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As companies turn down office thermostats to cut costs this winter, chief executives may be wryly wondering why their seats only get hotter.
"It used to be that CEOs of major corporations were expected to produce very steady returns, albeit average ones," notes Charles Lucier, senior vice president emeritus at management consulting firm Booz Allen Hamilton. "These days companies are expected to provide annual returns of 15 to 20 percent -- a much higher standard than just a decade ago."
And CEOs must achieve this lofty goal in an environment marked by intense global competition, breathtaking technological change and, of late, lackluster securities markets. Investors, stung by corporate scandals, demand not only superb short- and long-term performance but also strict integrity and expansive transparency.
The premium on producing superior results quarter to quarter is enormous. "Some CEOs are able to do that and not cannibalize the future, but many are not," says Roselinde Torres, group executive for global practices and marketing at Mercer Delta Consulting, a New York firm that advises CEOs on change and leadership development. As a result, says Booz Allen's Lucier, business has entered the age of "the ephemeral CEO": The rate of chief executive departures in the U.S., once extremely low, is now equivalent to the turnover of employees in general -- about 12 percent annually.
In its annual study of CEO succession, published last spring, Booz Allen said that underperformance is the primary reason CEOs are fired; in 2004 that explained 31.4 percent of all chief executive departures.
Many Wall Streeters recognize that they call the tune in this game of corporate musical chairs.
"I would like to see longer tenure and to see people be less influenced by quarterly earnings," confides one portfolio manager, who concedes that investors often place inordinate demands on management. "But our clients put pressure on us. Everybody wants performance; nobody wants to take responsibility for the pressure."
Others don't buy the "Wall Street made me do it" excuses that some CEOs use to justify ill-advised actions, poor results or sinking stock prices.
"They're just a management cop-out," says a mutual fund analyst. "If a company has bad short-term results but communicates properly about why its future looks good, the stock price shouldn't be affected."
To find chief executives who excel at their ever-tougher assignment, Institutional Investor surveyed portfolio managers and analysts at the world's leading financial institutions. Responding to the magazine's fourth annual ranking-of-CEOs poll were more than 1,700 investment professionals at close to 475 firms. Winners were selected in 62 industry sectors that correspond to our 2005 All-America Research Team survey (see table; for more on methodology, click here).
Taking the long-run view is how Mark Papa of Houston-based EOG Resources (see box), II's No. 1 CEO in Oil & Gas Exploration & Production, runs his business. "We don't make any decisions based on how we think the stock is going to react in the short term," he says. "We make our company's strategic decisions based on what we think is the best focus for the company. It's my job to communicate to the investment community but not to make the decisions based on how they're going to respond."
Another top II chief executive, John Kanas of Melville, New York-based North Fork Bancorp. (see box), acknowledges that the pressure for immediate performance sometimes can be intense. "If we were in a private environment, we would do some things differently," he explains. "We are frequently forced to pass up opportunities that may be in the long-term best interest of the company but would be too punishing in the short term."
David Novak of Louisville, Kentucky-based Yum! Brands, and II's No. 1 CEO in Restaurants (see box), juggles Wall Street's expectations by emphasizing one word. "We believe in the power of 'and': We aim to deliver short-term and long-term results," he says.
Consistent with the data showing companies' performance to be a key factor in CEO tenure, many of the chief executives cited by the II respondents head companies whose stock market gains were, on average, better than their peers'.
In the robust U.S. oil and gas sector, for example, where the typical company's shares were up 25.99 percent last year, EOG Resources gained 106.3 percent. That outperformance was largely as a result of CEO Papa's bet four years ago to explore for natural gas in the Barnett Shale area north of Fort Worth, Texas. Earlier drilling there had proved disappointing, but, using new technology, EOG was able to report significant natural-gas discoveries in 2005, more than justifying Papa's gamble.
Another great market performer was Scott Edmonds, who ranks No. 1 in Retailing/Specialty Stores. Shares of his company, Fort Meyers, Floridabased women's clothing chain Chico's FAS, gained an adjusted 93.01 percent in 2005, compared with just 1.84 percent for the MSCI specialty retail index over the same period.
"Chico's has the best culture, the best management team and the highest operating margins -- they are the best retailer, period," says one investor.
That notion of "culture" can be pivotal to a CEO's success, suggests one investment analyst. "A great CEO," he maintains, "is someone who can inspire others to treat the company as if it were their own."
