Judging McNealy: How do you grade his performance as CEO?

Posted by: Peter Burrows on April 28, 2006

I just read through the comments about our story in the magazine this week about Scott McNealy stepping down as CEO of Sun Microsystems. Most of the commenters thanked us for finding something positive to say about McNealy—which suggests a larger question to me. While Wall Street and the business media—including BW—have on the whole been unforgiving critics of McNealy during its slump of recent years, is there a wider lens through which to judge the performance of a CEO? While satisfying investors is clearly Job One, to what extent do other accomplishments—say, providing a great, safe place to work, or doing innovation that helps the industry at large—factor into the equation when its time to try to grade a CEO’s performance?

Here's what one reader, Big Iron, had to say:

McNealy stands alone in a world of corporate executive abuse of power, political correctness, and cowering to lesser-thans. His mistakes are many but his contributions and persona transcend them by a factor of 10. The world needs more McNealys.

Now, I'm not quite convinced about the "executive abuse of power" part. There's no evidence McNealy ever did anything wrong, or close to it. But one way or another, he has enjoyed the kind of support from Sun's board that any dictator would envy. Just look at some of his pay packages in recent years. And many question the board's decision to let him stay on as chairman and remain a public face of the company. "Typically, the [outgoing] CEO gives up the chairmanship and even his board seat. Otherwise, you create the potential for divided authority. You compromise the new leader's authority almost immediately," says Charles Elson, head of the John L. Weinberg Center for Corporate Governance at the University of Delaware. Letting a larger-than-life figure like McNealy retain power lowers the odds even more, says Elson--something even McNealy's golfing buddy Jack Welch evidently realized.

But such transgressions reflect more on Sun's board than on McNealy. And in so many other ways, he was a refreshing change of pace--a CEO who was absolutely steadfast in his determination to follow his strategic vision, and to make the employees he felt were necessary to accomplish the task a higher priority than the short term preferences of investors. I'd paraphrase his philosophy this way: Sun created untold wealth and had influence far beyond its size over the years, by following a path that pundits predicted many times would end only in disaster. It was only after he'd proven them all wrong that they jumped on the bandwagon--and then off again when Sun ran into hard times. So why should he listen when the same geniuses on Wall Street that pushed Sun's stock price to $64--and a preposterous earnings multiple of more than 100--during the Boom now tell him to whack his payroll by 30%? Better to ignore the negative analyst reports, cover stories and comments from former Sun executives, and stay focused on the end game. Because if his vision that "the network is the computer" is truly correct, Sun's investors would be far better off in the long run if he stuck to his guns. For a sense of McNealy's view of the world, check out new CEO Jonathan Schwartz' most recent blog entry.

Of course, it's tough to find enrollees in the McNealy school of management these days, other than Schwartz. At least I couldn't find any. Governance experts such as Elson said its admirable for a CEO to stand up to Wall Street over the short term--but not for years at a time, as McNealy has. "Over the short term, the stock price isn’t a great reflection [of a CEO's performance]. But you can’t pooh pooh market performance over the long term." Indeed, even Sun director and McNealy admirer Jim Barksdale expressed this view. "He’s created an awful lot of wealth for an awful lot of people, but business fortunes come and go. No tree grows straight to heaven."

I also called other CEOs for their view. McNealy's former No. 2, Motorola's Ed Zander, didn't respond to a request for comment (one of the gazillion I'm sure he received). Jack Welch wasn't available. But every one of the CEOs I did reach say McNealy had screwed up in unpardonable ways. All said he was only doing a disservice to his employees, by refusing to make the cuts necessary to get the company strongly back into the black. “Running an unprofitable $12 billion company is just not right," said one of these CEOs. Even if Sun is doing somewhat better, it's not enough to warrant any ticker tape parades, he said. "The patient may not be stable, but its still in intensive care."

Indeed, my own personal icons of management wisdom, Bill Hewlett and Dave Packard, would have likely agreed, were they still alive. Despite all the talk of HP's egalitarian, humanitarian, perk-i-tarian corporate culture, the No. 1 rule in the HP Way was simple: make enough money to let you afford all the rest of it.

Nonetheless, I can't help wondering if all this orthodoxy is a bit suffocating--and whether the business world should be a bit more forgiving of the McNealys of the world. After all, this guy isn't some clown that doesn't know how to make a profit if he wanted to. He's clearly an effective operational manager--he's proven it many times in the past--but has chosen the path he's taken because he thinks it has the greatest long-term potential (And he's only 51, young enough to still have an incentive to take the long-term view).

And while his public persona suggests an egoist who has lost the ability to adapt his view of the world, those who know him well know a far more sophisticated executive. Indeed, McNealy has admitted many times in recent years that he made strategic gaffes--like waiting too long to make Intel-compliant hardware. Still, Sun's strategy has changed hugely, vis a vis the AMD push and the decision to open-source Solaris. OK, maybe it's a case of a stubborn mule that was forced to move--but at least it did move.

Now, I'm not saying Sun will ever return to glory. In fact, I'd say the odds are looking as long as they ever have. If Andy Bechtolsheim's newish Galaxy servers were going to take the market by storm, it would already be happening. Other programs, such as its $1 per CPU hour grid offering, are also generating more ink than sales.

But McNealy, a hyper-capitalist if there ever was one, understands that not everyone wins. Still, you've got to respect the sheer courage--one of his favorite words--to refuse to dilute his real views just to satisfy the skeptics. Or maybe he has? The last time I spoke with him, at a media day at Sun earlier this year, I asked if he'd seen research that suggested that 90% of stockholders hold their shares for less than a year (this is tied largely to the rise of hedge funds). He shrugged and said he'd always listened mostly to Sun's biggest, most loyal shareholders. But when I asked if he'd have done anything differently vis a vis Wall Street, he said he would have increased Sun's R&D spending in recent years, rather than trim it at all.

So that's my take. How do you grade McNealy's performance as CEO?

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BusinessWeek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, Douglas MacMillan, and Spencer Ante dig behind the headlines to analyze what’s really happening throughout the world of technology. One of the first mainstream media tech blogs, Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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