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Confidential (in part) Client Edition

An Editorial about Executive Relationships

Beware Your CFO!

CFOs Can Make or Break the CEOs

PHOENIX, June 14 - They tend to sink or swim together.  The CEOs and CFOs seem inextricably linked, as if connected by an umbilical chord.  Rarely does a CEO find enough courage to cut the chord and cast his/her CFO pal overboard.   Not even after a CFO becomes a part of the ballast that's weighing down the corporate ship.  But there are exceptions.  As usual, they serve to confirm the rule.  

This editorial is about both... the rule and the exceptions; about the CEOs and the CFOs; and about their sometimes peculiar relationships.  It is based on more than 34 years of personal dealings with CEOs and CFOs of the largest computer companies in the world.  It is a digest of lessons we can learn from history.  

Our clients and friends may find the editorial interesting; some even amusing.  But the current CEOs had better play close attention.  They may find its key message vital to their long-term survival.  For, "those who do not learn from history are doomed to repeat it," as an old saw goes.

* * *

Take Carly Fiorina, for example, the HP CEO.  Last week, we watched her kick off a two-day conference for worldwide analysts in San Jose, CA.  It was the best performance by a CEO we have seen in a long time.  Fiorina was poised, relaxed and confident about her strategy and the HP future (stand by for our complete report on the conference).  Not since the days of George Conrades (the IBM heir apparent in the late 1980s), have we seen an IT executive who exhibited as much class, poise and understated self-assurance.

So you can imagine how stunned we were to read the following day a Street.com column in which Fiorina was pronounced one of the nation's worst CEOs!?  The other two "worst" CEOs profiled in a Jon Markman article were David Dorman of AT&T and Larry Ellison of Oracle (click here to read the column; click here to read our reply to the author - "Using Wrong Facts Discredits Your Opinions").

Some people may dismiss the Fiorina-bashing article as an isolated example of random malice.  That would be a wrong thing to do, as EDS's former CEO Dick Brown found out when he similarly brushed off Markman's and other Wall Street criticisms in early 2002 as "mischief" (see "The EDS Story" that follows).  And as IBM's John Akers also did in 1992, 10 months before being sacked himself by the Board.

Our three decade+-experience with boardroom and Wall Street relationships suggests that when things like that happen, it is usually because the company's CFO and investor relations people failed to do a good marketing job on Wall Street.  Whether or not that's the case at HP, we'll leave to Fiorina do decide (see the chart, Strong Finish Not Enough, Nov 2003, and HP: Still No Cigar, Feb 2004 - for some reasons the HP stock has been under performing the market).

As she contemplates that, she and other contemporary CEO can learn much from history... 

The EDS Stories...

"Great meeting you the other day. Sorry our time was short, but it was quality time -- what we did manage to spend together. Your commentary was 'straight on and content rich'."

That's how Dick Brown summed up in an e-mail our first meeting at EDS headquarters in Plano, Texas, in early April 1999, less than 100 days after he had taken over as chairman and CEO.  Jim Daley, his newly-appointed CFO, was also present.  So were the heads of corporate investor and industry analyst relations functions.

"Both Dick and Jim were pleased with your visit and commented to me how helpful your feedback had been," the head of the EDS investor relations wrote in a subsequent e-mail. "Thanks for taking the time to do so."

That's how it all began... Over the nearly four years that followed, Brown, Daley and this writer had had numerous personal and electronic interactions from all corners of the world on a myriad of EDS corporate and global topics.  

They included at least three warnings in 2002 that preceded three precipitous drops in EDS stock.  Each warning came with concrete suggestions for proactive steps that the CEO could take in order to turn things around.  Each went unheeded.  Instead, the CEO offered us grateful platitudes (Annex clients click here to read the confidential details).

"I thoroughly enjoyed myself (at Djurdjevic’s workshop for the top 20 EDS officers)," Brown wrote in December 2001.  "You have a special way of evoking responses from your audience by being provocative and ‘unvarnished’ in what you say.  It was a privilege to have you with our senior leadership team… We look forward to having you back again in the new year."

