MIT SLOAN SCHOOL OF MANAGEMENT
50TH ANNIVERSARY CONFERENCE SESSION ON CORPORATE GOVERNANCE
OCTOBER 12, 2002
"RESTORING FAITH IN THE AMERICAN ECONOMY"
© Copyright 2002 Hewlett-Packard Development Company, L.P
All rights reserved. Do not use without written permission from HP.
In honor of the 50th anniversary of the Sloan School of Management, I've managed to do something here this morning that I rarely did when I was a student: I made an 8 a.m. lecture. It turns out that when you're the person actually giving the lecture, you have no choice in the matter. But all of you do have a choiceand I want to thank all of you for choosing to come out this morning.
All of us share an enormous pride as Sloan school graduates because the Sloan School has managed to stay on the cutting edge through 50 years of enormous change in our free enterprise system while never losing sight of the fundamental values that make that system work in the first place, namely: trust, honesty, integrity, accountability and responsibility.
Even during those times when those values weren't necessarily in vogue, this school has always made it a priority to teach students that there is sometimes a difference between the legal thing to do and the moral thing to do; that to do what's profitable without doing right is ultimately to do wrong.
There are a number of things I'd love to discuss with you this morning. I'd love to talk about the transformation we see in technology today, which is that physical processes are becoming digital processes. I'd love to tell you how that transformation is driving a fundamental shift in the value proposition in the technology industry, away from those companies that can provide simple point productslike isolated servers or PCs- toward those companies that can put information technology ingredients together to provide end-to-end solutions. And I would love to tell you why the new HP, which we fought so hard to create, is uniquely positioned at the center of this industry to lead this revolution.
But the truth is, I think all corporate leaders today have a responsibility that goes beyond simply expounding on the particular trends in their particular industries. In light of the corporate abuses we have seen in the past year, I think all of us have a unique responsibility to help restore faith in the American economy.
Whether we've been touched by scandal or not, I believe it's incumbent on all corporate leaders to take ownership of this problem, and to lead by example at our own companies. As a group, we as corporate leaders have an opportunity to make clear, in our words as well as our actions, what we have always known to be true: that management serves at the pleasure and for the benefit of our shareowners, our customers and our employeesand not the other way around. Restoring that faithand rebuilding that trustis what I'd like to spend a few minutes talking about here today.
I do so knowing that a CEO giving a speech on corporate governance is to immediately invite inspection. But if CEOs don't speak out because they don't want to draw scrutiny, then corporate leaders will lose their voices in this discussion, which will give the initiative to people who know a lot about regulating business but not quite as much about running them.
It was a year ago this week that Enron took a billion dollar write-down of investments. Within three weeks, it would report that it had overstated its earnings since 1997 by $586 million. Within six weeks, the companywhich was valued at more than $60 billion just a year beforefiled for bankruptcy.
The stunning collapse of Enron not only cast a long shadow over our capital
markets, it quickly gave way to headlines that more Enrons were to come.
And sure enough, they have comemore than 10 in allleading
one newspaper this week to refer to the parade of fallen business leaders
as the "corporate perp walk" of the week.
Let's call this what it really is: it is greed, pure and simple. In every company accused of abuse, the traits are all the same: abuses of power, breach of ethics, undermining of honest accounting, deception of both public and private watchdog groups and, sometimes, the willing cooperation of such groups. In each case, checks and balances failed, and people tried to get away with gains made at somebody else's expense.
It is also true that these abuses occurred in an era when many quarters some media, some analysts, some management teams seemed to forget the fundamentals. Fundamentals like: management should manage the company not manage the share price. Between 1992 and 1999, the number of companies who beat estimates by exactly one penny quadrupled. Nearly 1000 companies have restated their earnings in the last year.
Fundamentals like management means balancing short-term returns with long-term investment; and that a CEO must think of a decade, not simply a quarter. Fundamentals like real profit, real cash flow and real balance sheets matter. Fundamentals like trust, integrity and responsibility matter.
There is no question who has paid the biggest price: it's been average investors, and ordinary people, who have either lost their jobs, lost their life savings, lost their pension fundsor lost all three.
