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Ceo Disease


Cover Story

CEO DISEASE

Robert A. Schoellhorn appeared to be the model chief executive. As CEO of Abbott Laboratories, the former sales rep had overseen a major comeback, nearly tripling sales and quadrupling profits during the 1980s. He was toasted as an Executive of the Year by a business magazine in 1986 and invited on the boards of more than half a dozen corporations and trade groups.

But few people knew much about the less public Schoellhorn--the grandiose man who ruled over his company as if it were a private fiefdom. Few people, that is, until Abbott's board kicked him out last March. He sued over his dismissal, and Abbott countercharged. There was a barrage of embarrassing charges--including misuse of company assets and expense-account irregularities. The board even looked into a bizarre incident at Schoellhorn's 60th birthday party involving a stripper hired by his former-secretary-turned-wife.

The strange saga of Robert Schoellhorn came to an end with an out-of-court settlement that cost Abbott $5.2 million in July. What happened? Many who worked with him believe that Schoellhorn, like some other top-notch executives, fell victim to his own success.

Pampered, protected, and perked, the American CEO can know every indulgence. The executive who finally reaches the top of a major corporation enters an exclusive fraternity. The CEO's judgment and presence are eagerly sought by other captains of industry and policymakers. CEOs zip around the world in private jets and cash the heftiest personal paychecks in industry. They take home 85 times what the average blue-collar worker makes, unlike their counterparts in Japan, where the ratio is closer to 10 to 1 (page 60).

It is a job that can easily go to one's head--and often does. "Too many people treat CEOs as some kind of exalted, omnipotent leader," says John Sculley, CEO of Apple Computer Inc. "The real danger is that you start believing that stuff." Sculley took a sabbatical in 1988 as a way of "reacquainting myself with the fact that I'm a mere mortal."

Many chief executives come to believe that they are much more than that. The perquisites and deferences create a protective cocoon--if not a full-fledged fantasy world--for the chieftains of some of the nation's largest companies. "Many CEOs take on a level of self-importance that goes way beyond reality," says Douglas D. Danforth, former CEO of Westinghouse Electric Corp. and now a director at several large corporations. "They view the company as their own . . . . Some people's personalities change completely. If you're not careful, you can be seduced."

Call it CEO Disease. The symptoms are all too familiar: The boss doesn't seem to understand the business anymore. Decisions come slowly, only to be abruptly changed. He (there are only two women CEOs in the BUSINESS WEEK 1000) feels he can do no wrong and refuses to concede any mistake. He begins to surround himself with sycophants in senior management and on the board.

TELLTALE SIGNS. Increasingly, the boss may seem out of touch--spending too much time away from the job, playing the role of statesman for the sake of personal recognition. He may even compete with industry counterparts over how much money he makes, how big the headquarters building is, or how many corporate jets are parked on the landing strip. And when it's time to leave the job, the boss just hangs on, often by undermining potential successors.

The majority of chief executives manage to sidestep the job's many pitfalls. They maintain the high level of leadership and commitment that got them into the corner office in the first place. They learn to deal with the intense pressures of the job and the awesome responsibility of running far-flung enterprises with thousands of employees and billions in revenues (page 59). "There are lots of CEOs who work in their shirtsleeves and don't hide behind the facade of corporate leadership," says former Jewel Cos. CEO Donald Perkins. He believes only a few of his compatriots exhibit the full-blown symptoms of "the Imperial CEO."

Still, plenty of chief executives, under the often enormous strain of churning out positive earnings every quarter, sometimes display isolated symptoms without having the disease. And for some bosses, only one or two symptoms can be enough to undermine a company.

Harold S. Geneen, an autocrat who ruled over ITT Corp. with an iron fist and an oversize ego, summed up the problem succinctly: "The worst disease that can afflict business executives in their work is not, as popularly supposed, alcoholism," he wrote in his memoirs. "It's egotism." It is a problem, Geneen thinks, that is "still in the closet, a secret everyone knows, few talk about, and almost no one knows how to handle. The egotist may walk and talk and smile like everyone else. Still, he is impaired as much by his narcissism as the alcoholic is by his martinis."

It is still rare when the board of directors or a company's shareholders--the natural checks and balances to a CEO's power--hold a corporate chieftain accountable before it's too late. And with the decline in takeover activity, which put more pressure on CEOs to perform, a strong case can be made that incidence of this malady is likely to rise.

