Being the chief executive of a public company has never been easy. Lately, it has been all but impossible. Enron-era accounting scandals, alleged options-backdating misdeeds and other tawdry scrapes have given rise to strict new regulations, a wave of investor activism and increased second-guessing by no-longer-quite-so-pliant boards of directors all of which has raised already-high stress levels and contributed to record turnover among CEOs. The only reliably positive news for chief executives had been a strong economy. No longer. Now, with housing and credit market crises threatening to trigger a recession, corporate chiefs will have to struggle to maintain, much less grow, earnings. And that will only give restless shareholders and independent directors more reasons to clash with the men and women at the top.
CEOs are very much on guard right now, says Keith Meyer, co-head of the North American CEO practice at executive search firm Heidrick & Struggles International. Without the economic tailwinds behind them, it really is going to separate those leaders who are really good at creating shareholder value from those maybe riding the crest of an industry wave.
Strong leadership is especially valuable during times like these. For a sixth consecutive year, Institutional Investor has surveyed the worlds biggest shareholders to find out which CEOs are the most outstanding in America. Many of the winning chief executives selected by our voters have proven their mettle in past crises by turning around companies that were hurting financially, suffering from scandals or otherwise confronted with serious obstacles.
James Skinner, for example, took over McDonalds Corp. in the middle of a turnaround that had been stopped cold first by former CEO James Cantalupos sudden death by heart attack in April 2004 and six months later when Cantalupos successor, Charles Bell, was diagnosed with advanced-stage cancer and resigned. By the time Skinner assumed the job, the fast-food chain was under siege from critics assailing its role in the growth of obesity in the U.S. Skinner oversaw a menu change that stressed healthier options. The 37-year McDonalds veteran also rallied stunned employees to follow through on the turnaround plan that Cantalupo and Bell had begun. Last year the company posted record earnings, with December marking its 55th consecutive month in the black. Its shares rose by approximately one third.
Skinner, judged by investors as the top CEO in the Restaurants sector, attributes his success to holding fast to a few simple principles, including focusing on developing future leaders internally and, even more important, building sustainable growth. Thats job No. 1 for a CEO if you dont get that one right, you dont get to have two or three, he says. Investors agree, noting that although Skinner is perhaps not as visionary as his predecessors, he stuck with a good strategy, as one portfolio manager says. He got points for stick-to-itiveness.
Hewlett-Packard Co.s Mark Hurd, the No. 1 CEO in the IT Hardware sector, has spent the past two years cleaning up a mess, following a revolt by old-line technologists against former CEO Carleton Fiorinas 2002 acquisition of Compaq Computer Corp. and Fiorinas exit amid a well-publicized governance scandal that involved alleged spying on journalists. Hurd kept a low profile while revamping the companys operations to make them more efficient and more profitable. He consolidated, for example, HPs 85 data centers worldwide to just six, saving some $1 billion in technology spending. Late last year HP surpassed rival Dell to become the worlds No. 1 personal computer vendor; its fourth-quarter earnings of $2.6 billion rose 39 percent from the same period in 2006, beating Wall Streets expectations. Its been a real challenge to get the organization behind him and moving in one direction, but he has largely done it, says one investor.
Stephen Hemsley of UnitedHealth Group assumed the CEOs chair during the darkest chapter in the insurers history. His predecessor and former boss, William McGuire, stepped down in 2006 amid a probe into the alleged backdating of options grants. Hemsley, the top CEO in the Managed Care sector in this years survey, set to work curing the companys ailments under the gaze of regulators investigating the companys dealings. He also had to rehabilitate UnitedHealths reputation in the eyes of analysts, investors and employees, a task he tackled by voluntarily having all of his remaining options repriced. By doing so, he forfeited $240 million in stock, a move that boosted his credibility and distanced him from McGuire. Hemsley apologized to shareholders, who suffered a 28 percent decline in the value of their investment during the first half of 2006, and improved communication with the market by freeing his executive team to speak with investors and analysts.
Its really quite simple, says Hemsley. We talk to them about the business the same way we talk amongst ourselves.
Says one investor who is impressed with Hemsleys performance, Youve seen him changing the image of the company to being more open and friendlier to the broker and investor community.
