CEO Excellence

Chapter 1: Vision Practice: Reframe the Game

Overview

Most leaders try to get better results by raising the target inside a game everyone already understands. Effort goes up, but only so far. The harder question is whether they are playing the right game at all. Almost no one knows how to answer that.

Nelson Mandela asks Francois Pienaar, in the movie Invictus, how a leader makes a team better than it thinks it can be. The Springboks won the 1995 World Cup. They were driven less by a rugby title than by the chance to unite a nation fractured by apartheid. The CEOs in this book change the game the same way. They change what success means instead of just aiming higher.

Ajay Banga at Mastercard saw a slogan about commerce and did the math. More than 85 percent of consumer transactions still happened in cash. His vision became "kill cash." He competed for that 85 percent instead of the 15 percent already electronic. Reed Hastings said in 2002 that Netflix's dream was to be a global entertainment distribution company. That is why it was named Netflix and not DVD BY MAIL. Aiming to be the number one DVD company in America would probably have ended in Blockbuster's fate.

Four practices drive a game-changing vision. Find and amplify intersections. Make it about more than money. Do not be afraid to look back to look forward. And involve a broad group of leaders in the process.

Hubert Joly found the right course where four circles overlap: what the world needs, what you are good at, what you are passionate about, and how you can make money. Best Buy was losing 1.7 billion dollars a year when he arrived in 2012. His answer was enriching lives through technology. By June 2019, shares were up 330 percent, while the S&P 500 rose 111 percent.

Piyush Gupta took over as CEO of DBS Group in late 2009. At the time, it ranked worst in Singapore for customer service. No one thought it possible to dream of being Asia's best. The confidence and capacity simply were not there. He compared it to telling a minor league team it could not only play in the major league but win the championship. He settled on "the Asian bank of choice" as a vision his leaders could embrace. By 2013, regional rankings recognized DBS as Asia's best bank. At that year's off-site, 250 of his leaders said they wanted to be the best bank in the world. In 2018, Global Finance named DBS the world's best bank. It was the first Asian bank to take that honor from the New York publication. Euromoney and The Banker gave the same title. Gupta kept going, adopting a tech company mentality toward "Making Banking Joyful" to redefine financial services.

The best CEOs use vision, mission and company purpose almost interchangeably. Advisers, academics and HR can argue about the distinctions. What matters is a clear, simply stated direction that redefines success, shapes decisions and inspires people to act.

A Japanese proverb says vision without action is merely a dream. The challenge that follows is turning a bold vision into reality.

Key Takeaways

• Change what counts as winning before you try to win harder.
• Aim at the large unmet need in your market instead of the slice everyone already fights over.
• Build your direction at the overlap of what the world needs, what you are good at, what you care about, and how you earn money.
• Make it about more than profit, and bring a broad group of leaders into shaping that direction. Expect them to raise the ambition once they own it.
• Settle on one plainly stated direction and stop arguing over whether it is called vision, mission or purpose. Treat the vision as the beginning of the work, not the end. Converting it into reality is the harder half.

Chapter 2: Strategy Practice: Make Big Moves Early and Often

Overview

Most leaders inherit a system that rewards caution, and the gap between average and exceptional performance does not close through small, steady steps. The tension is that the moves capable of changing a company's trajectory are also the ones most often postponed or avoided.

On May 25, 1961, John F. Kennedy told a joint session of Congress that his vision was to win the worldwide battle between freedom and tyranny, and his strategy was a run of big moves. The moonshot is the famous one, but he also asked for funding for unmanned space exploration, a nuclear rocket, and satellite technology, alongside the Peace Corps, new civil rights legislation, and fresh economic cooperation with Latin America.

Satya Nadella, who became Microsoft's CEO in April 2014, reframed its mission as "empowering every person and every organization on the planet to achieve more," then spent more than $50 billion on acquisitions including LinkedIn and GitHub, doubled investment in cloud and artificial intelligence, and moved the company from shrink-wrapped software to online subscriptions. He also sold the mobile phone business despite billions spent chasing Apple and Google. Through 2020 revenue grew more than 60 percent and the stock nearly sixfold while the S&P 500 doubled.