The planned October 2002 TV "Leaders to Leaders" broadcast never took place.  It was preempted by calamitous events that followed the Sep. 18, 2002 EDS stock plunge.  It was the beginning of the end for Brown.

"There appears to be a systematic and relentless effort by some unknown sources to make mischief and misrepresent the strong condition we have at EDS," he wrote to us on June 14, 2002, exactly two years ago.  "Of course, one reason I sleep well at night is none of this is true."

Brown ought not to have slept well at night.  He ought not to have ignored the negative opinions oozing out of Wall Street, however misguided or malicious he may have considered them.  He ought to have taken aggressive steps to combat the "mischief" instead of ignoring it.  And that's basically what we were recommending to him at the time.

As it turned out, Brown never implemented any of our critical suggestions offered over the course of several years.  Except for one.  In a reversal announced in early 2000, EDS abandoned a stock buyback program of which we were highly critical.  The share repurchase plan was the CFO's idea.  Daley grumbled but relented after having wasted $1.8 billion on the stock buyback program in 1999 (see EDS Forsakes Stock Buybacks, Feb 2000).  

It was a victory of sorts for us, but a hollow one in the end.  The "EDS Story" is a textbook example of a CEO who didn't have the courage to cut the chord that tied him to a CFO who did not know how to manage Wall Street's expectations.  Which means he lacked marketing skills.  Ultimately, the CFO's ineptness cost them both their jobs.  

* * *

That's easy to say in hindsight, a critic may note.  But did Brown himself have the benefit of history?  Actually, he did, as it turns out.  Had he bothered to study it, that is...

In early 1996, EDS was going through a "divorce" with GM.  The effort consumed the senior leaders' time and attention to such an extent that they took their eyes off the ball.  As a result, new contract sales plummeted.  

Alarmed by such developments, we issued several warnings about it.  Assured by the then CFO Jody Grant and other senior executives that all was well, Wall Street ignored the warnings.  Until late October, that is.  When EDS published its third quarter results, it suddenly dawned on its investors what we had been saying for months - that the company's sales were slumping, and the revenue and profits would soon follow, too, if the trend were to continue.  

The "EDS stock dropped like a stone" read the headline of our October 1996 report (see the above chart, too).

That shook the EDS leaders out of their slumber and back to selling again.  EDS sales recovered and revenues resumed their growth.  But the company kept missing quarterly earnings forecasts.  And who is in charge of managing such Wall Street expectations?  Again, the CFO, of course.

Jody Grant, the then CFO, finally left the company in March 1998.  But by then, it was too little too late.  Investor confidence had been already shaken, and the EDS stock was in the doldrums.  Once again, the CFO's shortcoming was a lack of marketing skills.  

Grant was never replaced.  Gary Fernandes, EDS's top sales and marketing executive, assumed the CFO duties following Grant's departure.  The move was termed temporary.  It ended up being "permanent" (the company ran without a full-time CFO for about a year).

In August of the same year, the CEO (Les Alberthal) announced he would step down as soon as his replacement was found.  His successor turned out to be Dick Brown, whose selection was announced in December 1998.  Having been bypassed for the CEO position, Fernandes resigned (retired) at the same time. 

The rest is history... sad, at times, as you saw.  If only the CEOs whose living depends on being good students of history were to learn to learn from it.  Tall order, we know.

The IBM Stories...

IBM is a source of both "good" and "bad" CFO stories.  And sometimes even of "bad" CFOs who were good for the business (and, therefore, for their CEOs).

Enter Allen Krowe, the IBM CFO under both John Opel (1981-1984) and John Akers (1985-1993).  Pompous at times, and arrogant most of the time, Krowe nevertheless managed to have Wall Street analysts and investors eating out of his hand, just as our cartoon from August 1985 depicts.  

Always a supreme marketer, Krowe made IBM look great even when the company was merely mediocre (see "Is IBM Mortgaging Its Future?", Apr. 1983).  