With the advent of postbubble reforms like the Sarbanes-Oxley Act, and as shareholders and directors take a more active role in governing public companies, chief executives must be ever mindful of how their actions are viewed. They will have to be even more careful during a cyclical downturn, as profit growth and stock-price appreciation will be more difficult to achieve.
When you talk to board members today, the biggest issue or regret they have is not firing a CEO soon enough, says Steven Wheeler, head of the global strategic leadership practice at management consulting firm Booz Allen Hamilton. Boards today take a more active role in challenging managements than they used to, which puts even more pressure on CEOs to explain their actions. Thats a substantial change over the past few years.
Increasingly, directors are making sure they do not have regrets. In November, 132 public-company CEOs left their jobs, a 38 percent increase from the 96 who departed in October and 17 percent higher than in November 2006, according to outplacement consulting firm Challenger Gray & Christmas. If economic conditions worsen in the coming year, those numbers may rise further as companies seek CEOs who can lead them through a crisis.
In the last year weve been looking for individuals who can thrive with challenge, says Clarke Murphy, head of the CEO and board services practice at New York executive search firm Russell Reynolds Associates. And not a warm-and-fuzzy challenge, but an Oh my gosh, this is a huge problem challenge.
Voters in our survey are doing the same thing. Several of our top CEOs win plaudits from investors for managing through a bull market with the coming down cycle in mind.
Exelon Corp. CEO John Rowe, who takes top honors in the Electric Utilities sector, says he often heard criticism that his company was failing to be sufficiently aggressive as energy prices spiked and debt capital was abundant during the past few years boom. Even as rivals borrowed heavily to boost financial performance or build massive new facilities, Rowe resisted calls to do the same. Now that growth is slowing, he is glad he did not overextend the company and so are shareholders.
Its very easy to look smart when everything is booming, Rowe tells II. Its very hard to look smart in a recession or a collapse in prices. We try to make very hard-headed decisions that can survive a whole business cycle. If you lever all you can when times are good, you will not have the financial strength you need when theyre not good. Its a matter of trying very hard to be consistent about what the long-term drivers of value are.
The top CEO in the Electrical Equipment & Multi-Industry sector, Emerson Electric Co.s David Farr, also has been positioning his company to withstand more difficult times ahead. Farr has focused on boosting non-U.S. sales, particularly in China, where the company has been making substantial investments and now does more than $1 billion in annual sales. Today, 52 percent of Emersons revenues come from outside the U.S., compared with 40 percent when Farr took over in 2000. That geographic diversity will allow us to do reasonably well even though the U.S. economy will slow down, says Farr, adding that the push into China is also a preemptive strike against rivals there that may want to invade Emersons existing turf. My biggest concern is that I allow a Chinese Emerson to emerge, and when I pass this on to the next generation, they have a new Emerson out of China to deal with.
Such clear-eyed, proactive leadership will be in higher demand in coming months, forcing the charismatic visionaries who thrive in bull markets to either adapt or give way to down-to-earth cost-cutters and shrewd pragmatists who can lead companies through a downturn. CEOs who have taken advantage of booming capital markets to grow through big acquisitions may find it difficult to make the transition. Going forward, it is going to be a much different challenge for these CEOs who have played that game, says Heidricks Meyer. You need an operational focus, and it maybe goes back to the old-fashioned way to lead, which is: How do you get more from the operations you have?
Who ever thought dealing with Sarbanes-Oxley would seem like a walk in the park?
The Best CEOs
Listed here by sector and industry are the 59 chief executives who scored the highest when Institutional Investor asked portfolio managers to choose the top-performing CEOs in their domains.
Hugh Grant Monsanto Co.
Metals & Mining
Richard Adkerson Freeport-McMoRan Copper & Gold
Paper & Forest Products
John Faraci International Paper Co.
Aerospace & Defense Electronics
George David United Technologies Corp.
Airfreight & Surface Transportation
Frederick Smith FedEx Corp.
Business & Professional Services
Jeffrey Joerres Manpower
Electrical Equipment & Multi-Industry
David FarrEmerson Electric Co.
James OConnor Republic Services
Alexander (Sandy) Cutler Eaton Corp.
