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NOVEMBER 20, 2002 CEO Q&A The Tech Outlook from Cisco's Chief John Chambers on when the spending and hiring rebound will begin in earnest, on education, and on the importance of stock options
Cisco has cooled off since then, but it has still survived better than most of its peers. The share price has fallen 82%, to around $14 as of Nov. 19. Yet Cisco still has a stunning $21 billion in cash in the bank. BusinessWeek Editor-in-Chief Stephen B. Shepard sat down with Cisco CEO John Chambers on Nov. 14 to discuss the future of the company, the outlook for the tech industry and the economy, and corporate governance. Here are edited highlights of their discussion, which took place before an audience at the 92nd Street Y in New York City: Q: What's the outlook now? Are we at the bottom? What do you see for the industry as a whole? A: Well, I think for the industry as a whole, for technology, its future will be very bright, but it will be in a different way than before. You'll see a brutal consolidation.... Those areas of technology that are just neat for technology's sake will not only be put on the back burner, they'll be taken off the stove. If you're growing [productivity] at 1% per year, like we were for almost three decades, every 72 years you double the standard of living of your country. If you grow at 3% per year, you double the standard of living every generation, which means that our children will have twice the standard of living that we did. Their children will have twice the standard of living that their parents did. If you grow at 5%, you double it every 14 years. That's what business and government leaders around the world understand. Q: Well, I believe it too. Yet business isn't spending. What are they waiting for? A: Until their revenues and profits improve, you won't see them spending as much. I think both business and government leaders are realistic, particularly in today's environment. If you spend before you see your own profits and revenues start to turn up, you can put your company and your job into serious jeopardy. While there will be some leading companies -- and GE is an example, Home Depot, and some of the others -- that take good technology risks now, CEOs are probably the most conservative I have seen them. Not that they're predicting something negative to happen, but they don't know how their own revenues and profits [are] going to turn up. Until they see that, they're going to be hesitant to spend. Q: Will it take 18 months for the rebound to occur? A: Many people in the industry believe that it will [take 18 months]. I personally do not believe that. I think as our customers' business turns up, those areas that can show productivity, they'll start to spend within two to six months after that. Q: But we won't see a robust increase in jobs for the foreseeable future, right? A: I believe that as productivity goes up, profitability goes up. Then small-to-medium businesses will be the area where the biggest consumption of new jobs will occur. When there is standard of living growth like that, then people spend more money. So your economy bounces back quicker, and also job growth will occur. But it will lag the technology upturn, I think, unfortunately, by a couple of quarters. So your basic premise is right. What I'm worried about is that increased productivity and technology will, over time, push companies to be located wherever the best-educated workforce is. So you're going to see global competition -- not just for jobs, but for companies -- in a way that we've not seen before. The jobs will go where the best-educated workforce with the best infrastructure, with the right supportive government [are]. That's why I'm so impatient about education. Q: Are you optimistic about education, that we're going to get there? A: Not without fundamental change. On education, I'm pretty radical. I believe that any child ought to have a choice, and parents ought to have a choice regardless of income, that competition raises all boats, that we've got to get away from social promotion. We've got to pay our teachers more. We've got to get the class size down. This is where I think business, and candidly, the press has to take a more active role. When you graduate in California with a high-school degree, that doesn't mean you can read. That's a frightening thought. So what you're going to see is, jobs go where that educated workforce is And that isn't [a fight] between New York or North Carolina or California. It's between the U.S. and China and Eastern Europe. Q: Along with Andy Grove and some others out there, you've been one of the big advocates of keeping the accounting treatment of stock options pretty much the way it is and not expensing them. If all companies are required to expense stock options, how would that affect Cisco, and what would happen to its reported profitability? A: If I could take a step back and paint a little bit bigger picture and then answer your question very specifically: Anybody in this room -- how many of you have ever owned a house? Q: It's New York City, John. People live in apartments. A: Well, that's not as good as Chicago. But anybody who has ever owned a house knows you treat the house or the condominium that you own different than you do something you're renting. Or to put it in a different terminology, Steve, when was the last time you rented a car and on the way to turning it in, washed it or changed the oil? The point that I'm making is, when you own something, you treat it dramatically different. The American dream is based upon ownership. So at Cisco, we give 80% of our options not to our senior management but to the rank and file. Fifty percent to nonmanagers, individual contributors -- an engineer or a secretary, if you will. If somebody would have told me when I graduated [from the MBA program at Indiana University] that I was going to do that, I would have said, "Socialism will never work." It works great. As we take on these new [global] competitors, we want to think about what we're doing before we change that. I think what you're going to see is what I would call stock-options governance. I think companies have to go to shareholders for all approval of all stock options, and they should. Cisco has traditionally done that for all of our major stock options. Secondly, you ought to say in that how much you're going to give to senior management, middle management, individual contributors -- rank and file, if you will. And top management ought to hold those top options for a prolonged period of time. Anything we do to accounting should improve your ability to understand it and the transparency of it. What's being proposed at the present time, I think, will complicate it even more. I want people to understand what's going to happen. A Microsoft of the world will probably never be able to be challenged by the small companies. The way the small company grows from a small company to a large company is by using stock options very effectively for its rank and file. So if you take that away, you're going to inhibit competition in the whole high-tech industry.  Edited by Beth Belton Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | NOVEMBER |
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