The Dictator's Handbook Read online

  It should be obvious that any board members involved in deposing the former CEO have the potential to be a problem for a new CEO. Having once been a coup maker, there is little reason to doubt that they stand ready to start trouble once again if they think the circumstances warrant it. And what could those circumstances be but application of one or more of the rules of governance we set out earlier, especially if that application harms their interests.

  Research into CEO longevity teaches us, not surprisingly, that time in office lengthens as one maintains close personal ties to members of the board. Just as sons and daughters may make attractive inheritors of the mantle of power in a dictatorship, friends, relatives, and fellow employees can generate the expectation of more loyal supporters after power is achieved. This logic probably contributed to Lewis Platt’s elevation to CEO of HP. Putting more outsiders on a board translates on average into better returns for shareholders, a benefit to everyone. At the same time, it also translates into greater risk for the CEO.2 Since the CEO’s interest is rarely the same as the shareholder’s interest, CEOs prefer to avoid outsider board members if they can.

  Corporate problems, especially those serious enough to oust a sitting CEO, can serve to galvanize attention and enhance oversight by the board, making existing coalitions less reliable. Furthermore it is likely that the new, replacement CEO will face real impediments to his efforts to create and shape a board of directors in the wake of an older CEO’s deposition. After all, the old board members did not get rid of the prior incumbent with the idea that they would also make it easy for the successor CEO to get rid of them. Nevertheless, any new CEO worth her salt will try to do just that. The long-lasting CEOs are the ones who succeed.

  Carly Fiorina became Hewlett-Packard’s CEO in 1999. After six turbulent years she was deposed from that position and as chairwoman of the board in early 2005. Prior to being removed she was the target of an unsuccessful proxy fight mounted by Walter Hewlett and David Woodley Packard, sons of HP’s founders. The board, in keeping with the power of inherited insider influence, also included Susan Orr, founder David Packard’s daughter. All were individuals with big financial stakes in HP. Furthermore, as big shareholders Hewlett, Packard, and Orr were more concerned about HP’s overall performance than about any private benefits they got from being on the board. Good news for shareholders—potentially bad news for Fiorina.

  The board that selected Fiorina as CEO consisted of fourteen members. As we’ve seen, three were relatives of HP’s founders; three more were current or retired HP employees.3 Fiorina’s initial board, in other words, had a substantial group of insider and grey members who were not of her choosing and who had big stakes in the corporation’s stock value. It is not hard to see that Carly Fiorina needed to make changes to build a leaner board with stronger attachments to her. It would not be easy—while the previous board selected her, they were not her handpicked loyalists.

  She achieved results, nonetheless. A year after Fiorina’s ascension, HP’s proxy statement to its shareholders in 2000 listed only eleven board members, 20 percent fewer than the group that selected her. Three, including David Woodley Packard, were gone. As Fiorina became more entrenched in her position, the board continued to shrink—the 2001 statement listed only ten board members, a reduction of nearly 30 percent from the board she originally inherited. Seemingly growing more secure in her control, Fiorina launched an effort to merge Compaq with HP, an effort with both beneficial prospects and serious risks for her continued rule.

  Naturally, Fiorina presented the merger as a boon for HP and its shareholders. As Fiorina explained on February 4, 2002,It is a rare opportunity when a technology company can advance its market position substantially and reduce its cost structure substantially at the same time. And this is possible because Compaq and HP are in the same businesses, pursuing the same strategies, in the same markets, with complementary capabilities. So, yes, we thought about a go-slow approach. But, we concluded, after two-and-a-half years of careful deliberation and preparation, that standing still had enormous risks.... Standing still means choosing the path of retreat, not leadership.4