In fact, companies belong to their shareholders, and they are the ones that CEOs must ultimately please. Yet at a time of modest market returns -- the Standard & Poor's 500 index gained just 3 percent in 2005 -- many investors appear to be willing to overlook a stretch of mediocre performance if they believe a chief executive has the company headed in the right direction. "Great CEOs," contends consultant Torres, "win and hold the confidence of investors while they implement their long-term strategy, even if that means weathering an occasional bad quarter."
Our list of top CEOs abounds with examples of those who have persuaded investors that their basic strategy is sound, despite short-term setbacks. One portfolio manager cites the example of Zimmer Holdings, a Warsaw, Indianabased orthopedic-implant company, which remains a favorite despite a 20 percent decline in share value last fall after CEO J. Raymond Elliott stated that greater price competition would adversely affect Zimmer's performance (see box).
The market "overreacted" to his remarks, Elliott told a health care conference last November, but he continues to actively communicate with investors because "we want people to understand what we're seeing relative to Zimmer."
Keys to winning investor support for top management are evidence of flexibility and a willingness to take calculated risks. That, says Booz Allen's Lucier, contrasts with the not-so-distant past, when CEOs could win accolades for simply being capable caretakers.
Hugh Panero, CEO of Washington, D.C.based XM Satellite Radio Holdings, is anything but a custodian of convention (see box). Panero built his company on a new business model -- subscription radio -- and a new digital technology, the industry's first major technological change since FM broadcasting began more than a half century ago.
One of just two companies licensed to broadcast via satellite in the U.S. -- Sirius Satellite Radio is the other -- XM is tackling the challenge of providing content that will attract subscribers even as it works with auto companies and hotels to install receivers capable of accessing XM's digital signal and persuades electronics makers to market such receivers. Although the company has yet to earn a profit, revenues reached $153 million in the third quarter, up 134 percent from $65 million a year earlier, and it has attracted about 6 million subscribers in four years.
"I focus on hitting my numbers at the end of the year," says Panero, formerly CEO of Request Television, a pay-per-view network bought by Viewer's Choice Canada in 1998. "When you execute, the chatter and the noise fade away."
For the CEO of an established business, quick reflexes can be critical to sustaining growth. When fears of an avian flu pandemic swept China and threatened to drive away customers of Yum! Brands' fast-growing KFC Corp. restaurants there, CEO Novak acted swiftly. He made sure the message got out through in-store promotions and mass-media advertising that the company -- the No. 1 consumer brand in China, according to ACNielsen -- was buying all of its chicken from top-quality suppliers and cooking it at high temperatures. He also arranged to use backup suppliers from outside China, in case that became necessary. (In the event of a bird flu outbreak in the U.S., meanwhile, Novak has had KFC prepare television commercials reassuring customers that its chicken is still safe to eat.)
Other winning CEOs face other sorts of public trials. Richard Parsons of Time Warner, II's top Entertainment chief executive, has been involved in a bruising, very public battle with investor Carl Icahn, who wants to break up the company. Steven Ballmer, our highest-ranked Software CEO, now must answer investors' questions about Microsoft Corp.'s future in a world gone Google -- after his company's lackluster share performance, starting 2005 at $26.40 and ending it at $26.15. Even CEOs who deliver outstanding performance are not spared: In November top Integrated Oil CEO Lee Raymond of Exxon Mobil Corp. was grilled by a none-too-friendly Senate panel looking into record-high post-Katrina gasoline prices and oil company profits.
When facing a crisis or, more often, the need to set a fresh course, boards of directors often hire CEOs from outside who have experience managing change and no attachment to the status quo. For investors, however, that may not always be the best solution.
"What we find in our research," says Booz Allen's Lucier, "is that when outsiders are hired, they do a great job for investors for the first two or three years, but following that they are a disaster. Outsiders deliver worse returns long-term than insiders." Their lack of intimate knowledge about their new businesses, he explains, makes it harder for them to manage and run their new companies in a way that creates long-term value for investors.
North Fork's John Kanas demonstrates how a long-term insider can produce results. Kanas joined the tiny suburban bank in 1971, became its CEO in 1977 and since then has transformed it into a 360-branch bank holding company, the nation's 16th-largest, through more than a dozen acquisitions. "He is a very good executor of deals," points out one sell-side analyst. He is also bottom-line-focused: North Fork's average annualized return on equity was 21.56 percent for the five years through 2004, versus 15.20 percent for the banking industry, according to SNL Financial.
