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What is a corporation’s most valuable resource? Wall Street has got it wrong.

Issue #1118 – Money certainly is not the answer to the question, “What is a corporation’s most valuable resource?”. But Wall Street just doesn’t seem to be capable of recognising that fact and corporations repeatedly get themselves into serious trouble as a result – just like Hewlett-Packard.

Of course, we all know that the answer to the question is ‘its employees’! NOT money NOR its shareholders.

No company can operate without employees, even if it is a one man band – someone has to do the work; that makes the money; that makes the company operate; that makes it survive; that makes it profitable; that means it can grow.

What goes so wrong with US corporations is that they pander to the stock markets, whose job it is to look for anything sensational – good or bad – rather like journalists! Sensational good news has the ability to raise a company’s fortunes on the stock markets over time but sensational bad news can all-but destroy a company in the blink of an eye.

A successful company is one that comprises a happy bunch of fulfilled employees. There is good reason that a corporate body is a singular entity – an ‘it’ not a ‘they’ – the overall result is the sum of the total!

As long as the company continues to operate successfully, shareholders will be happy. But, if ever the employees are unhappy, the company suffers, is incapable of performing to its maximum capability and, thus, profits and share prices suffer and the shareholders become unhappy.

It is only to be expected that profits, or profit as percentage of income, will fluctuate, rise and fall, especially in what is effectively a saturated market – they cannot always be on the increase (unless that company has a total monopoly, of course). And yet, Wall Street seems to expect that a company must only ever show ever higher profits and improved profit as percentage of income.

What are the consequences?

Simple – the company and its CEO are under such pressure to perform that they look for any means that just might, possibly, improve the company’s perception with the financial analysts on Wall Street.

Mark HurdMark Hurd

Let’s take a look at Hewlett-Packard’s Mark Hurd. He alienated the workforce to the point where there are now multiple web sites dedicated solely to verbal homicide – all in an attempt to slash costs for the sake of increasing profits and impressing Wall Street. The result? An impressive increase in share value (an incredible 175%) and a massive crash in employee confidence and loyalty (immeasurable!). In the end it was not a business matter that prompted his demise but a loss of personal integrity. Let’s face it, business success and lots of money make people arrogant and gives them a sense of indestructibility and immortality.

Léo ApothekerLéo Apotheker

Then there’s Léo Apotheker, ousted just last week after less than a year in the job. He had the foresight to restore employee confidence in the company and solicit their support, bringing new vision and sense of corporate unity. But, clearly he does not understand the hardware business or the fact that Hewlett-Packard’s PC arm is probably the company’s primary shop window, very closely followed by its printers. Even if the sale of PCs is only a loss-leader for the company, it HAS to be there. This autumn several friends/family have come to me for advice on buying a new laptop and every one has mentioned Hewlett-Packard – this says it all! It is not even as if Hewlett-Packard is unfamiliar with the loss-leader approach – printer hardware is, effectively, largely a loss-leader for the raft of consumables and services on offer from any printer company. This is where the profit lies not in the hardware.

Mr Apotheker foolishly announced in August that PSG (Personal Systems Group) would be sold or spun off. I believe that this was a combination of his lack of understand of hardware, his desire to pull the company into his comfort zone and his desire to impress Wall Street in order to push up a flagging share price. It totally backfired and Hewlett-Packard’s share price is now at its lowest level for six years and at same level as 17 years ago – having crashed by about 53% since its high in February of this year when Mr Apotheker was riding high and around 46% in the year since he took over.

These past few days it has become clear that some news services are blaming Hewlett-Packard’s board for the unsettled time the company has experienced in the past decade. Perhaps they are right – they are probably right! The board certainly seems to have been behaving like the board of a soccer club – firing managers on the slightest whim, just because a few games are lost. And I, for one, am left totally gob-smacked that the board would approve the spinning off of PSG. But, the big question has to be, “Are they hiring the right people”?

For a company like Hewlett-Packard, there can be no perfect grooming ground for CEOs. Or can there?