  There is no reason to doubt the sincerity of Fiorina’s expectations for the Compaq merger. But it is instructive to examine a major indicator of how Fiorina’s appointment and how her views meshed with broader market sentiments. The day before the announcement of Carly Fiorina’s appointment as HP’s new CEO, HP’s shares traded at $53.43. The market’s reaction to her appointment can reasonably be described as uncertain. The price of HP shares was flat immediately following the announcement and then began a decline, falling to under $39 by mid-October 1999, about three months later. Of course, markets are forward looking and so investors were watching and learning, modifying their expectations as Fiorina took charge. The news and modified expectations must have been good for a while because by early April 2000, HP’s shares had risen markedly to about $78. But good feelings and good circumstances were not to prevail for long. After April 7 the share price went into a tailspin, bottoming out in September 2002 at around $12 a share, and significantly underperforming the major stock market indexes. By the time Fiorina resigned in February 2005, HP’s share price had only rebounded to about $20.

  With respect to the Compaq merger, the market was similarly pessimistic. The plan to merge with Compaq was announced on September 3, 2001. The shares rose on the news, with a peak in December of that year of about $23, though still well below the value the day before Carly Fiorina became CEO. Over the period from July 1999 (the announcement of Fiorina’s appointment) to the end of December 2001, the adjusted Dow Jones index fell 9.4 percent while HP’s adjusted share price fell 47 percent.

  From the perspective of any big investor in HP, including the Hewlett and Packard families, Fiorina must have looked like a disaster. Their company was doing worse than the general stock market; their fortunes were being hammered. She was a CEO in trouble. Nevertheless, the upward tick in the share value indicated a renewed, if temporary, boost of optimism at the announced intention to merge with Compaq. But markets don’t like infighting, and when Walter Hewlett and David Woodley Packard declared their opposition to the merger, the gains were reversed. Soon the price collapsed even further, halving as it became apparent that there was to be a proxy fight in which Hewlett and Packard sought to muster support from enough shareholders to defeat the board’s proposed slate at the corporation’s annual meeting. No doubt Fiorina realized that she was going to be in for a tough time, perhaps even before her public announcement of the intended and eventually successfully completed merger. It also seems likely that she would already have known Hewlett and Packard’s views. We can only conclude that this was an intentional gamble on a major policy shift, one that could—and did—adversely affect the wealth of HP’s large shareholders (such as present or former board members Hewlett and Packard).

  Looking at the Compaq-HP merger politically, we can see several critical themes emerging. Fiorina was already in some trouble because of declining share value. She had successfully diminished the board’s size and shuffled its membership, both wise choices for a CEO seeking longevity in office. Yet despite these actions, she still faced significant opposition from the inner circle of essentials and influentials. She had not yet secured the board’s loyalty. The Compaq merger might have made good business sense and could therefore have been good for the stock price, thus softening internal opposition to her. Or else, seeing the merger as a fait accompli, her opponents might have given up their fight. That didn’t happen. And the disgruntled board members, heavily invested as they were in HP’s stock value, could not be mollified with private rewards.

  However, what in retrospect may seem like a political nonstarter at the time held great political advantages. What, for instance, had to be an implication for board composition of Fiorina’s multibillion dollar merger with Compaq? Once the deal was sealed Fiorina would have to bring some Compaq leaders onto the postmerger HP board. This could be done eit
her by expanding the existing board to accommodate Compaq influentials or by pruning the existing board to make room for the new, Compaq representatives drawn from Compaq’s selectorate. Fiorina apparently saw that the merger would provide an opportunity to reconstitute the board, providing an undeniable opportunity to weaken the board faction that opposed her. That seems to be exactly what she tried to do.

  Of course, her rivals would not sit idly by and be purged. Unless such a purge can be accomplished in the dark, presented as a fait accompli to the old group of influentials, the risk of failure is real. As it happens, Securities and Exchange Commission (SEC) regulations require disclosures, which make turning a board purge into a fait accompli extremely difficult when the opportunity to purge the board depends on a prospective merger.