In the early 1980s, for example, IBM duped almost everybody, especially Wall Street, by what we called its "Great Lease Base Sale" strategy.  The move  inflated revenues and profits and masked Big Blue's weaknesses.  So we took IBM to task over it.  Here's an excerpt from our April 1983 Annex Computer Report:

April, 1983:  Opel on Cary: "Remarkable Display Of Business Courage and Confidence" (Annex Computer Report; Jun/83 issue):

In a tribute to the outgoing chairman at IBM's 1983 Annual Meeting in Boston, IBM's (now also retired) chairman John Opel praised (Frank) Cary for his "remarkable display of business courage... and confidence," and for "setting our growth strategy."  Opel also lauded Cary for his confidence "that the great opportunities which we saw before us would be translated into actual demand."

"...ACR (Djurdjevic) asked the IBM Chairman (Opel) to explain why IBM achieved this (financial) turnaround, in part, by borrowing from its future?  Mr. Opel pointed out the increased significance of IBM's service revenues... and the IBM Credit Corp. (ICC)... In conclusion, Mr. Opel told ACR (Djurdjevic) "we have reasons to be optimistic about our future." --------------------------------------------

May, 1983:  Krowe: "Purchase Is a Natural Order of Things  (Annex Computer Report; Jul/83 issue):

"After the IBM shareholders meeting in Boston... John Opel asked Mr. Allen Krowe, IBM's Senior VP and Chief Financial Officer, to handle our concerns (regarding the lease base sale)... Krowe attributed the reason for a change to customer preference.  'So, you are saying that the shift to purchase was not IBM-driven, but was market-driven?' ACR (Djurdjevic) asked.  'That is correct,' Krowe replied (without hesitation, even though it was pure BS)

He did agree though with our assertion that this would lead to 'greater period-to-period fluctuations, and therefore, pose an increased requirement for accurate demand forecasting.'  But, he also added that IBM's recent performance suggests that the company is relatively insulated from the influence of negative worldwide economic factors (such as the current recession)."

That was also BS, but it didn't hurt the IBM stock.  Most of Wall Street either didn't understand or didn't care.  They ate out of Krowe's hand, lapping up BS like that as if it were gospel truth, sending the IBM shares up, up and away (the stock reached a high of $175.88 in August 1987).

After Krowe left IBM in the late 1986, he also made a good CFO for Texaco for a number of years (meaning, he managed to keep the Texaco stock up through thick and thin, as he did in IBM's case).  

Nonetheless, one could argue that Krowe was a "bad" CFO when it came to substance.  But he was a great "fluffmaster."  He managed well Wall Street expectations using his ample marketing savvy.

* * *

Frank Metz, the man who succeeded Krowe in his job, was the antithesis of his predecessor.  Metz spent most of his time micromanaging the numbers instead of glad-handing Wall Street investors.  In the end, he micromanaged himself out of the job (in January 1993).  Metz also dragged down with him John Akers, his boss and IBM CEO at the time, and Jack Kuehler, the president.

After years of indiscriminately cheering IBM's missteps as well as good moves, Wall Street finally gave up on the Akers/Metz team circa March 1992, 10 months before they were shown the exit.  Here's an excerpt from Annex Bulletin 92-15 (3/02/92):

"Some IBM shareholders may one day forgive the IBM directors for having the stock near a 10-year low despite the raging bull market.  They may one day forgive them for wasting the billions of dollars of IBM's hard-earned equity.  They may even forgive them for not carrying out their fiduciary duties.  But they will never forgive them for allowing John Akers to kill the IBM corporate 'halo.'  In matters of state and kingdoms, that would be like losing the crown jewels or the king's horse.

IBM's/Akers' Public Humiliation

An exaggeration, perhaps?  Hardly.  Consider the following lines from recent U.S. business press, for example:

'So if you're loss-ridden owner of IBM (stock), what do you do?' asked the respected SMART MONEY supplement to the Wall Street Journal (forward-dated to 4/15/92).  'There is one kernel of hope.  One day, perhaps before the Millennium, IBM's directors will realize that promises made by chairman John Akers will never be delivered, and they will fire this hapless, overmatched, blame-the-troops leader.  When they do, the stock will jump 10% from whatever it is that day.  Don't miss this last exit before oblivion'."