CEOs aren't the only ones trying to figure out short- versus long-term trade-offs; the proper balance is the holy grail of business school professors and management consultants.
Walter Scott, a professor of management and leadership at the Kellogg School of Management at Northwestern University, offers this kernel of advice to would-be CEOs: Forget about stock prices in the short term, and "care a lot about the stock price in the long run." But he acknowledges, on behalf of every CEO in America, that this is "easy to say and hard to do."
MARK PAPA
EOG Resources
Age: 58
Year named CEO: 1998
Number of employees: 1,250
2005 stock performance: +106.3 percent*
Annual compensation: $1.79 million
Stock options: $15.84 million
Papa: "I always enjoy the interplay with shareholders. Some may view analyst meetings as tedious; I think they give me a different perspective."
One voter: "Mark is a terrific steward of capital and someone I trust with my money."
Last November, when the ordinarily restrained Mark Papa said Houston-based EOG Resources had brought in a "monster well" that could produce 7.7 million cubic feet of natural gas a day, investors sensed something spectacular was going on in the Barnett Shale.
EOG's involvement in this now-booming field north of Fort Worth, Texas, dates to 2001, when Papa, who holds a petroleum engineering degree from the University of Pittsburgh and an MBA from the University of Houston, decided to explore in the promising but technologically challenging pocket. Today, as the hunt for natural gas in North America grows frenzied, he is again taking the long view. "Others are busy buying each other at inflated prices," says one fund manager. "Papa is quietly adding to acreage in areas like the Barnett Shale that he knows will produce strongly for years to come."
The long-term view has paid short-term dividends: The company's third-quarter net income was $341.9 million, up 102 percent from the comparable 2004 figure. Notes one investor, "His success at relentlessly focusing EOG on its long-term goals, despite the all-too-often short-term nature of financial and energy markets, puts Mark at the absolute top of oil and gas CEOs." -- Scott Martin
J. RAYMOND ELLIOTT
Zimmer Holdings
Age: 56
Year named CEO: 2001
Number of employees: 6,500
2005 stock performance: 15.8 percent
Annual compensation: $2.18 million
Stock options: $15.84 million
Elliott: "Since our spinout from Bristol-Myers in 2001, we've been telling the Zimmer story nonstop."
One voter: "He and Zimmer can be viewed as pioneers in the industry."
When hints of pricing weakness in the medical device market began to multiply last summer, investors turned to Warsaw, Indianabased Zimmer Holdings, the world's biggest orthopedic-implant company, for the full story. True to form, CEO J. Raymond Elliott started warning shareholders in early September that competition was growing and that price cuts were "absolutely" on the table.
"Our investor strategy included lots of face-to-face meetings, accessibility to both [CFO] Sam Leno and me, comprehensive and transparent disclosures and, above all else, candor," says Elliott, a graduate of the University of Western Ontario in Canada. His company reported net earnings of $533 million for the nine months ended September 30, 2005.
Although the stock and sector sold off in the months that followed, investors appreciate Elliott's delivery of the unvarnished truth. "He has integrity," says one buy-side analyst. "He answers questions directly, without dancing around like many chief executives do."
Wall Street also likes Elliott's long-term approach. As one investor explains: "Under Ray, Zimmer has invested in R&D and developed new technologies. He is not afraid to spend money knowing returns may be many years away." -- S.M.
DAVID NOVAK
Yum! Brands
Age: 52
Year named CEO: 2000
Number of employees: 850,000 (includes franchise associates)
2005 stock performance: 0.24 percent*
Annual compensation: $4.50 million
Stock options: $63.24 million
Novak: "As a retailer, we must beat year-ago results at all costs."
One voter: "It's clear they have a long-term plan on which they are very, very focused."
At Yum! Brands, the Louisville, Kentuckybased owner of 34,000-plus KFC Corp., Pizza Hut and Taco Bell Corp. eateries worldwide, management's reflexes are as fast as its food. When fears of avian flu scared customers away from chicken items and hurt KFC revenue in China last fall, CEO David Novak acted swiftly. Yum!, whose year-to-date earnings of $1.87 per share through the third quarter were 13 percent above the comparable 2004 figure, arranged for alternate sources of supply in case some producers were quarantined, and the company readied a series of television commercials for the U.S. market to reassure customers that even if a flu outbreak were to occur, KFC chicken is safe.