MORALE BUSTERS. Much of the damage done by an afflicted CEO is insidious, striking at the heart of the corporation's ability to compete: employee morale. One employee survey after another confirms that a severe gulf is emerging in many companies between the CEO and his work force. As the rank and file lose faith in top management, morale often collapses. Employees fail to generate the new ideas that are the lifeblood of any renewing enterprise. A we-vs.-them attitude prevails. Sometimes it can be a contributing factor in bringing a company down, as it was at Bank of New England and Lone Star Industries, both of which ended up bankrupt.

Few chief executives come close to the greed and excess symbolized by F. Ross Johnson, who unsuccessfully tried to take RJR Nabisco Inc. private in a deal that would have enriched Johnson so extravagantly that it made other big LBO payoffs of the decade look paltry. The most visible sign of corporate largess was Johnson's palatial hangar in Atlanta for RJR Nabisco Inc.'s 26 corporate pilots and 10 planes. Adjacent to the hangar is a three-story building, complete with Italian marble floors, inlaid mahogany walls, and a roomy atrium with a Japanese garden. It's a remaining asset that Kolhberg Kravis Roberts & Co., which took RJR Nabisco private, has yet to unload. Asking price: $10 million. Unloading Johnson was far more costly: He walked away with $53.8 million, the largest golden parachute ever.

If some CEOs feel the need to compete on the basis of corporate aircraft, others gain a sense of superiority by constructing huge headquarters buildings or other edifices. The late Armand Hammer of Occidental Petroleum Corp. spent more than $50 million of corporate funds to build an elaborate art museum that bears his name. Only a lawsuit by major shareholders prevented Hammer from spending even more.

There are dozens of less-known examples. In the midst of a $271 million loss in 1989, Lone Star Industries Inc. Chief James E. Stewart ordered layoffs, put $400 million of corporate assets on the block, and eliminated the company's dividend. But Stewart had a $2.9 million expense account and still flew in the corporate jet to headquarters in Stamford, Conn., from his home in Florida--even as the free-spending executive told his own managers to fly coach. Lone Star, the nation's largest cement company, filed a Chapter 11 bankruptcy in December, and Stewart resigned a month later as the board conducted an inquiry into his expenses. Stewart says the company's failure was the result of a downturn in the cement industry and foreign "dumping."

SHY PEOPLE. There are, of course, events that have nothing to do with the CEO's hubris that conspire to make the No. 1 job tougher. Information once readily available to him as a senior executive often becomes filtered. Few subordinates want to deliver the bad news. And a powerful CEO, by his very nature, often discourages such behavior. Former Texas Air Corp. CEO Frank A. Lorenzo's reputation as a tough boss so intimidated top executives that they dared not defy him. "When Frank was in a meeting, the whole chemistry of it changed," says one former colleague. "Once they saw which way he was going, a couple of people would hop on it, and the train was rolling."

It is almost axiomatic that those who rise or raid their way to the top of large corporations are intensely driven. That's not bad in itself. But trouble can arise when this drive is fueled by what Harvard business school management Professor Abraham Zaleznik calls "unhealthy narcissism." Few if any managers are motivated solely by the altruistic desire to better the corporation. They are also striving to satisfy inner, ego-related needs. Eric G. Flamholtz, a University of California at Los Angeles management professor, says the inner agenda centers on an executive's needs for self-esteem and control over people and events. While these needs are healthy in moderation, they cause problems if they get out of hand.

With each higher step on the corporate ladder, an executive discovers fewer restraints: unlimited expense accounts, fewer performance appraisals, and the power, in some cases, to make decisions unchallenged by anyone. "You have fewer people to report to and fewer people who control what you do," says Harry Levinson, a corporate psychologist. The decreased supervision and increased power that coincide with success only reinforce and confirm the narcissist's already grandiose self-image. If he attains the top job, it comes bubbling to the surface. "They think they have the right to be condescending and contemptuous to people who serve them," says Levinson. "They think they are entitled to privilege and the royal treatment."

HIS AND HERS. Consider the rise of Schoellhorn at Abbott. He joined the company in 1973 after 26 years with American Cyanamid Co., rising to become CEO only six years later. He presided over a steady and uninterrupted increase in earnings, revenues, and profit margins. But a few years after becoming chief executive, Schoellhorn seemed to change, according to Abbott executives who knew him. "He felt the company owed him so much because it was so successful," says a former Abbott executive. "There was no price he could extract that would make the ledger balance out." Schoell-horn has declined both writ-ten and telephone requests by BUSINESS WEEK for an interview for this story.