Albert Stroucken Owens-Illinois
Gary Kelly Southwest Airlines Co.
Apparel, Footwear & Textiles
Lewis Frankfort Coach
Autos & Auto Parts
John Barth 1 Johnson Controls
Indra Nooyi PepsiCo
Cosmetics, Household & Personal Care Products
Alan Lafley Procter & Gamble Co.
A.D. David Mackay Kellogg Co.
Gaming & Lodging
Stephen Wynn Wynn Resorts
Homebuilders & Building Products
Robert Toll Toll Brothers
Micky Arison Carnival Corp.
James Skinner McDonalds Corp.
Retailing/Broadlines & Department Stores
Robert Ulrich 2 Target Corp.
Retailing/Food & Drug Chains
Thomas Ryan CVS Caremark Corp.
Ronald Sargent Staples
Michael Jeffries Abercrombie & Fitch Co.
Louis Camilleri Altria Group
John Rowe Exelon Corp.
Rex Tillerson Exxon Mobil Corp.
Keith Rattie Questar Corp.
Oil & Gas Exploration & Production
Robert Simpson XTO Energy
Oil Services & Equipment
Andrew Gould Schlumberger Financial Institutions
John Stumpf Wells Fargo & Co.
Harris Simmons Zions Bancorp.
Brokers & Asset Managers
Lloyd Blankfein Goldman Sachs Group
Kenneth Chenault American Express Co.
Arthur Ryan 3 Prudential Financial
Evan Greenberg Ace 4
Christopher Nassetta 5 Host Hotels & Resorts
John Martin Gilead Sciences
Health Care Facilities
Wayne Smith Community Health Systems
Health Care Technology & Distribution
David Snow Jr. Medco Health Solutions
Stephen Hemsley UnitedHealth Group
Medical Supplies & Devices
David Dvorak Zimmer Holdings
Fred Hassan Schering-Plough Corp.
David Pyott Allergan
Cable & Satellite
Brian Roberts Comcast Corp.
Robert Iger Walt Disney Co.
Publishing & Advertising Agencies
John Wren Omnicom Group
Radio & TV Broadcasting
David Field Entercom Communications Corp.
Computer Services & IT Consulting
William Green Accenture 3
Electronics Manufacturing Services
Timothy Main Jabil Circuit
Bruce Chizen 6 Adobe Systems
Eric Schmidt Google
Mark Hurd Hewlett-Packard Co.
Semiconductor Capital Equipment
Stephen Newberry Lam Research Corp.
Richard Templeton Texas Instruments
Lawrence Ellison Oracle Corp.
Data Networking & Wireline Equipment
John Chambers Cisco Systems
Paul Jacobs Qualcomm
Ivan Seidenberg Verizon
1 John Barth stepped down as CEO of Johnson Controls in October 2007 and retired at year-end 2007.
2 Target Corp. announced in January 2008 that Robert Ulrich will step down as CEO in May 2008.
3 Prudential Financial announced in November 2007 that Arthur Ryan will step down as CEO in January 2008 and as chairman in May 2008.
4 Based in Bermuda.
5 Christopher Nassetta stepped down as CEO of Host Hotels & Resorts in October 2007.
6 Bruce Chizen stepped down as CEO of Adobe Systems in November 2007.
Stephen Hemsley UnitedHealth Group
Age: 55 Year named CEO: 2006
Number of employees: 58,000
2007 stock performance: +8.4 percent
Annual compensation: $4.3 million
Stock options: $3.1 million
When Stephen Hemsley took over as CEO of UnitedHealth Group in November 2006, he knew he was in for a rough year. His predecessor, William McGuire, had just resigned amid allegations of options backdating, and Hemsley, the companys former president, who had been cleared of wrongdoing, was tasked with cleaning up the companys image and putting UnitedHealth back on track.
A Department of Justice investigation of the alleged backdating is still ongoing, despite a recent settlement between McGuire and shareholders in which the former CEO agreed to return $618 million in gains. Still, Hemsley has gone a long way toward restoring the credibility of the embattled Minnetonka, Minnesotabased health insurer, the countrys biggest. After apologizing to shareholders and employees for the mess, he volunteered to give up options worth $190 million (and has since forfeited an additional $50 million worth). He then revamped UnitedHealths senior management team, improved internal controls and restated 12 years of earnings downward by $1.5 billion to account for greater options expenses.
