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H E S S E L B E I N & C O M P A N Y

by Rober t Re i s s

HoW to BeCoMe a traNSForMatIVe Ceo

W hat is it about Steve Jobs’ legacy that so captures our imagination and inspires innovation? It’s that Steve Jobs was a true transformative chief executive officer (Ceo). the most successful Ceos of our time generally share that

one quality—they are transformative. In this article I share the findings from significant research on transformative Ceos.

after decades of studying organizations and Ceos, I have come to believe that enterprise has now entered the fourth phase of business —the transformative organization. In the 1920s at General Motors alfred Sloan introduced the corporation; in the 1950s Peter drucker codified the practice of management, in the 1980s Japanese business brought quality and teams; and today the next phase of enterprise has emerged, transformative organizations, those that combine higher purpose and profit.

I define a transformative Ceo as someone who “creates new value that reinvigorates a company, reinvents an industry or reboots society.”

as background, the insights for The Transformative CEO, published by McGraw-Hill in 2012, are based on my in-depth direct conversations with 241 top Ceos. then, one night I read a book by Jeff Fox, How to Become CEO, one of his 12 best sellers. I found in Jeff a remarkable business storyteller. So I found his number on the Web and called him up right then … we met for breakfast a few days later. For two years, Jeff and I have worked together to help clarify this new business category—the transformative Ceo, which we believe can be a game changer for business, the economy, and society.

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New business value

is a direct line to new

shareholder value.

the Ceos’ minimum tenure in that role was about 5 years and the maximum over 23 years. each of the identified Ceos had ample time to implement his or her agenda. 

tim Powell, president of tKa, sums up the findings, “the Ceo is really also the ‘Chief Value officer’ of an enterprise. It’s a key part of his or her job to set and monitor strategic value goals, to make sure that opportunities for value are maximized, and that threats to value are minimized. For a traded company, the single metric that summarizes success on all these dimensions is the stock price. We believe shareholder value incorporates all other forms of value that a company produces. tKa measured the stock performance of companies selected previously based on the transformative Ceos’ criteria. We found that the results illustrated quantitatively that superior performance by a Ceo can drive superior performance by a whole organization, which is then reflected in its stock performance relative to the market as a whole.”

the graph on the following page is of the Knowledge agency’s findings.  

Five Rules of How to Become a Five Rules of How to Become a Transformative CEOTransformative CEO

Here are five tenets you can use to help your business become transformative. transformative Ceos may use more than one rule. In fact, I’ve come to believe that good Ceos use one principle, great Ceos two, and transformative Ceos three or more.

Before I discuss key principles of how to become a transformative Ceo, I share results from research on transformative Ceos. after our evaluation of transformative Ceos, in the back of my mind was one nagging question: does such transformative leadership produce superior financial results or not?

Primary Research on Transformative Primary Research on Transformative CEO Financial PerformanceCEO Financial Performance

I asked the Knowledge agency (tKa), management research experts, to analyze the financial performance of transformative Ceos. tKa tested a fundamental benchmark—the change in the stock price during the tenure of each Ceo identified in The Transformative CEO. Because market conditions varied widely over the time frames tested, they evaluated the results against the S&P 500 index, which represents over 75 percent of the US equities market. the benchmark metric used was stock price return in excess of the return from the S&P 500. tKa tested each of the 11 transformative companies (identified in The Transformative CEO) that were publically traded and had market capitalizations over $1 billion as of June 1, 2012.

eleven Ceos were tested, 10 of whom presided over share appreciation greater than that of the benchmark during their respective tenures. In five of the cases this was by a triple- or quadruple-digit percentage point margin! the evaluation showed that the median of evaluated companies exceeded the market by a significant margin of more than 44 percentage points.

these superior gains were interestingly achieved in periods experiencing up markets—the strong expansion experienced by Home depot during the ’80s and ’90s—and in down markets—the prolonged contraction experienced by General Mills, UPS, and Campbell Soup since 2008.

When looking behind these numbers, tKa identified one outlier, Xerox. Xerox’s performance for six of the focus Ceo’s seven years in office had actually surpassed the market by a margin of as much as 70 percentage points. However, Xerox lost its gains and fell below the market for the first time since 2003 during the significant downturn that started in late 2008.