Schoellhorn divorced his wife of 35 years in 1985, citing irreconcilable differences, and married his secretary a few months later. He spent millions of dollars of Abbott money to buy a pair of the priciest corporate jets then available--an unusual expense at what had been a conservatively run company. "They were dubbed `his and hers,' because only Schoellhorn and his wife used them," says one executive. "It was never part of the Abbott culture before."

It didn't help, former executives say, that Schoellhorn's second wife picked out the china and the custom-made seats for the jets. She even had their favorite hole at the Indian Wells Country Club near Palm Springs, Calif., etched into the partition glass of one of the planes. And when a new model of the same aircraft came out only a few years later, Schoellhorn spent more than $20 million to acquire it.

At work, he increasingly refused to allow anyone to challenge him. Over a nine-year period, Schoellhorn ousted three heirs apparent because, several executives say, they weren't yes-men. Division heads began to worry that Schoellhorn was sacrificing long-term growth by cutting R&D budgets to maintain 15% earnings growth a year. Says a current top executive: "The primary agenda of Bob Schoellhorn was preserving his own power and eliminating his competition. He was addicted to the power and the privilege of the office." Outside the company, as Abbott stock soared, Schoellhorn was something of a hero. He joined the boards of other companies and groups, including Pillsbury Co. and ITT, and spent so much time on outside activities that his colleagues began to think of him as an absentee manager. One top executive estimates that Schoellhorn was on the road 70% to 80% of the time. "Schoellhorn lost his ability to lead Abbott because he lost the respect of its executives," he says.

When his wife hired a stripper for his birthday party, attended by fellow executives and their wives, it was too much for many of the already disenchanted management team to endure, according to several executives. Many of the guests were appalled. Schoellhorn's wife didn't return telephone calls for comment. After Schoellhorn forced the resignation of his third apparent successor in 1989, the birthday party incident became an issue in a board investigation that led to his firing in March, 1990.

BOSS'S RED GLARE. Abbott's board, at least, finally checked Schoellhorn before his behavior severely affected profitability. But in many cases, boards wait until it's too late. One recent example is the dramatic decline of Bank of New England Corp., which was seized by the government on Jan. 6. It wasn't until after an examination by federal regulators disclosed that the bank had $1.2 billion in bad real estate loans in late 1989 that the board forced out CEO Walter J. Connolly Jr.

Many former executives and analysts lay the blame for the debacle on Connolly, a former Marine who supervised drill instructors. He is widely described as a temperamental autocrat with an unpredictable, Jekyll-and-Hyde personality. Connolly so completely dominated the bank over his five years as chief executive that his management style was dubbed WWW--Whatever Walter Wants. What Connolly wanted, and got, were terrified yes-men. During monthly meetings with his top executives, he would aim his sights on one manager picked at random. Connolly would grill the hapless victim with rapid-fire questions and a relentless glare.

"One officer might say: `Deposits are up 10%, and we're really pleased because it's the second month in a row,' " recalls a former executive. "Connolly would say: `Why are you pleased? Do you think 10% is enough? Why do you jump to conclusions? Are we running a bank where 10% is enough?' and on and on. Once Walter was riled up, people would end up yessing him to death."

The details he often demanded during these monthly tirades reflected Connolly's own failure to remove himself from his bank's nitty-gritty operations. Driven by a desire to best rival Bank of Boston Corp., he personally wooed large real estate developers, offering cheap rates on loans with little collateral. Often, he made the loans without consulting his lending officers, say former executives. Connolly declined to be interviewed.

Some CEOs become so seduced by the image of the corporate chieftain that they rarely perform their jobs effectively. Howard M. "Pete" Love took office at National Intergroup Inc. in 1980 with an ambitious vision to diversify the troubled steelmaker. His moves into such far-afield areas as drug wholesaling, oil distribution, retailing, and savings and loans have reaped more than $700 million in cumulative losses during the past decade. For most of that period, Love was too busy attending to an enormous list of civic commitments to focus fully on the disaster at NII. From 1984 to 1988, during the height of the company's woes, he sat on more than a dozen corporate and civic groups.

Love was voted out of office at an annual meeting last July and was scheduled to resign as CEO on Mar. 31. However, in a recent letter to BUSINESS WEEK, Love strongly disagreed with these criticisms and contended that "we are well on our way to fulfilling our objectives." But by now, National Intergroup is only a shadow of its former self.

Love had some CEO Disease symptoms pretty much from the start. But as the downfalls of Connolly and Schoellhorn illustrate, the malady tends to become more of a problem after a person has held the top job for a number of years. By then, the boss has had time to forget what life was like as an ordinary mortal.

