwin Jacobs is an entrepreneur at heart. The Cornell University and Massachusetts Institute of Technology electrical engineering graduate founded Qualcomm in 1985 after leaving M/A-Com, which had acquired his previous telecommunications equipment start-up, Linkabit, five years earlier. Twenty years later, Jacobs finds himself leading a 7,600-person public company worth $73 billion. But he tries hard to preserve the giant firm’s entrepreneurial spirit.
“It’s a lot different from when we started with only eight people,” says the CEO, whose sons, Paul and Jeffrey, joined Qualcomm in 1986 and each run one of the company’s units. The elder Jacobs encourages an informal, collegial exchange of ideas among employees through e-mail discussion groups and by bringing in guest speakers from academia and other businesses. “We’re always trying to inject some intellectual ferment into the company,” says the former MIT engineering professor.
Jacobs’s own higher-level thinking has turned San Diego-based Qualcomm into the undisputed leader among providers of the microchips, software and services that power today’s ever-more-sophisticated wireless handsets. The company, which sold its phone-manufacturing operations to South Korea’s Kyocera in 2000, has been the driving force behind the Code Division Multiple Access technology protocol that is rapidly becoming the global industry standard for so-called third-generation wireless communications networks. These networks allow mobile phones to be used for broadband communications such as surfing the Internet and transmitting movies and music videos.
More than 100 million subscribers currently communicate over third-generation CDMA networks operated by the likes of Verizon Wireless and China Netcom. That widespread adoption of CDMA has fueled earnings growth of 378 percent over the past two years at Qualcomm. The company’s shares, pummeled by the collapse of the technology and telecom bubble in 2000, recovered from a three-year low of $11.62 in August 2002, rising to $42.40 at the end of 2004.
Jacobs foresees a host of new applications for Qualcomm’s wireless technology. One recent breakthrough allows diabetics and pacemaker users to attach sensors to their cell phones that monitor blood sugar levels and heart rates and inform caregivers of any irregularities.
“Our approach remains to be very innovative,” says Jacobs, “to bring about large changes, not little ones.” -- J.S.
C. John WILDER
TXU Corp.
Age: 46
Year named CEO:2004
Number of employees: 14,800
2004 stock performance: +177.7 percent*
Annual compensation: $1.18 million**
Stock options:$5.42 million
Wilder: “A CEO of any company today must show disciplined capital allocation to maximize returns for shareholders.”
One voter: “He’s willing to look at options and alternatives that aren’t always the easiest.”
C. John Wilder has had plenty to keep him busy since taking over as CEO of TXU Corp. last February. He has moved aggressively to streamline the once-bloated electric utility, selling underperforming divisions and outsourcing back-office operations to cut costs. And investors have cheered him on, sending Dallas-based TXU’s shares up 177.7 percent last year.
Wilder is no stranger to hard work -- or recognition. His performance in his previous job, as chief financial officer of Entergy Corp., so impressed investors that they voted him No. 1 in the Electric Utilities sector in this magazine’s survey last year of the country’s top finance chiefs (Institutional Investor, February 2004). As a CEO he wins praise for decisiveness and clarity. “He does a phenomenal job of communicating his plan to the marketplace,” one voter says.
That plan has three phases. The first -- designed, in Wilder’s words, to “rationalize, restructure and restore financial strength” -- is already wrapped up. Those three “Rs” saw TXU sell its flagging TXU Gas Co. and TXU Australia Co. divisions for a total of $5.5 billion and team with French business-services firm Capgemini to handle call-center and other administrative functions. Now Wilder is focused on improving the performance of TXU’s core electric-utility business; then he plans to attend to growth initiatives. His aggressiveness is paying off. In October, TXU posted third-quarter earnings of $662 million, nearly 70 percent higher than those of the same period in 2003.
Wilder is unafraid to take risks. A planned energy-trading collaboration between TXU and Credit Suisse First Boston collapsed last September after the parties were unable to agree on terms. Instead, Wilder elected to develop TXU’s own trading and marketing business. Trading has regained a degree of respectability -- and profitability -- in the industry recently, following a series of debacles involving energy suppliers, most notably Enron Corp., that got caught up in the risky trading world. “This is a very important part of our business, and the existing team is very capable,” Wilder says.
Wilder’s handiwork is already paying dividends -- literally. TXU stock climbed by 16 percent -- by more than $8 -- in one day last October after the company raised earnings projections and announced plans to boost its dividend by 350 percent and buy back 50 million shares. TXU has paid off $6 billion in debt since Wilder took over. “Now it is time to return some of the capital from asset sales to our shareholders,” he says. -- T.C.
* Adjusted for splits and dividend payments.
** As CFO of Entergy Corp.