Most important, Hemsley has delivered strong financial performance. Net income for the third quarter rose 15 percent compared with the same period a year earlier, to $1.3 billion, handily beating analysts estimates.
While 2007 was not, by any measure, our strongest performing year, I do think we made important changes, says Hemsley, adding that the shake-up presented an opportunity to open things up, to look at team dynamics and organizational structure, and bring in new leadership. The beginning of that is maybe what I will look back on as the initiative to be proud of.
Bruce Chizen Adobe Systems
Age: 52 Year named CEO: 2000
Number of employees: 6,794
2007 Stock performance: +3.9 percent
Annual compensation: $4.9 million
Stock options: $77 million
Being a CEO is tougher than ever, avers Bruce Chizen. The global nature of business today, the onerous corporate governance demands and the shorter shareholder fuse make it an all-consuming, 24-7 job. That is why, after a successful seven-year run, Chizen in November announced that he would step down as CEO of software maker Adobe Systems, handing the reins to president and COO Shantanu Narayen effective December 1.
I wanted to take a break, explains Chizen. Before it was too late, I wanted to be able to take a step back and look at taking on different challenges.
Chizens departure (he is included as a winner in our ranking because our voting cutoff was September 30) was sad news for Adobe shareholders. During his tenure the San Jose, California, companys share price rose some 34 percent, compared with just 3 percent for the Morgan Stanley Capital International U.S. software index and 13 percent for the Standard & Poors 500 index, and sales more than doubled. Adobes software, including the popular Acrobat Reader and suite of publishing and photo editing software, has become nearly ubiquitous on desktops around the world, including those of this magazine. Chizens successful 2005 acquisition of Macromedia, and its Flash Web-animation technology, positioned the combined entity to compete against giants like Microsoft Corp. in the Web-based application business.
In 2007, Adobe completed its biggest software release ever; its Creative Suite 3 was received more enthusiastically than even Chizen had hoped. That success helped drive impressive numbers for the quarter ended November 30: Profits rose 21 percent and sales soared 34 percent over the same quarter in 2006. And Chizen believes Adobe is well positioned for a potential economic slowdown.
I dont think any company is immune to a recession, but what protects Adobe is the fact that were so diversified, he says, pointing to the number of markets and geographies in which Adobe competes and the variety of customers it serves. Also, the cost of our products is relatively inexpensive. So unless the economy really goes south quickly, we should do okay.
Perhaps most of all, the Street will miss Chizens straight-talking, nativeNew Yorker vibe. We deliver on our commitments, he says. And when we dont, we face up to it.
John Rowe Exelon Corp.
Age: 62 Year named CEO: 2002
Number of employees: 17,200
2007 stock performance: +35.2 percent
Annual compensation: $15.1 million
Stock options: $6.1 million
John Rowe will pick the tortoise over the hare anytime. During the long boom in capital markets activity that ended over the summer, the CEO of Chicago-based electric utility Exelon Corp. resisted calls from shareholders to juice the companys performance by adding debt, mindful that too much leverage can be a big burden when times get tough. Now, as housing and credit market crises threaten to throw the economy into recession, Rowe is thankful he did not give in. We spend a lot of time teaching our officers that the protection of value is as important as growth, explains Rowe.
Patient and cautious as ever, Rowe is contemplating a cut in capital spending and taking a wait-and-see approach to building two nuclear plants in Texas. Our board has made a very clear decision that its only authorized $100 million of commitments over the next two years, says Rowe. Were going to take two years to make certain that we know more about the state of the economy.
The CEO is taking a similarly pragmatic stance on one of the most important issues facing utilities and other energy companies: pressure to reduce environmentally damaging carbon emissions. Rowe cochairs the National Commission on Energy Policy, a bipartisan group of academics and business leaders that in April recommended the implementation of a mandatory cap-and-trade system, among other mechanisms, to limit greenhouse-gas emissions. In so doing, the commission sought to ensure that the industry would suggest a common-sense, market-based approach to an issue that the federal government seemed destined to tackle with legislation and regulations. But a cap on emissions from the burning of coal and other fossil fuels also will help boost the value of Exelons nuclear generating plants. The company is the biggest U.S. atomic generator, accounting for one fifth of the countrys nuclear power.