RECOVERY. Of course, it doesn't have to turn out that way. A few fairly simple reforms would go a long way toward preventing many cases of CEO Disease, at least in its most virulent form. One obvious answer is to disperse decision-making. An advantage of this approach is that it focuses attention on a group of executives, not just the CEO.

The prevalence of the problem also makes an overwhelming case for more involvement at the board level. To be effective, boards must be composed of a sizable percentage of outside directors who have the time to learn enough about a company and its managementto make informed decisions about its leadership.

If the boss isn't receptive and problems mount, a responsible director has no choice but to press for change. On four separate occasions since he started serving on boards, Jewel's Perkins says, "I've sat down with the CEO and said: `In my judgment, you've made the contribution you can to this organization.' " Three CEOs took early retirement.

Ultimately, the power to prevent, and if necessary, cure CEO Disease rests with the shareholders. They have the right, and the duty, to insist on a board of competent and aggressive outsiders. At least, they do in theory. In reality, shareholders are often either passive, indifferent, or only invested in the stock on a short-term basis.

Still, CEO Disease need not be terminal. Consider the "recovery" of M. Anthony Burns, CEO of Ryder System Inc. From 1979, when he became president of the company at 37, to 1988, Ryder acquired nearly 100 companies in efforts to shift the company's focus from trucking to transportation. Earnings and revenues exploded, and Burns quickly became a managerial darling. Celebrated by management guru Robert H. Waterman Jr. as a "master," Burns clearly enjoyed the limelight and was promptly blinded by it. He joined the boards of several companies and nonprofit groups and spent heavily to permit Ryder to co-sponsor the Doral Ryder Open.

But in 1989, Ryder paid for its explosive growth. Burns's bid to build a transportation empire left Ryder vulnerable to a downturn in its industries. The company saw multimillion-dollar write-offs and layoffs to slash costs and get in line with market demands. As takeover rumors swirled, Burns quickly put golden parachutes in place and a poison-pill defense--both of which drew heavy criticism from unhappy shareholders. "I went from being a genius to being brain-dead," concedes Burns.

Instead, Burns now says, he realized his critics had a point, quit two boards, and cut back some involvement in charitable activities. Now, he's far more careful not to overextend himself. "The demands on your time for external activities are incredible," he says. "It's easy to get caught in that trap." Even so, the turnaround at Ryder has a way to go.

Burns may be more the exception than the rule. Many CEOs who stray never regain their footing. But at least shareholders of companies with such a CEO have a choice. In this sense, the real blame lies not so much with the growing number of flawed CEOs as with shareholders and boards that fail to insist on better management.

WALTER J. CONNOLLY

BANK OF NEW ENGLAND

OUSTED JAN., 1990

Ruled so completely that many managers feared telling him anything he didn't want to hear. The bank's financial woes

led to his ouster

ROBERT A. SCHOELLHORN

ABBOTT LABORATORIES

OUSTED MAR., 1990

Turned Abbott around--then loaded up on the rewards of success. A habit of replacing would-be heirs helped cost him the trust of managers and the board

JAMES E. STEWART

LONE STAR INDUSTRIES

RESIGNED JAN., 1991

Ordered layoffs and sold corporate assets but toted up a $2.9 million expense account and still commuted to work in the corporate jet

HOWARD M. LOVE

NATIONAL INTERGROUP

RETIRES MAR., 1991

As financial troubles

piled up at NII, he relished the role of corporate statesman, attend-

ing to a long list of

outside commitments

PHOTOGRAPHS BY RED MORGAN; BOSTON GLOBE PHOTO; DOUG MENUEZ/REPORTAGE; RANDY TAYLOR/GAMMA-LIAISON; BOB SACHA

DOES YOUR BOSS HAVE IT?

-- He or she can do no wrong, refusing to

concede any

mistake

-- Spends excessive time on the boards of other companies or civic groups, playing the role of statesman

-- Surrounded by sycophants who yes the boss's every whim

--Wants to make every

decision but doesn't bother finding out all the details

--Always trying to be one

up on counter-

parts in salary,

headquarters,

aircraft

--Overly concerned about where she sits in meetings or whether people rise when he enters a room

--Relishes media attention--not especially for the company but for personal gain

--Hangs on to the job too long--often undermining candidates who might someday be successorsJohn A. Byrne in New York, William C. Symonds in Denver, and Julia Flynn Siler in Chicago, with bureau reports


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