Unlike the half-century between 1930 and 1980when 5 to 15 percent of Americans invested in the marketthe explosion of defined contribution plans in the 1990s means that today, more than 60 percent of Americans own stock. Which means that to a degree unprecedented in American history, corporate wrongdoing is being felt not just at the boardroom table, but at the kitchen table as well. In the last 10 years, average Americans bought into the idea of a market-driven society.
And now their anger is pointed in many directions. As the New York Times recently pointed out, "many issues have been blended together in the public mind-set, from cooking the books and stealing corporate cash to excessive pay and perks"making no distinction between crime and common practices. That's because, to many, there are no distinctions.
Similarly, many investors put all companies in the same boat. The Secretary-General of the United Nations, Kofi Annan, who was here yesterday morning, has said that the most frustrating thing about Africa today is that investors don't yet differentiate between countries in Africa. They hear about something bad happening in Zimbabwe, and they take it as proof that they shouldn't invest in Ugandabecause hey, Africa is Africa, they thinkso they keep their investments away.
In this atmosphere, the same is true of corporate America. The misdeeds of some have cast aspersion on every corporate office in America. After all, if a dozen companies either issued make-believe accounts or made-up earnings numbers, why should anyone believe that dozens of other companies aren't practicing the same deceptions? So they keep their investments awayand the Dow falls below 7,500 for the first time in five years.
According to one poll, public confidence in big business is at its lowest point since 1981.
As is their role, into this breach, regulators and government officials have stepped with ideas for new regulation and legislation. As one report put it, while the federal government has taken a hammer to conflicts of interest among auditors and executives, the New York Stock Exchange has done the same thing for boards of directors. From the integrity of certified financial audits to appropriate accounting principles and auditing standards, what used to be the legal ceiling is increasingly becoming the legal floor. And if that will help restore investor confidence, it's an important step.
But if we are truly embarking on a new Age of Reformsuch as the one America went through a century ago following a similar decline in public trustleadership is not going to come from the government or other oversight organizations. True leadershipas it did 100 years agomust come from corporate America itself.
So how do we do it? Managing a company, not a share price, means balancing the requirements of shareowners, customers, employees and communities. And managing a company for the long-term, not just the short-term, requires building sustainable value for shareowners and customers and employees and communities. And these relationships of sustainable value require real trust and real candor.
Coming as I do from a company of scientists and engineers, it probably comes as no surprise that I believe trust begins first and foremost as a DNA question: if you don't have ethics strongly coded in your own business, it's going to be difficult to project those values in the larger market.
After all, what is trust? It's no accident that the word "trust" derives from the Scandinavian word "truste," which means firm, solid, steadfast. In a phrase, I think trust means being counted on to do the right thing when nobody is watching. It means doing what you say you are going to do. It means that your word is your bond.
In the end, business practices aren't driven by corporate culturethey reflect corporate culture.
When I was a student here, it was called values-based management, the famous Theory Z. It was based on the profound idea that the most valuable resource a company has doesn't lie in its products or plants or plans: it lies in its people. And it was driven by the equally profound idea that if you treat people right, you'll get the best they have to give. In the real world, I think we've all learned that this has a lot more to do with common sense than it does with any theory.
We all know: people want to do a good job. They want to be treated with consideration and respect. They want to feel a real sense of accomplishment in their work, to have their ideas considered and their achievements recognized. They want to feel like they're part of something larger than themselvesto be a part of the larger vision, direction and goals that a company is working toward. There is now a mountain of evidence to support the idea that a company's objectives can best be achieved by people who understand and support a company's vision, and who are allowed flexibility in working toward common goals.
The difficulty comes in communicating not just what a company is trying to do, but how it is trying to do it. Any corporation can sit down and write a high-minded statement of values. But we all know: it is in living those values that is the hard part.
At HP, we understand that values need to be constantly reinforced in an organization to be real. That how we do things is as important as what we do.
Forty-five years ago, HP pioneered the idea of a corporate values statement. Realizing that the rapid growth of HP made it impossible to have the daily one-to-one contact with employees that the founders had long enjoyed, in 1957, Bill Hewlett and Dave Packard convened a group of HP employees together at the aptly named "Mission Inn" in Sonoma, California, to put those values in writingso new employees and future employees would understand not just what we did but how we did it. That's how the famous "HP Way" was born.