  • Mark Hurd actually had what may be one of closest matches, coming from NEC. As already indicated, he built profit levels and even saw the company come through the 2008/09 recession relatively unscathed – but at the unacceptable cost of employee loyalty and respect.
  • Léo Apotheker did not – yes, he was in the IT industry but had no experience of IT hardware, and what makes a hardware company tick, and he had lost it at SAP when he tried to implement an unreasonable price hike. His indiscretion with the PSG announcement also led to a significant loss of employee confidence and respect.
  • Carly FiorinaCarly Fiorina
  • Carly Fiorina came from AT&T / Lucent, again, not a bad match considering the consumer and communications hardware focus. She presided over the contentious acquisition of Compaq in 2002, a move that effectively created the IT giant that Hewlett-Packard became. But, she had a very turbulent time on the stock market, with prices rising from around $40 in the middle of 1999 to an incredible $70 only to crash to about $12 at the time of the recession and then to recover to no more than $25 before she was ousted in 2005 due to concerns about the company’s performance [on the stock market], when the share price was back down to $20. Again, employees completely lost respect for her, accusing her of trashing the HP ethos, destroying bonuses and incentives while spending money on her own lifestyle.

So what is the answer? Hewlett-Packard now desperately needs a chief who will command utter respect while handling the company with the respect it deserves after all these years. Forget Wall Street, forget the shareholders – they will thank a CEO of this calibre in the end.

I think we need to draw comparisons here with Anne Mulcahy. She could be hailed as having been Xerox’s saviour when the company was in desperate straits in 2000.

Anne MulcahyAnne Mulcahy

Anne Mulcahy started at Xerox as a field sales rep 15 years before being appointed as CEO. She spent three years as Vice President for human resources before becoming Chief Staff Officer in 1997. Clearly, she understood the value of the workforce, treating them as key stakeholders, and also the importance of listening to customers. She put a great deal of effort into re-motivating staff when she took over and is now widely respected as a high-calibre leader. While she did impose cuts and reduce the workforce during her tenure as CEO, it is generally recognised that the company had to reinvent itself in order to survive – literally.

I do understand that her reputation is by no means unblemished and she is almost certainly guilty of complicity in the various accounting irregularities and scandals that surrounded both Xerox and Fannie Mae (of which she was also a board member). So she is by no means whiter-than-white.

Ursula BurnsUrsula Burns

However, the fact remains that she turned a grossly over-indebted and unprofitable leviathan into a lean and profitable organisation with a great future – one that it has been building on ever since. Debts fell from 10x equity to less than 2x in four years under her guidance. Share prices reflected her impact, increasing by around 150% (~$8 to ~$20) from the time of her appointment to a peak in mid-2007. It is unfortunate that the global recession decimated the share price back to a little under the $7 level by the time she handed over to fellow Xerox insider Ursula Burns (first worked for Xerox as an intern in 1980) in May 2009.

Essentially, there is almost no substitute for home-grown talent in a company that truly values its employees. That person understands the company; believes in it; is totally loyal to it; has a vested personal interest in seeing it continue to grow and thrive; and draws immense personal satisfaction from a job well done.

Again, we see the similarity with soccer clubs – some of the most revered club managers are those that played in their youth for the team they later went on to manage. For instance:

  • Dutchman Rinus Michels played his first professional soccer for Ajax and later led the club to become European Cup champions. He also led his national team to win the Euro 88 championship. It is also said that, under his leadership, Holland should have won 1974 World Cup. He was greatly admired and was named Coach of the Century by FIFA.
  • The renowned Bill Shankly played for 10 different clubs (and his national team) in the 1930s and 40s and went on to manage five clubs. The first of these was Carlisle United, the first club he played for and which he took from 15th position to 3rd position (and challenging for the title) in Division Three North in two years. Eight years later he was appointed to manage Liverpool FC, one of the clubs he played for during the war years and which he went on to manage for 15 glorious years. He is noted for building team camaraderie and for valuing and respecting the fans.
  • Bob Paisley had been a one-club player, playing for Liverpool FC for 15 years, but then immediately becoming a physiotherapist and coach for the club. He went on to serve under Bill Shankly, eventually taking over as manager after Shankly and taking Liverpool to its heady days dominating the league in the late 1970s, winning the European Cup three times – a record. After retiring from the front line in 1983 (passing the baton on to another Liverpool ‘old-boy’, Joe Fagan), he continued working with the club, becoming a director till retiring properly in 1992 due to ill-health.

Now, frankly, I hate football and everything that it stands for in terms of money, wealth and fame but here it serves as a valuable tool for understanding the lessons to be learned from engendering loyalty in employees and taking the best performers to the highest levels.

So, we come full circle – a company’s most valuable resource is its employees! No one has the potential to be more loyal than a long-standing employee.

Hewlett-Packard – search out your young high-fliers; mentor them; train them; cultivate them; and you will have your successful CEOs of the future.

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