Ten months later, they went into oblivion together, the CEO and CFO of the best marketing company in the world, who unfortunately did not have enough marketing savvy to keep their jobs.

* * *

Jerry York, a former Chrysler executive, arrived at Armonk shortly after the new CEO, Lou Gerstner, was tapped by the IBM Board in April 1993.  The two IBM executive searches ran in parallel.  So Gerstner didn't really get to pick his first CFO.  He acquiesced to the one the Akers' Board had selected.

York was plain spoken and a straight shooter.  He was also a smoker who did not hesitate to use four-letter expletives to make his point.  This did not sit well in a cushioned Armonk environment where underlings tried to guess the boss's view before feeding him/her gently the information he/she wanted to hear. 

So York did not last long.  He left in September 1995 to join a disgruntled Chrysler shareholder Kirk Kerkorian in his bid to shake things up on the carmaker's board.  Here's an excerpt from an epitaph we wrote about him as he left IBM ("York's History; Thoman's In!", Sep 1995):

York left behind a legacy of a tough executive, who has been credited by Wall Street with masterminding the IBM restructuring efforts.  But those who worked with York inside IBM know better.  “He won’t be missed much around here, I can tell you that,” said a senior IBM executive about the news this morning.  “He wasn’t a people person.” 

But York was lucky.  Which is sometimes more important than being a “people person.”  He was a large wrecking ball at a time when wrecking jobs were in demand at IBM.  But it would be false to assume that he engineered the project, or even made it possible, the insiders say.  He happened to be the right type of person at the right time at the right place.  He untied the knot and let go with the wrecking ball. 

But it was the IBM chairman (Gerstner) who gave the nod.  “We had all this stuff (the cost cut-backs) figured out even when Akers was still around,” said a long-time IBM insider.  “It’s just that Akers didn’t have the guts to do it. Gerstner did.” 

Of course, he could better afford to do it.  After all, it wasn’t the Gerstner legacy the IBM CEO had asked York to wreck.

(from Annex Bulletin FB95-01, 9/05/95)

For more on York's lore at IBM, click here.

* * *

When Thoman took over from York, we thought his marketing skills would serve him well in his new job as IBM.  As it turned out, he didn't have many (marketing skills).  Thoman's main qualification for the CFO position turned out to be the same one that brought him to his previous job as the head of IBM's flailing PC business - his longtime friendship with the boss, Lou Gerstner.  Period.

Here's an excerpt from his epitaph in June 1997, written shortly after he had moved up (!) to become the CEO of Xerox:

IBM's $7 billion-man?  Yes.  Remember, Rick Thoman, the former IBM CFO, now the new Xerox boss?  IBM's loss, Xerox's gain?  At least  that's how the media spun the story.  Some analysts revered Thoman's omnipotence, recalling how the IBM stock went up $6 billion following IBM's second quarter 1996 earnings release (see Annex Bulletin 96-39, 7/25/96).  Conveniently, Thoman's fans blotted out the "Day of Big Blue Infamy" - the headline of our report of April 17, 1996.  It was the day Thoman's remarks managed to knock out about $7 billion-worth of IBM share prices in less than an hour (see Annex Bulletin 96-24, 4/17/96).  [...]

(An excerpt from Annex Bulletin 97-26, June 13, 1997)

And how did the former IBM CFO do as CEO of Xerox?  He was fired ("resigned") less than three years later.  Here's what we wrote to the Wall Street Journal in 2002, commenting about its May 6 article on accounting improprieties that occurred at Xerox on Thoman's watch:

Although Rick Thoman is not mentioned in this WSJ piece, he was Xerox's president and CEO during the exact years of alleged accounting infractions. Thoman, a Lou Gerstner protégé from way back in their AmEx days, was the IBM CFO in his last job at IBM (1995-1997) before leaving IBM in 1997 to head up Xerox. He was fired by the Xerox board in May 2000.