  There are two potential responses to a rebellion such as the one Fiorina faced over HP’s weak share price and the Compaq merger. A CEO can either purge essentials and boost the private benefits to remaining coalition members, or expand the coalition and increase rewards to the general selectorate of interchangeables (that is, shareholders). Having survived the proxy fight in 2002, Fiorina faced an eleven-member board that included five new members carried over from Compaq as part of the merger. HP’s board had shifted materially with only six previous HP board members on it. Since Fiorina had been the mover and shaker behind the Compaq deal it is reasonable to believe that she assumed the new members would be likely to work with her as opposed to lining up with board members who had supported Walter Hewlett’s fight against the merger. Walter Hewlett and Robert P. Wayman, meanwhile, left the board. By this time Fiorina had expanded the total board size by only one, from ten to eleven, while overseeing the departure of several old board members at the same time to make room for five Compaq representatives. Surely she had reason to believe she now enjoyed the support of a majority of the new board.

  Perhaps in an effort to shore up the support of remaining old hands on the board, or perhaps coincidentally, there also was a notable shift in board compensation. Just before Fiorina became HP’s head, board members earned compensation (that is, private benefits) that ranged from $105,700 to $110,700. With Fiorina in office and the board diminished in size, this amount dropped slightly to $100,000–$105,000 and remained there in the years 2000–2003. But in 2004, according to HP’s 2005 proxy statement, board members received $200,000 to $220,000. During the same period, dividends remained steady at $0.32 a share annually and HP’s shares significantly underperformed the main stock market indexes. Clearly something was up: HP’s stock price performance was poor; dividends were steady; and directors’ pay doubled.

  Fiorina’s board shuffling and their improved compensation seem aimed at getting the right loyalists in place to help her survive. Although the Compaq merger resulted in the board growing from ten to eleven, what is most noteworthy is that this net growth of one member was achieved while adding five new members (one of whom stepped down at the end of the year). So, the old members constituted only about half the board, shifting the potential balance of power toward Fiorina. Presumably that is just what she hoped, although it is not how things turned out.

  Expanding the board was not, and generally is not, the optimal response to a threat from within. To her credit, in terms of political logic, she significantly expanded the size of the interchangeables by adding Compaq’s shareholders to HP’s list of shareholders. This normally helps to induce strengthened loyalty, but declining share value could not have been good for new HP board members, who had been heavily invested in Compaq since their economic well-being was now tied to HP’s share performance. Nor could Fiorina mollify HP’s large shareholders on the board with better board compensation, since their welfare depended on producing the “public good” of greater returns to shareholders. Those grey board members who owned lots of shares made the seemingly small board of eleven actually pretty large in terms of shares they could vote.

  Under enormous pressure, Carly Fiorina stepped down. She was replaced by Patricia Dunn as chairwoman, with HP’s Chief Financial Officer (CFO), Robert Wayman, emerging again as a significant HP player. He was made interim CEO. Wayman, unable or uninterested in translating his interim position into a full-time job, stepped down a month later while continuing in his role as a member of the board and an HP employee. Mark Hurd in turn replaced him as CEO.

  In the immediate aftermath of Fiorina’s ouster the board separated two key positions, CEO and chairperson, presumably in a good Montesquieu-like effort to promote the separation of powers and protect themselves against future adverse choices by the CEO. If that was their intention, they certainly failed. Following Hurd’s ascent to the position of CEO he successfully brought the two posts back under one person’s control: his own.

  Within a year of Fiorina’s ouster, all the leading coup makers who acted against her were gone. Mark Hurd had risen to the top and, as suggested by the quote from Italo Calvino, he had to watch day and night to keep his head. Four years later, despite stellar HP performance, Hurd was, in turn, forced out amidst a personal scandal. This is the essential lesson of politics: in the end ruling is the objective, not ruling well.