The Five Moves That Matter Most

McKinsey analyzed 3,925 of the world's largest companies across fifteen years to identify which bold moves most reliably lift a company from average to top profit generator:

1. Buy and Sell. At least one deal a year, cumulatively above 30 percent of market cap over a decade. Aon's Greg Case reports more than 220 acquisitions and 150-plus divestitures in fifteen years.
2. Invest. Capital expenditures to sales exceeding 1.7 times the industry median for ten years. Mary Barra put $27 billion, over half of GM's product development capital through 2025, behind electric vehicles.
3. Improve Productivity. 25 percent more improvement than the industry median over a decade. Allianz's Oliver Bate drove the expense ratio from a decades-flat 30 percent to below 28 percent.
4. Differentiate. Gross margins 30 percent or more above the industry across a decade. LEGO's Jørgen Vig Knudstorp called his approach niche differentiation and excellence.
5. Allocate. Shifting more than 60 percent of capital expenditure among business units over ten years creates 50 percent more value than reallocating slowly.

How Many Moves, and When

Roughly 40 percent of companies in the middle quintiles of economic profit creation made no big moves in ten years, and another 40 percent made only one. Two moves more than double the chance of rising to the top, and three or more make it six times likelier. Moves made early beat late ones.

Managing the Downside of Big Bets

Doug Baker's sixteen years at Ecolab show what early boldness buys. With Nalco's rival tied up in its own acquisition, Ecolab announced in July that it would buy Nalco for $8.1 billion, worth 75 percent of Ecolab's market cap at the time, and Baker planned to spin off pieces of it to cap the risk. More than a hundred smaller deals widened Ecolab's products and reach. Market capitalization rose eightfold while revenue grew from $4 billion to $15 billion.

Larry Culp's three acquisition hurdles at Danaher had to be cleared in sequence:

• Like the space and the company.
• Be able to add value.
• Make the math work.

Bankers reverse that order, and Culp says that gets you into trouble. Danaher's early deal mindset led with the math and bought indiscriminately, while Culp as CEO favored higher-margin, less capital-intensive instrumentation. Over his 2001-2014 tenure, shareholder return was 465 percent against the S&P 500's 105 percent, market value rose from $20 billion to $50 billion, and revenue quintupled.

Acting Like an Owner

Investor Ted Forstmann told first-time CEO Ed Breen to look in the mirror and decide for himself, and Breen began judging as though he owned all of General Instruments, which settled the competing claims of vendors, customers, employees, and investors. At Itaú Unibanco, Roberto Setubal was panicking as inflation ended overnight and the bank began losing money. He announced account fees in public, competitors predicted clients would flee, and customers accepted the fees because the bank was transparent about them.

Heart Paddles and S-Curves

Dominic Barton describes a rhythm of change he calls heart paddles applied to the organization, since average corporate lifespan fell from ninety years in 1935 to eighteen in 2015, making it existential for a company to ask why it should exist in a decade. Best Buy's Hubert Joly closed his Renew Blue turnaround, declared it over, and opened Building the New Blue, the next in a series of S-curves, adding smart home, senior care through sensors and artificial intelligence, and Total Tech Support. Every big move should have a start and a finish, with each completion building confidence and capacity for the next.

CEOs act boldly by pairing a clear view of the future and understood risk/reward trade-offs with owner thinking and heart paddles. Without big moves made early and often, few companies reach the top.

Key Takeaways

• Build your strategy as a run of bold moves rather than one flagship bet, and launch the first ones early: McKinsey's fifteen-year study of 3,925 large companies found that a second move more than doubles the odds of reaching the top tier of profit creation, while three or more makes it six times likelier.
• Draw those moves from the five that separate top profit generators from the rest: a steady cadence of acquisitions and divestitures, capital spending well above the industry norm, faster productivity gains, gross margins far above peers, and aggressive reallocation of capital between business units.
• Screen acquisitions on fit first, your ability to add value second, and the numbers last, and arrange a way to shed pieces before you sign, since leading with the math is how buyers end up overpaying for the wrong assets.
• Judge major decisions as though you owned the whole enterprise, and when you must impose or raise prices, explain them openly so that customers accept them instead of walking.
• Give every big move a clear start and a declared finish, and have the next one ready before the current one ends, so the organization keeps moving instead of standing still.

Chapter 3: Resource Allocation Practice: Act Like an Outsider

Overview

Capital is supposed to follow strategy, but in most companies it stays right where it was last year. The people who have the power to move it understand why they should, and they still don't do it. What holds them back isn't a lack of analysis.

The planes that came back

Abraham Wald was a mathematician who fled Austria after the 1938 annexation. He was asked to help cut bomber losses. Commanders wanted to reinforce the panels that returning planes showed riddled with holes. Wald reasoned that aircraft hit in critical areas never came back at all. So the spots with the most holes were the wrong ones to armor.