Here's what the Fortune magazine said about Thoman-Gerstner in May 2000:

[...] "Haphazard execution is not what Xerox hoped for when it hired Thoman. A career-long protege of IBM CEO Lou Gerstner, Thoman was supposed to bring a touch of Lou-like luster when he joined Xerox in 1997. But Thoman's operating record wasn't quite as unblemished as the Xerox board seemed to think. According to several consultants, while the IBM's PC division under Thoman had great products, he kept missing targets by not having enough goods on hand.

By all accounts, Thoman's departure will be very popular with the troops. In a conference call with analysts, (Paul) Allaire (Xerox chairman) characterized the initial feedback from Xerox staff about the management changes, which include appointment of Anne Mulcahy as president, as 'overwhelmingly positive and enthusiastic' and 'just fantastic'"--in other words, Mussolini's head on a stick. Perhaps it's best Thoman didn't make it till the end of the year."[...]

(An excerpt from a letter to the WSJ, May 6, 2002)

* * *

Thoman was followed by another longtime pal of Gerstner's - IBM's general counsel Larry Ricciardi - who remained an "acting" CFO until Doug Maine replaced him.  In turn, Maine was replaced in late 1999 by John Joyce, a rare IBM insider who possessed both financial and marketing moxy.  While we occasionally made fun of his pontifications (e.g., "A Slam-dunk of Bunk," Jan 2000), Joyce certainly knew how to twist arms and minds on Wall Street.

It was during this trio's years as IBM CFOs that Big Blue carried out its most successful "marketing" program - squandering the tens of billions of dollars on stock buybacks (see Stock Buybacks Questioned: Is IBM Mortgaging Its Future Again?, 4/29/97, Where Armonk Meets Wall Street, Greed Breeds Incest, Nov 1998, and many IBM stories on that topic at the bottom of this article).

Just last month, Joyce was named the head of IBM Global Services - the company's biggest and most important unit.  It is not every day that one sees a CFO go from a financial to an operational role.  The fact that IBM's current CEO trusted Joyce with such a key assignment was actually a tribute to a good marketing job he did as the IBM CFO.

The Amdahl Story...

We first met at Amdahl's Cupertino, CA, headquarters in November 1992, after this writer published an unflattering article about this erstwhile IBM competitor.  Ed Thompson was a smallish and unassuming man.  At a time when most CEOs and CFOs were over six feet tall, you'd never think that he was an important executive.  But Thompson quickly made up for the underwhelming first impression with his enthusiasm and knowledge. 

During the next hour or so, Thompson proceeded to outline his company's business and financial strategy, and answer all questions with such precision and competence, that this writer turned to the president of Amdahl Canada who accompanied him on this trip and asked in awe: "Who is this guy?  What does he do at Amdahl?"

"He is our CFO."

"Your CFO?"


"You've got to be kidding.  I've never before seen a CFO who is good at marketing."

The Amdahl Canada president just smiled contentedly.  The purpose of his trip had been evidently accomplished.

As long as Thompson held the reigns as the CFO (which was for the following decade or so), Amdahl's stock and its CEOs (Gene White, Jack Lewis) did well.  In fact, given Lewis' financial brilliance and his propensity for micromanaging the problems, and Thompson's marketing savvy, it seemed at times as if their (CEO/CFO) roles were reversed.  Either way, the Amdahl shareholders and investors were the winners of such a combination.

Other Contemporary Stories...

Harry You, Accenture's CFO, is a contemporary example of a CFO with loads of personality and marketing savvy.  A former Morgan Stanley investment banking executive, he joined Accenture in July 2001, just as the company was going public.  He never looked back.

As you can see from the above chart, the Accenture stock outperformed both the S&P 500 and IBM by about 100% since the start of trading in July 2001.  Just importantly, You steered his company through two secondary offerings that brought in billions of dollars of Wall Street capital to Accenture shareholders and officers.

And based on what we have seen in the first two quarters of the current fiscal year, that's just a start (see Accenture: Burning the Track , Mar 2004).