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was actually homeless, caring for his 2½-year-old son while living out of his car. But he had a friend and they had an idea. they would create a new type of shampoo. also, because they had no marketing budget, they would not sell, as all shampoos had, to the direct consumer. Instead, they created a new product—shampoo with conditioner in one—and marketed it directly to the one customer who would really value the time savings and quality

Rule 1: Create New Value. New value means something that didn’t exist before. New value can be a new product, new service, or new customer. New business value is a direct line to new shareholder value.

example #1: How can you transform and create new value in the ultimate commodity—the egg? In 1996, egg consumption had declined from 365 per year per person to 234 per year. eggland’s Best Ceo Charlie Lanktree then had a unique insight. the best way to transform an egg was to actually change what was inside. and the way to do that was to change what you feed the chickens. as Charlie says, “humans can cheat on their diet, but a chicken can’t.” So the chickens were fed a strict diet low in fats and the result was an egg with less fat, less cholesterol, and better taste. Now the egg may cost more, but to the consumer having two healthy eggs for 60 cents vs. 40 cents is still less than a candy bar for a nutritious breakfast. the result—for the past 15 years, eggland’s Best has had annualized growth of over 17 percent every year.

example #2: today John Paul (JP) deJoria has a net worth of $4 billion, but a few decades ago he

The goal is something

much larger than just the

company.

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The talent determines how

to engage the customer.

billion in assets and become the largest savings bank in america.

Rule 3: Put Culture First. Prior to this project, I believed the myth that the first step to turning a company around starts with the customer. I was wrong. I’ve since learned it actually starts with the culture … and the talent determines how to engage the customer. Starting with culture leverages the entire organization. In fact, Senn delaney Ceo Jim Hart once told me, “the most impactful strategy is creating an agile culture.”

example #1: When Zappos started, they had no money for advertising, so instead they focused on the culture, and every person there focused on the customer. Ceo tony Hsieh says, “For any company, the kind of culture they have doesn’t really matter. What matters, what’s important, is that it is a strong culture, and that it is consistent throughout the entire company.” today Zappos is not only profitable, but a truly beloved company ... just ask any customer.

example #2: In 2001 Campbell Soup Company had lost half its market value and was dramatically cutting costs to the point where they were removing chicken from their signature chicken noodle soup. day one for new Ceo doug Conant was to tell the team that the culture was the answer. He listened and focused on employee engagement, which is measured by the ratio of engaged to disengaged. the current ratio was 2:1, and world class was 12:1. By focusing on the culture and allowing employees to solve the business issues, engagement levels rose to 17:1, profitability was restored, and Campbell

of this product: the beauty salon owner. With no money, they had only one option—knocking on doors. and knocking on more doors. according to JP, “If you knock on 100 doors and they all say no, then at door 101, be just as enthusiastic as you were at door number 1.” Because of this new product reaching new customers and being sold where failure was not an option, John Paul Mitchell Systems has become an industry game changer. and being the transformative Ceo he is, JP then did act two and started Patron Spirits, where again he created new value by producing the first ultrapremium tequila. and today, not only has he become very successful, he has built two companies focused deeply on giving back to society.

Rule 2: Have a Higher Purpose. a higher purpose is about focusing the business on something much greater and more important than the business … and something that will have a positive impact on people, communities, and sometimes the entire world. this means the goal is something much larger than just the company.

example #1: Waste Management realized they were carting 110 million tons of waste a year. the 40,000 associates drove the higher purpose to ultimately stop creating new landfills. the result was the concept, “extracting Value from Waste,” which led the company to use their waste to actually create energy. Working from a higher purpose galvanizes the workforce while doing the right thing … and with social media can create a groundswell of positive followers and new customers.

example #2: When ING direct started, according to Ceo arkadi Kuhlmann, “the core of my idea was to bring americans back to savings.” this calling galvanized employees and built a huge following. the operational model that followed was completely different than any bank. In banking, 50 percent of bank costs can come from the branch system; so ING direct, unlike the 9,600 other banks in america, would have no branches and instead return that money to depositors in the form of higher savings rates. a decade later, ING direct had $90