Eighty-three percent of chief executives say capital allocation is a key growth lever, ahead of operational excellence and buying other companies. Yet a third of companies move only about 1 percent of their capital a year, compared with more than 6 percent at the top performers. When money doesn't follow strategy, the strategy is just slides. And a CEO who moves money worse than the markets do will soon face a push from activist investors. Two things stall the movement of money. Moving it between units is politically painful. And when profits dip for a year or two afterward, the markets punish that.

Borrowing outsider eyes

Andy Grove asked Gordon Moore what a newly installed CEO would do. Moore said exit memory chips, and Intel did, staking its future on the microprocessor. Danaher made that same outsider view into a business model, giving the movement of money more than half of management's time. Under Larry Culp, Danaher bought $22 billion worth of companies while selling off over a third of its business.

The habits:

• Start from zero.
• Solve for the whole.
• Manage by milestones, not annual budgets.
• Kill as much as you create.

Starting from zero

An anchor is the information a decision leans on. With a "limit 12 per customer" sign, shoppers in one of Daniel Kahneman's experiments bought seven cans of soup. With no limit, they bought just over three. Last year's budget is the corporate anchor, and starting from zero means refusing to treat any investment as a given. GM's Mary Barra turned down hundreds of millions for a market whose plan was to lose money, and eventually exited it.

Solving for the whole

Lockheed Martin's Marillyn Hewson reviewed every business area's plan together. She cut the weakest and doubled down on shared priorities, judging investments by what the corporation gained rather than what each unit wanted.

Making pruning a ritual

Pruning becomes a way of life when it is built into ritual. Sundar Pichai reflects on advice from his mentor Bill Campbell, a three-time chief executive at Claris, Intuit and GO Corporation, who asked him each Monday what ties he had broken that week. Similar products like Play Music and YouTube Music stick around until somebody makes the call, and Pichai treats breaking those ties as a way of empowering people, expecting his leaders to do the same on their teams.

A funeral that became a rebirth

Feike Sijbesma gave the discipline ritual form at DSM with a "Hall of Failures": funerals for failed projects that honored the attempt as long as lessons were learned and shared, signaling that no resources would go to it. Technicians from other divisions attended and shared what they had learned.

One such funeral became a rebirth. A multiyear project had produced a coating that pushed all incoming photons through picture frame glass, but the technology was far too expensive, and museums, the only market for it, were too small for DSM. As the eulogy was delivered, a technician from another unit asked whether applying the chemistry to solar panels would give them more photons to absorb. Sijbesma and his chief innovation officer exchanged looks of disbelief: the sales department had fixated on picture frames. The project was resurrected, testing showed a 5 to 10 percent power boost, and the antireflective coatings business grew on funds freed by other pruned products.

Pruning and nurturing across the portfolio

• Valeo's Jacques Aschenbroich moved resources out of former core products into emissions-reduction and driver assistance systems.
• Adidas's Kasper Rorsted cut inventory held by retail partners to build the online channel.
• Israel Discount Bank's Lilach Asher-Topilsky drew money from international operations toward domestic opportunities.

No excellent chief executive felt they had moved money too aggressively. Majid Al Futtaim's Alain Bejjani says the difficulty comes from organizations anchored in commitments and realities outside their control. That is why boldness wins. An outsider has no political debts and no history to protect, and that freedom is what breaks through.

Key Takeaways

• Decide where resources go by reading what is absent: the canceled programs, the units that shrank, and the bets nobody proposed tell you more than the funding requests in front of you.
• Treat the earnings dip and the internal fight as fixed costs of moving money, and argue from the position of someone with no stake in past commitments when the pressure to reverse arrives.
• Make every business earn its next dollar from zero, with no claim on the budget it held the year before.
• Sit over all units at once, cut the bottom of the ranking, and concentrate the savings on bets the corporation as a whole needs rather than ones each division would choose for itself.
• Give pruning a recurring calendar and a social form: announce the kills, harvest the lessons and the people, and stay alert to a discarded technology whose real market is somewhere else entirely.

Chapter 4: Culture Practice: Find the One Thing

Overview

Culture change stalls when leaders treat it as one more item on a crowded list. The temptation is to spread attention across every value and behavior at once. That is where most efforts fall apart.