We could go on with some more CEO/CFO "war stories," but will stop now and take stock of the lessons that the preceding examples can teach us.  Through all these decades and multiple personalities in various companies there seems to be one common conclusion and one common thread.  

Common Conclusion: A CFO can make or break a CEO.  Good ones will make them, bad ones will break them.

Common Thread: And what constitutes a "good CFO?"  Having superior marketing skills, not just financial knowledge.

Those are the two important lessons history can teach us.  Contemporary CEOs can take them or leave them at their pleasure or peril.

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2004: Beware Your CFO! (May 2004); IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004); EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004);  IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)

2003 EDS: “Biggest Feather in Cap’s Cap,” (Dec 2003); "Pain without Gain" (Oct 2003), "EDS CEO Replaced" (Mar 2003);  Rebuilding Trust and Confidence (Feb 2003)

2002 EDS: Wall Street Legal Vultures Descend Upon EDS (Sep 27, 2002),  EDS Issues Earnings Warning (Sep 18, 2002),  Wall Street-Main Street Chasm Widens (July 3, 2002),  Analysis of EDS 4Q01 Results (Feb 8, 2002)

A selection from prior years: Annex Research Analysis of EDS 4Q00 Results (Feb 7, 2001),  EDS Takes Over US Navy (Oct. 10, 2000),  EDS Second Quarter Results (July 28, 2000),  Annex Bulletin - 2000-02 (EDS' e-Price Clubs).

2002 IBM: “Gerstner: The Untold Story”  (Dec 27), "Gerstner Spills the Beans" (Dec 13), "On a Wing and a Prayer" (Oct 21), "IBM-PwC Tie the Knot" (Oct 2), Big Blue Salami (June 19), "Looming IBM Layoffs" (May 14), "IBM 5-Yr Forecast: From Here to Eternity?" (Apr 2002),  “Tough Times, Soft Deals,” (Apr 25, 2002), “Gerstner’s Legacy: Good Manager, Poor Entrepreneur” (Jan 2002), IBM Pension Plan Vapors: Where Did $17 Billion Go? (Mar 2002), "Sir Lou OutLayed Lay!" (Apr 1, 2002).

A selection from prior years: Is IBM Cheating on Taxes, Annex Bulletin 99-17 (May 1999),  IBM 5-year Forecast 2001: An Unenviable Legacy (June 2001) "Break Up IBM!" (Mar. 1996), Fortune on IBM (June 15, 2000), “Smoke and Mirrors Galore,” July 2000), "Slam Dunk of Bunk" (Jan 2000), Annex Bulletin 98-14 ("Wag the Big Blue Dog"), Armonk's Fudge Factory (Apr. 9, 1999)Where Armonk Meets Wall Street, Greed Breeds Incest (November 1998)Stock Buybacks Questioned: Is IBM Mortgaging Its Future Again?, 97-18 (4/29/97),  "Some Insiders Cashed In On IBM Stock's Rise, Buybacks" 97-22, 7/27/97,  Djurdjevic’s Forbes column, "Is Big Blue Back?," 6/10/97;  “Executive Suite: How Sweet!,” (July 1997), "Gerstner: Best Years Are Behind", Aug. 10, 1999), "IBM's Best Years Are 3-4 Decades Behind Us" (July 1999), "Lou's Lair vs. Bill's Loft" (June 1999),  "Corporate Cabbage Patch Dolls," 98-39, 10/31/98; Djurdjevic’s Chronicles magazine October 1998 column, "Wall Street Boom; Main Street Doom", “Louis XIX of Armonk,” (Aug. 1996), "Mountain Shook, Mouse Was Born" (Mar. 25, 1994), “A Nice Guy Who Lost His Compass” (Jan 26, 1993), “Akers: The Last Emperor?” June 1991), Industry Stratification Trend (Mar. 30, 1990) etc.]

Or just click on and use "financial engineering" or similar  keywords.

Volume XX, Annex Newsflash 2004-13
June 14, 2004

Bob Djurdjevic, Editor
(c) Copyright 2004 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

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