What is an Effective CEO Worth?

The idea that every founder of an enterprise or incoming CEO of an organization should actually know something about his or her chosen industry is not accepted everywhere. There is one school of thought that one business or organization is pretty much like every other so that a competent executive in one can be successfully transplanted to a completely different type of industry. But for every Tony Hsieh, who knew nothing about selling shoes but made Zappos.com a huge success, or every Lou Gerstner, who went from soup to tech (Campbell’s to IBM) and did well at both, you have hundreds of Mike Zafirovskis who went from cell phones to switches (Motorola to Nortel) and flopped horribly.

“It’s easier to fool people than to convince them that they have been fooled,” Mark Twain.

It is my view that you do, in fact, have to know something about making films before you can make a great one and this is just as true in the grocery business, the transport sector or any part of the tech industry. It’s no fluke that Facebook is humongous and Harvard Connect is just a lawsuit. Mark Zuckerberg knew something about coding while the Winklevoss twins knew very little.

Closer to home, Tobi Lutke is a top Ruby on Rails developer, and it is no fluke that he is co-founder of the fastest growing e-commerce platform anywhere on the web (Shopify.com).

Michael E Gerber in his classic book, The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It (HarperCollins, NY, 1995) argues that you should work on your business not in your business. He puts it this way: “… small businesses in the United States simply do not work; the people who own them do.”

I have found that when a founder stops getting in the trenches with his or her team, the enterprise inevitably hits some rough weather. Gerber says that every business needs some combination of entrepreneur (providing vision and being an agent for change), manager (bringing order to the business and cleaning up messes made by entrepreneurs) and technician (the one who actually performs the work).

Gerber is right about this, but where I find fault is with the idea that the founder or CEO can delegate any two of these. If the CEO is an entrepreneur at heart, he or she must have some technical expertise and some management chops as well. That doesn’t mean that they can’t hire up–bring in people who are better managers or better technically than they are. It just means they can never absent themselves from any of these crucial components because, when well executed, these together create an opportunity for any organization to have success.

Lou Gerstner at IBM immersed himself in their technology and understood it well enough to: a) approve innovative projects and stop bad ones, and b) come up with his own thoughts on new directions including new technological directions for the company.

Mike Zafirovski came to the University of Ottawa during Nortel’s heyday to give the worst speech I have ever heard a CEO of a major company give. For 50 minutes, Mike talked about getting (Motorola’s) six sigma processes embedded into Nortel’s DNA while improving their financial ratios. If this had been a speech by a CFO, well, bravo. But this is the CEO, the person who is the leader, who sets the pace, who describes a bold new vision for the organization and then gets tens of thousands of stakeholders to follow him/her, come hell or high water.

Think about Apple when Steve Jobs was induced to return as interim CEO. If Mr Jobs had come to our university, he would have spent his 50 minutes talking about insanely great new Apple products and services–how he was going to change the world. Even on his deathbed, Steve was focused on the future–he had a eureka moment concerning the evolution of television.

When Steve returned to Apple, they had about 6 weeks of cash left. First, Steve got a lifeline from Microsoft (a co-opetitor) in the form of a $150 million line of credit and cut Apple products down from dozens and dozens to just a handful.

The introduction of the iPhone by Steve and his team propelled Apple into becoming the most valuable tech company on the planet with a profit per employee greater than most company’s income per employee. We estimated the iPhone had a 288% p.a. internal rate of return to Apple, a phenomenal performance.

Apple’s market capitalization on March 21, 2014 was $475.31 billion (Yahoo Finance). One could argue that a visionary CEO like Steve Jobs who could also execute is worth nearly half a trillion USD since it is all too likely that Apple would not exist today but for Steve Jobs’ return to the corner office.

Here’s an excerpt from David E Perry and Mark J Haluska’s upcoming book (to be published in 2015*), HIRING GREATNESS, How to Recruit Your Dream Team to Accomplish Your Objectives and Crush Your Competition, about how a star executive can bring almost inconceivable value to your enterprise. Unfortunately, the reverse is also true:

In the six months
after Marissa Mayer was hired as Yahoo!’s
CEO, market value increased $17 billion.
Imagine making one decision that created $3.8 million dollars in market
value an hour! At nearly the same time Yahoo!
began its rapid ascent, Ron Johnson the new JC Penney
CEO, caused sales to plummet – $4.3 billion.
A single decision of his brought losses of $500,000 dollars an hour! 

Ron knew something about technology retailing having been SVP of Apple Retail Stores (introducing,

for example, brilliant concepts like their GENIUS BAR) but very little about general merchandising and department store operations. Ron was unceremoniously fired in 2013 after a makeover at JC Penney utterly failed. 

On the other hand, I would argue that Ms Mayer was admirably prepared to take on the revival of an a former iconic tech brand like Yahoo! having been a long tenured executive at Google beforehand.

In my career, I have almost always made money in real estate, something I know a bit about. I have a PhD in Urban Economics and 30 years of on-the-job experience. In everything else (hockey, newspaper publishing, finance company, sign company, toy and game firm, tech and more), I lost money. You have to wonder why it took me so long but now I carry a piece of paper in my briefcase that says:

“It’s Real Estate, Stupid.”
“It’s Real Estate, Stupid.”
“It’s Real Estate, Stupid.”

Really.

@ profbruce

Related:

Don’t be a one-sigma business, https://www.eqjournal.org/?p=938

Prof Bruce’s Startup DNA Checklist, https://www.eqjournal.org/?p=2471

* Here’s my review of David and Mark’s new book:

“Most Canadians don’t use language like how to ‘crush’ your
competition, but they are kidding themselves if they think that tough
executives in the US and China aren’t
thinking of doing that each and every day. In their book Hiring Greatness, David Perry and Mark Haluska point out that there
is no substitute for hiring the best—it’s people after all who produce income
not assets. That’s the difference between having a CEO like Steve Jobs at Apple
or a Mike Zafirovski at Nortel. Some difference. In this amazingly candid,
must-read, David and Mark disclose secrets to great recruiting—things like
never hire a liar, people don’t quit companies, they quit bosses and
compensation is far more than just monetary will take your company to a whole other
level,” Bruce M Firestone, PhD, Ottawa Senators founder and Century 21 Explorer
Realty broker, September 2015.