The One Thing

Paul O'Neill's first shareholder address as Alcoa's CEO was about worker safety, not margins or revenue. Investors sold the stock. Yet within a year Alcoa delivered record profits. By his retirement thirteen years later, net income had risen fivefold. People cannot be ordered to change, he reasoned. But disrupting habits around one thing spreads through a company.

Other CEOs settled on their own single focus:

• Marillyn Hewson at Lockheed Martin: "Innovation with Purpose"
• Reed Hastings at Netflix: "Freedom and Responsibility"
• Ajay Banga at Mastercard: the Decency Quotient

How the One Thing Gets Found

At Microsoft, a team from across the company ran a deep review with experts, senior leaders and focus groups. Then a group of seventeen leaders, chaired by Satya Nadella, sorted through the findings. He chose growth mindset, drawn from Stanford psychologist Carol Dweck's research on learning from mistakes. He shed the company's individualistic, failure-averse habits.

Reshaping the Work Environment

Four forces shape a work environment:

• The stories told and the questions asked
• Formal mechanisms: structure, processes, systems, incentives
• The role modeling employees observe
• Confidence in one's own ability to behave in desired ways

Greg Case worked all four for Aon United. He carried the message through earnings calls and a Manchester United sponsorship. He tied senior leader pay to a single firm-level P&L. Aon grew from $6 billion to over $50 billion in market capitalization by early 2020.

Make It Personal

According to the book, 86 percent of CEOs say they model desired change. Only 53 percent of their direct reports agree. Nadella once badly answered a question about women seeking raises. He told employees he was wrong and examined his own biases.

Make It Meaningful

Masahiko Uotani made English Shiseido's official headquarters language. He offered lessons that three thousand employees accepted. Shiseido reached its 1 trillion yen sales goal three years ahead of schedule. Toby Cosgrove gave all forty thousand Cleveland Clinic employees badges reading "I am a caregiver." Patient experience there went from last to first among large American hospitals.

Phrases and Questions That Carry the Culture

Getting a cultural message out to a diverse workforce calls for a handful of memorable phrases beneath the main principle. Sam Walton built Walmart's service aspiration into a ten-foot rule: any employee within ten feet of a customer should meet their eye, smile and offer help. Nadella made Carol Dweck's Mindset required reading for his lieutenants. Then he simplified it for everyone else into a shift from "know-it-alls" to "learn-it-alls." After those six words, risk aversion and office politics began to decline. Kan Trakulhoon of Siam Cement turned innovation into a shop-floor question about improving process and productivity. The first foreman he asked froze. Trakulhoon, a believer in the Buddhist philosophy of metta, or loving-kindness, reassured him that any answer was safe. On his next visit, everyone had an answer ready.

Measure What Matters

Microsoft asks employees a single pop-up question daily. First whether they know about growth mindset, later whether leaders show it. Jim Owens set Caterpillar's target at 90 percent of employees understanding the vision and their own part in it. The industry benchmark was 65 percent positive feedback. Caterpillar reached 82 percent by the end of 2009. Johan Thijs at KBC turns the Accountability element of PEARL into a scorecard covering capital, liquidity, profitability and people. Promotion into management there requires outside screening on Performance, Empowerment, Accountability, Responsiveness and Local embeddedness.

The First Leg of the Stool

Measuring culture also informs merger judgment. Maurice Lévy walked away from a merger with Omnicom that would have created the world's largest advertising group, largely over cultural differences. Reed Hastings says Netflix's distinctive culture has ruled out many deals. Culture, in Marvin Bower's phrase, is "the way we do things around here." That is broad enough that the best CEOs pick one thing. It is the first leg of a three-legged stool supporting delivery of vision and strategy. Arthur W. Jones observed that organizations are perfectly designed to get the results they get. That leads next to organization design.

Key Takeaways

• Commit to one cultural priority instead of a wall of values. Employees can hold only a few behaviors in mind, and a single focus spreads on its own.
• Arrive at that priority through genuine diagnosis: gather evidence across levels and functions, let a small senior group sift it, and pick a principle grounded in research rather than in fashion.
• Reshape the environment rather than lecturing people. Pull at once on the stories and questions in circulation, formal structures and incentives, the behavior leaders visibly model, and employees' confidence that they can act differently.
• Admit it out loud when your own conduct contradicts the standard. Then give the principle a concrete, repeatable form: a rule for the shop floor, a badge, a shared phrase, a question anyone can answer without fear.
• Ask employees on a regular cadence whether they know the priority and see leaders living it. Let those readings shape promotions, pay, and which mergers you pursue or walk away from.