Other aspects of the KFC business also required attention. To contain costs, Novak, a graduate of the University of Missouri and a former PepsiCo executive, closed more than 350 KFC stores last year. To attract more customers to existing stores, he added discount-priced snack items and a popular variety-chicken bucket to all KFC locations. "We have to be on top of what our customers want and then do something about it," he explains.
In a rough year Yum!'s share price was virtually flat. Nevertheless, one satisfied investor says, "Novak does a great job of getting the different parts of the organization to work together." -- Suzanne McGee
* Adjusted for splits and dividend payments.
HUGH PANERO
XM Satellite Radio Holdings
Age: 49
Year named CEO: 1998
Number of employees: 800
2005 stock performance: 27.49 percent
Annual compensation: $1.06 million
Stock options: $17.21 million
Panero: "In a duopoly you can't get too caught up in the competition of the moment in your quest to be the leader."
One voter: "What he promises in the quarterly guidance is what is delivered."
You don't drive your father's Oldsmobile, so why, reasons Hugh Panero, CEO of Washington, D.C.based XM Satellite Radio Holdings, should you have to listen to your father's car radio?
Not so long ago, of course, FM or AM were your only choices. When Panero, a former Time Warner Cable executive, joined thenAmerican Mobile Radio Corp. as CEO in 1998, satellite radio was all but unknown. But at the end of 2005, four years after launching the service nationwide, he estimates that XM had more than 59 percent of the satellite radio market and about 6 million subscribers.
To sustain such chart-topping growth, Panero is promoting new technologies to make the XM product more appealing, such as playing devices with MP3 capability, while developing new programming, including original content, and lining up deals with hotels to put XM in guest rooms and with auto manufacturers to install XM-compatible receivers in their new cars. (General Motors Corp., Hyundai Motor Co. and Toyota Motor Corp. have all signed up.)
"You ignore any of those three areas -- technology, content and distribution -- at your peril," Panero says. "The ongoing challenge that we face is how to allocate scarce resources among them."
Reluctant to sign pricey talent deals like rival Sirius Satellite Radio's $500 million pact with "shock jock" Howard Stern, Panero's investment in content includes the launch of several channels, including "Take 5," dedicated to women's programming, and another devoted to sports, in an arrangement with the National Hockey League.
Says one investor, "I like his approach to execution and cost control."
Panero realizes that one of his most pressing challenges is to turn his money-losing company's cash flow positive. Although 2005's third-quarter revenue of $153 million was 134 percent above the comparable 2004 figure, losses amounted to $131.9 million, compared with $118.0 million a year earlier. -- S.McG.
JOHN KANAS
North Fork Bancorp.
Age: 58
Year named CEO: 1977
Number of employees: 7,200
2005 stock performance: 2.01 percent*
Annual compensation: $5.73 million
Stock options: $4.64 million
Kanas: "A leader sets an example for others to follow; a manager just tells others what to do."
One voter: "He instills a very strong esprit de corps among his people."
Through aggressive acquisitions, including the $6 billion takeover of GreenPoint Financial Corp. in 2004, chief executive John Kanas has transformed Melville, New Yorkbased North Fork Bancorp. from a 1950s amalgam of small-town Long Island institutions into the nation's 16th-largest bank, with assets of $60 billion. Net income in 2005 through September was $738 million, an increase of 123 percent over the comparable 2004 period.
"I've watched a tiny company grow into a large one and witnessed how this growth has changed many people's lives for the better," says the 1968 graduate of Long Island University, who remains committed to additional acquisitions.
Expansion hasn't been his only challenge lately. Kanas has had to guide North Fork through 13 Federal Reserve Board interest rate hikes since summer 2004, while coping with a growing but skittish economy.
"We've had to restructure our balance sheet and change some practices so that we're less exposed to the margin pressures brought on by the current interest rate environment," he says. "We've also amended our lending practices and reduced loan values to try to head off fallout from a possible contraction in real estate values."
Kanas's candor distinguishes him from his peers, admirers say. "He doesn't play the accounting games that a lot of others do," says one asset manager. "He lets the numbers, good or bad, speak for themselves." -- Tom Johnson