What's sometimes forgotten about the HP Way is that it didn't happen overnight. It grew out of 20 years of experience in the company itself, and was an attempt to capture the values of the company, not to create them. In turn, those values were reinforced everywhere. Our values are fundamentals, not rocket science. Trust, respect, integrity, contribution, teamwork and collaboration, passion for customers.
Of course, one of the challenges we've had in the past year in our merger with Compaq is how to combine two large organizations145,000 employeesinto one team without sacrificing the values that made us successful. So, before the merger was even announced, we undertook a cultural due diligence study in both companies to learn what employees valuewhat motivates them. What gives them pride and commitment.
The study involved in-depth interviews with 127 executives and 138 focus groups involving more than 1,500 managers and employees from both companies in 22 countries around the world. We also conducted team-building meetings to examine our cultural perceptions, share ideas, and develop common goals. In the end, we were able to identify the key attributes of HP and Compaq, a set of values we all aspired to.
The interesting thing is, the values that came out of that work were the same ones that made up the original HP Way, with one notable addition that says more about the times than anything elsespeed and urgency. The point is people everywhere aspire to the same things.
Values are reflected in how we do things. At HP, we have something called the open door practice. Anyone can raise any issue with anyone else, anytime. We reinforce this in interesting ways. Our board members are free to interact with any employee they chooseand they do.
Our employees are free to contact anyoneany board member included, and they do. I think the thing that's impressed me the most, is in the three years at HP, every communication I've ever received has been signed. Even during the emotion and turmoil of the proxy contest, every communication I've received has been signed.
It is also true that one can never take these fundamentals of how we do things for granted. And particularly I think in times of turmoil, people need reinforcement on the most fundamental things. In times of turmoil like a merger, in times of turmoil like the threat of war, in times of turmoil like a down economy, in times of turmoil like corporate scandal, it is more important than ever to reinforce these fundamentals because people think if they don't hear it, it must no longer be true.
As I and the rest of the management team travel around our new company, we talk always, always about how we do things. That our character as a company is as important as our capability and our results. We have reinforced the open door policy with all of our employees, not just our new employees. We make it clear that it is not simply a right, it is an obligation, it is our expectation, that employees raise their hand and raise issues about which they have concern or an important point of view.
And because we are pulling together a new company for the first time, we are reinforcing these open door policies with other means. We are using a belt and suspenders, if you will, not simply setting a tone at the top, not simply reinforcing existing policies, but also creating some new ones like 800 numbers, like ombudsman roles to make sure that people understand how we do things is as important as what we do.
I began by talking about the basic DNA of a company, the way values are acted upon every day by employees, the way trust and integrity are displayed every day all up and down the management chain, from the boardroom to the shop floor, because this is where it all starts. Without this foundation of integrity and candor, no amount of regulation will fix what ails Corporate America.
It is, of course, integrity and candor in the boardroom that has riveted everyone's attention and concern.
Finally, the values that govern the boardroom should be no different than the values that govern the shop floor. Which means truly open debate, truly open dialogue, truly open access.
Of course, asking the tough questions, and engaging in truly open and honest debate and dialogue is a board member's job. And providing truly open access to employees, and informationinsight to the good, the bad and the uglyis management's job.
But what I've found serving as Chairman and CEO of HPparticularly during our proxy contestis that practicing these fundamentals is more than compliance with a board's, or management team's responsibilities. They make a board and a company more effective.
People have asked me"How did you keep the board together during the proxy battle?" The answer is, they kept themselves together. They kept themselves together because they exercised the highest standards of governance. They asked the hard questionsover and over, and then asked them again. They debated the merits of the merger, and all its risksand compared it to every other alternative. They routinely met without me. They routinely talked with the management team, with the auditors.
Open debates, open doors and open access make all teams more effective, and these fundamentals should be as much a part of the boardroom as anywhere else. Of course, processes and controls and regulations can, and should play an important role. But it is how we conduct ourselves in our companies and our boardrooms that will have more lasting impact than the certification we sign.
And if the fundamental DNA of the shop floor and the boardroom are the same, then policies and practices must be aligned and consistent and equitable from top to bottom, and bottom to top.
Nowhere is this more true than pay. At HP this has been a long-standing practice. When employees forgo a bonus in the tough times of the last few years, everyone forgoes one. No one is eligible for a raise until everyone is eligible.