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“wows.” Perhaps the single easiest way to uncover new strategies is to carefully observe a great strategy from another industry and recalibrate that strategy to your company.

example #1: MtV was originally an american media company. When they wanted to expand internationally, Bill roedy, who by name was Ceo of MtV Networks International, actually had not even one international affiliate. So Bill took a seemingly unrelated “industry”—the military. roedy then used lessons he had learned as a student at West Point. Bill roedy placed small indigenous “fighting units” in each country to make connections and build the brand. this was based on his guiding principle to “respect and reflect local cultures.” the result has been widespread approval of MtV even in the most conservative cultures to the point where MtV International has grown to have over 2 billion viewers globally.

an additional thought on MtV International. one day Bill told me another secret of business, which although not a rule of being transformative, to me pulls everything together: “We don’t take ourselves too seriously. remember, I’m the one who brought Bevis and Butt-Head to russia!” I fondly remember Bill’s smile in telling me this and it always reminds me that business must be about fun, impact, and contributing to our global community.

example #2: early in this article I stated how transformative Ceos combine several of these rules. In looking deeper into the ING direct example, the way they were able to “bring americans back to savings” was through a different business model, which they actually learned from another industry. arkadi Kuhlmann saw all 9,600 banks trying to maximize wallet share of each customer in a high-margin business. So instead,

Soup Company again was top of such lists as Most admired Companies.

Rule 4: Obstacles Are Opportunities. Common sense says obstacles are bad. But obstacles actually drive the process of deep thinking for solutions. Because obstacles uncover unique situations, obstacles open new doors of opportunity. the irony is an obstacle can actually drive a transformative Ceo farther than he or she ever would have gone without it.

example #1: In 1998 Marvel comics had just emerged from bankruptcy with a stock price of 96 cents per share. according to then Ceo Peter Cuneo, “We were recovering from bankruptcy and at one point our assets were $3 million in cash and 7,000 fantasy characters that had been mostly dormant for some time.” Marvel set the strategy of aligning with major motion picture leaders like Sony and Universal and creating joint movies to bring back those characters. after several blockbusters like Spiderman, Marvel was strong enough to raise over $500 million and build their own motion picture studios. Fast-forward a decade and disney bought Marvel for $54 a share. the net/net is Marvel would not have grown so dramatically had their backs not been against the wall, allowing for only one option.

example #2: at&t Mobility Ceo ralph de la Vega learned an incredible lesson when he was 10 years old. He was separated from his parents in Cuba for 4 years because of the Castro regime. He lived with a family he had not met, in a new country where he didn’t speak the language or even like the food. But that unimaginable challenge taught him that obstacles make one strong and open new opportunities. He brought that belief with him when launching the roKr as the first music phone, which he had shared with Steve Jobs. the roKr was a huge market failure … but as obstacles are opportunities, when Steve Jobs wanted to bring the iPhone to market, he connected with de la Vega. the rest is history...

Rule 5: Learn from Other Industries. If you’d like a silver bullet to create new value for your organization, try this tomorrow. observe all your interactions with products and services and identify where there were

Be transformative!

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Kuhlmann went to the low-margin, high-volume model, which he told me he learned from analyzing supermarkets.

In summary, I have one hope. as more Ceos and leaders become transformative, they will create new value that will create new jobs and new opportunities and inspire others to achieve their potential. So when we become transformative, we collectively succeed and ultimately build the foundation—one business at a time—to elevate business, the economy, and society. Be transformative!

Robert Reiss is founder and host of the Ceo Show (www.ceoshow.com), a nationally syn-dicated radio show that reaches up to 600,000 listeners a week, as well as hosting the Ceo tV Show. the Ceo Show also publishes the Ceo Forum, a quarterly magazine received exclusively by the top 10,000 CEOs in America. Reiss writes for Forbes.com as a specialist on CEOs. His work with CEOs was featured on CNBC’s Squawk Box and in the Harvard Business review where Reiss was cited as an “expert in executive commu-nications.” Reiss is a frequent keynote speaker on how to become a transformative CEO.