I got involved in the carbon issue originally because I thought it was a problem that had to be solved and I wanted to help develop reasonable proposals for doing it rather than unreasonable ones, says Rowe. It is now more and more clear that in our case, because of our large nuclear fleet, there is a potential economic benefit here as well.
David Farr Emerson Electric Co.
Age: 52 Year named CEO: 2000
Number of employees: 140,000
2007 stock performance: +31.4 percent
Annual compensation: $22.2 million
Stock options: $21.0 million
David Farr didnt enjoy much of a honeymoon after becoming CEO of Emerson Electric Co. in October 2000. In the spring of 2001, the new chief realized he had to tell the board that the diversified conglomerate was about to break a 43-year streak of growing earnings every quarter.
I didnt sleep for five days, Farr recalls.
But as a cyclical downturn began to grip the electrical equipment industry, Farr realized that the company would have to either break the streak or sacrifice its future profitability by dramatically cutting investment in new technology. The reason were doing this, he told directors and shareholders, is that were not going to reduce technology or innovation investment in this downturn. As a result, we may have some down margins right now, but were going to come out much stronger than our competitors.
Farr was right. He led the company through a rugged restructuring that included plant closings and layoffs, while maintaining spending on research and development, and Emerson emerged leaner and well positioned to exploit renewed economic growth. Earnings for Emersons fiscal fourth quarter, ended September 30, 2007, rose by 20 percent over the previous-year period. Sales for the fiscal year climbed 12 percent, to $22.6 billion.
Farr expects Emersons revenue growth to fall to about 5 to 7 percent in 2008, as the overall economy slows. But the companys diversity, in terms of both business lines and geography, should help it weather tougher times. Non-U.S. sales made up 52 percent of total revenues last year, up from 40 percent when Farr took over. He is aiming to increase that foreign share to 60 percent by focusing on fast-growing markets in Eastern Europe, the Middle East and Asia.
Farr, who has spent more than 26 years at the St. Louisbased company, is proud of his efforts. Emerson went from being a so-so Midwestern company, he says, to becoming a global leader, with a market capitalization of $45 billion. Thats not a small company, he adds. Its not G.E. but we do pretty well for ourselves.
James Skinner McDonalds Corp.
Age: 63 Year named CEO: 2004
Number of employees: 465,000
2007 stock performance: +36.4 percent
Annual compensation: $11.3 million
Stock options: $6 million
James Skinner displayed keen leadership skills at a company reeling from tragedy, when he took over at McDonalds Corp. following the sudden loss of two chief executives James Cantalupo, who died of a heart attack in April 2004, and Charles Bell, who was diagnosed with cancer and resigned just six months after succeeding Cantalupo. Skinner executed the turnaround plan of his predecessors, helping McDonalds post strong earnings growth and stock-price appreciation by divesting sister chains Boston Market and Chipotle and improving the appearance and efficiency of existing McDonalds stores. Now he is trying to position the iconic restaurant chain for harder times, as a housing downturn, high fuel prices and credit market woes dent consumer confidence.
We need to provide everyday affordability and value, says the 37-year McDonalds veteran, who has increased prices by just 3 to 4 percent annually in recent years despite surging wage and commodities costs.
Skinner stresses that the outlook for growth in the industry remains strong, with annual sales projected to increase from $800 billion today to more than $1 trillion over the next five years. There is no one in the world more poised to take advantage of that opportunity than McDonalds, he says. We need to position ourselves so the customer has an option. If theyre going to eat out, McDonalds should be their place.
The chain has come under increasing criticism for its contribution to ever-expanding American waistlines, particularly those of children. That is an issue that Skinner is confronting head-on. The CEO has pushed menu changes that feature healthier choices, such as salads and fruits, alongside its mainstay Big Macs and Quarter Pounders.
What I tell people is, we are not responsible for obesity, nor will we be the people who solve the problem in America or any other country, Skinner says. But we have to be part of the solution to provide choices that make people feel good about the experience at McDonalds and have choices that fit into their busy, active lifestyles.