If open doors and open access and open dialogue are part of the fundamental DNA of effective groups, so are the principles of equity, consistency and alignment. And once again, these fundamentals must apply in the boardroom as surely as on the shop floor.
Before I take your questions, I want to close on a final point. I mentioned balancing the needs of employees, customers, shareowners and communities. And I believe communities belong as equal members in the balanced equation that management teams are responsible for.
In this day and age, we are not just corporate citizenswe are global citizens. With global reach must come global responsibility. We live in a world today where there is more prosperity than ever beforebut it's also a world where two billion people are living on less than two dollars a day; where 130 million children will never go to school; where one in five people have never had a clean glass of water. If we learned anything on September 11th, we learned that a global economy that is creating prosperity for millions will not be sustainable if billions of people feel they have no stake in it.
There has never been a time when corporations have had the reach, the resources, the knowledge and the expertise to make a difference that we do today. Now, more than ever, corporate leaders have an opportunity to redefine the role of the corporation on a world stage, to leverage our ability to improve the lives of people, communities and nations for the better.
On one hand, it means being good global citizens, maintaining high standards and setting a good example in areas like the environment, ethics, labor and human rights. On the other, it means being part of the communities in which we do business.
Too often, corporations look at disparities in the developing world and ask two fundamental questions: first, how do we use our money to provide people with the resources they need to make a difference; or second, how do we use our talents to make sure citizens in the developing world have the training to use the technology or equipment we provide once they've got it?
That's what traditional philanthropy has been aboutbut if we have learned anything in this new global economy, we have learned that traditional philanthropy is no longer enough. In asking those two questions, we rarely take a leap to a fundamental third question, which is: how do we engage their talents? How do we engage local citizens in local communities in the developing world to learn what's important to them, and what goals they hope to achieve?
I think we in the multinational community rarely ask local citizens what they think and what they needeither because the market share hasn't been there, or the profit motive hasn't been there. But if we never make the leap to that third question, corporations leave off the table those very assetsour ability to invent locally relevant products, our project management skills, and our ability to set goals and meet themthat make us most relevant. The truth is, financial capital alone is not the greatest wealth multinationals can bring to the developing world, it is human capital. It is experience and knowledge, and the ability to transmit that into capacity building. Especially at a time when the challenges are so great, we need to apply all of our best talents to solving those problems.
But that can't happen if multinationals remain faceless entities from far-away places. It can only happen if corporations engage local citizens in the developing world in the places where they live and work. Like some of the companies represented in the room today, we are working to create a new model of involvement, one that taps more deeply into the things we do best.
Instead of simply committing resourceslike computers or printersand wishing them well, we are committing some of our best talent to underdeveloped communities from East Palo Alto to Kuppam, India to South Africa; putting our people in place for up to three years; and charging them with working with local citizens to set goals and create solutions for the challenges the community prioritizes. In the process, we're working hand in hand with local governments, NGOs and humanitarian organizations. This isn't about imposing solutionsit's about listening to the needs of the community and helping them acquire the tools they need to make their own goals and dreams come true.
Why do it? This is not an argument for compassion; it's an argument for enlightened self-interest. First, because of the security dimensionpoverty anywhere undermines stability everywhere. Second, because if we look beyond the next quarter or two, particularly for an industry where only 10 percent of the world is in a position to buy our products, we have to acknowledge that many of the ideas and markets of the future will come from the developing world.
But our ability to make a difference abroad starts with integrity here at home. The good news is that for all the trouble our economy and our country have been through the past year, our economyand our system of free enterpriseremains the strongest in the world. American capitalism has shown a remarkable ability to react, recover, adapt, evolve and triumph over change. And let's remember: American capitalism is not some unseen force. It is usall of us. As Senator Joe Lieberman has said, the force that's kept America strong for two centuries is not the hidden hand, but the credible handshake.
No one of us alone can restore faith in the market. This is a challenge that all corporations sharewhich is why I believe it's up to all of us, as corporate leaders, to solve. To me, the important thing is to understand that good corporate governance is not something that is being done to us. It is not something being foisted upon us. The values we are being asked to live by today are the same values we used to build the greatest economy on earth.
The values we are being asked to live by are the same fundamental values we know we must act upon every day to build effective teams and companies.
As the regulations and investigations mount, as our lawyers and auditors focus on our compliance, let's focus on these fundamentals. Because there simply is no substitute.
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