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Dealing With Investors the Sam Palmisano Way

Geplaatst op mei 28, 2014 in News

Last fall, when it was still not clear who would be the next chief executive of Microsoft, Jack Welch recommended Sam Palmisano for the job.

The two were sitting on stage at Radio City Music Hall chatting about business-y stuff when the retired GE CEO made the suggestion, and I was a little surprised when the retired IBM CEO didn’t dismiss it out of hand.

I’d be interested, Palmisano replied, but only “if Bill took the company private.”

Bill Gates did not choose to take Microsoft private (it would have cost a lot), and insider Satya Nadella became the company’s new CEO. But I tucked Palmisano’s remark away, and when we started putting together a package of articles for the June HBR on American corporations’ relationship with Wall Street, I thought I’d ask Palmisano about it. What was so horrible about publicly traded companies that he’d consider being a CEO again, but only if he could avoid public markets? Are today’s investors really that horrible?

Short answer: no. Palmisano’s main complaint with public companies, he said when I asked, had to do with “the regulatory environment and the role that’s being defined for the board.” Basically, he thinks public-company boards are being forced to spend too much time on compliance and control, which crowds out more important topics like strategic investment and growth. But investors — he didn’t have a problem with them at all.

They do, however, have to be managed intelligently. Palmisano and his executive team struggled with that during his first few years as CEO, but eventually came up with the approach that he discusses at length both in the Q&A published in the latest HBR and in this brand-new Ideacast podcast (we covered some similar ground in the two interviews, but they were entirely separate conversations, so if you’re a glutton for this stuff, you should consume both):

Download this podcast

The abridged version is that Palmisano and then-CFO Mark Loughridge came up with what they called the “investor model” or the “road map” — a strategic plan complete with multi-year goals for investment, revenue growth, and earnings growth that they asked investors to judge them by.  (Here’s a version of it from a couple of years into the process, which started in 2006.) The idea was to avoid the distracting dance around quarterly earnings and quarterly earnings forecasts, but at the same time tell investors more than just “trust us.”

At first investors didn’t trust them, but as IBM began meeting and surpassing the targets it set for itself, and Palmisano began inviting the company’s biggest shareholders in for day-long discussions of the company’s strategy, criticism of his leadership faded and the company’s stock began a long upswing. He succeeded in charming Wall Street … without ever deigning to participate in one of his company’s quarterly earnings conference calls or talking up its prospects on CNBC.

Obviously, if IBM hadn’t met the targets Palmisano and Loughridge set, it would have been a different story.  And there are indications now that Palmisano’s strategic plan and its focus on earnings-per-share gains may have eventually become counterproductive. In the cover story of the latest Bloomberg Businessweek, Nick Summers reports that many IBMers now refer to what is officially called Roadmap 2015 as “Roadkill 2015.”

But in dealing with the investment community, Palmisano’s approach still seems like the only productive one for the CEO of a publicly traded company to take. Don’t respond to Wall Street, in the sense of paying attention to the day-to-day or even month-to-month movements of the share price or the things that sell-side analysts ask on earnings calls or business-channel anchors ask on TV. Instead, come up with a strategy, communicate it clearly to investors and give them transparent ways to judge whether you’re succeeding or not. Last year I wrote about how Amazon’s Jeff Bezos had succeeded in part by approaching Wall Street with the attitude of a good dog trainer. That’s an extreme case, and in some ways so is Palmisano’s: CEOs of companies with lower profiles than IBM’s sometimes probably do have reason to join in on conference calls and make the voyage to Englewood Cliffs. But they need to figure out what to tune out — and learn to manage Wall Street rather than being managed by it.

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