  The Perils of Meritocracy

  One lesson to be learned from Mark Hurd’s ultimate removal at HP is that doing a good job is not enough to ensure political survival. That is true whether one is running a business, a charity, or a national government. How much a leader’s performance influences remaining in office is a highly subjective matter. It might seem obvious that it is important to have people in the coalition of key backers who are competent at performing the duties associated with implementing the leader’s policies. But autocracy isn’t about good governance. It’s about what’s good for the leader, not what’s good for the people. In fact, having competent ministers, or competent corporate board members, can be a dangerous mistake. Competent people, after all, are potential (and potentially competent) rivals.

  The three most important characteristics of a coalition are: (1) Loyalty; (2) Loyalty; (3) Loyalty. Successful leaders surround themselves with trusted friends and family, and rid themselves of any ambitious supporters. Carly Fiorina had a hard time achieving that objective and as a result she failed to last long. Fidel Castro, by contrast, was a master (of course, he had fewer impediments to overcome in what he could do than did Fiorina) and he lasted in power for nearly half a century.

  The implications of this aspect of political logic are profound, particularly in small coalition governments. Saddam Hussein in Iraq, like Idi Amin in Uganda and so many other eventual national leaders, started as a street thug. Autocrats don’t need West Point graduates to protect them. Once in power, people like Amin and Hussein wisely surround themselves with trusted members of their own tribe or clan, installing them in the most important positions—those involving force and money—and killing anyone that may turn out to be a rival.

  Saddam Hussein came to power after compelling his predecessor (and cousin) Ahmed Hassan al-Bakr to resign in 1979.5 Before that, however, he had carefully laid the groundwork for his control over Iraq. In 1972, for instance, he spearheaded the nationalization of international oil interests in Iraq. Oil, of course, was and is where the money is in Iraq, so he had fulfilled the essential ingredient to come to power: he knew where the money was. Once in power, he ruthlessly pruned his support base.

  Just six days after President al-Bakr “resigned,” Saddam Hussein convened a national assembly of the ruling Ba’ath Party’s leaders (the Revolutionary Command Council). The assembly was videotaped at Saddam Hussein’s insistence. During the session, Muhyi Abdel-Hussein, secretary of the Revolutionary Command Council, read out a confession that he plotted against Saddam Hussein, and then sixty-eight more “enemies of the state” were named as coconspirators. Each, one at a time, was removed from the assembly. Twenty-two were sentenced to death by firing squad and summarily executed by members of the Ba’ath Party, each branch of which was required to send a delegate with a rifle to participate
in the executions. Hundreds more were executed within the next few days. Saddam Hussein’s biographer asked Saddam about the decision to eliminate these people, most of whom had risen in the ranks of the Ba’ath Party with Saddam’s support. He reports, “The answer was that as long as there is a revolution, there will be a counter-revolution.”6 As we said before, those who can bring a leader to power can also bring the leader down. It is best to shrink the ranks of those who represent a threat and keep those who are most trusted to be loyal.

  How competent were the approximately 450 Ba’ath leaders who were executed as part of Saddam’s consolidation of power? It is difficult to say from this remove, but we do know that among their ranks were professors, military officers, lawyers, judges, business leaders, journalists, religious leaders, and many other well-educated and accomplished men. For good measure, Hussein also threw in leaders of competing political parties who, after all, might have conspired to replace him.

  Survivors included people like Saddam’s cousin, “Chemical Ali,” Ali Hassan al-Majid. Chemical Ali most notably demonstrated his loyalty in 1988 when, under orders from Saddam, he launched a successful campaign to commit genocide against Iraq’s restive Kurds. Long before that al-Majid had established his commitment to Saddam Hussein. In the infamous videotape mentioned earlier, al-Majid is seen speaking to Saddam, saying, “What you have done in the past was good. What you will do in the future is good. But there’s one small point. You have been too gentle, too merciful.”7 Unlike many who were executed following the July 22, 1979, party assembly, al-Majid, previously a motorcycle courier/delivery boy, had little formal education. Although he held the posts of defense minister, interior minister, and head of Iraq’s intelligence service, it seems his main area of competence was murder.