Saturday’s edition of The Age had a front page splash heralding “Sol’s great leap forward”. The article noted that Telstra’s share price “surged by a healthy 10 cents… as chief executive Sol Trujillo promised a great technological leap forward.”
What is interesting is that media has lapped up the notion that Telstra’s 3G plan (which is hardly groundbreaking) is a great leap forward by the CEO. Trujillo, has become Australia’s first true celebrity CEO.
The myth of the celebrity CEO grew in the US in the 1990s and reached fever pitch during the dotcom bubble. A great book by Christopher Byron, titled Testosterone Inc: Tales of CEOs Gone Wild profiled the rise (and to an extent fall) of four celebrity CEOs. GE’s Jack Welch, Al “Chainsaw” Dunlap, Tyco’s Dennis Kozlowski and Ronald Perelman.
While Chainsaw Dunlap was barred from being a director for financial fraud and rightfully Kozlowski rots in jail (Perelman is a slightly separate case as he is more of an owner-manager), Jack Welch is still feted as being one of the greatest CEOs ever. The greatest myth underlying Welch’s celebrity status is that he “rejuvenated a dying company”. Before he arrived, GE (under the stewardship of Reginald Jones) had increased earnings at an average 16% year – by contrast, during Welch’s tenure, the celebrity CEO only managed to increase earnings by 12% each year. Similarly, the book Built to Last compared the performance of seven GE CEOs.
By the end of his 20 years as CEO, the Welch legend had grown so great he didn’t need to involve himself in menial tasks like, you know, running the company. According to Byron, in his final year at GE, out of 252 working days, Welch allegedly spent 166 days making speaking engagements, leaving “barely a day and a half each week that hadn’t already been spoken for.”
GE shareholders would rightfully have been wondering, was Jack Welch working for GE or was Welch working for Welch? In his first year of retirement, Welch received benefits worth $2.5 million (which included “the use of GE aircraft for personal travel” and “the use of a New York City apartment with a resale value of $11 million”). Jack wasn’t too hard done by while working at GE either — he received around US$122 million remuneration in 2000.
Of course, the Welch myth was self-perpetuating. The reason that GE was worth US$400 billion when Welch resigned was because the market valued it on the absurd PE ratio of 39. When Welch commenced at CEO, the market was far less generous and GE traded on a PE of 9. Without the inflated Welch-driven expectations, GE would have been worth around US$100 million when Welch departed. The high market cap then justified Welch’s huge remuneration and retirement packages.
Whenever a company stops being about the shareholders and employees, and starts being about a mythical non-founder CEO, shareholders should be afraid, very afraid.
Back to Telstra. While Trujillo may have had final sign off on his Telstra’s next generation wireless network, he would no doubt have been advised by battalions of outside consultants and investment bankers, not to mention Telstra’s hundreds of internal managers and analysts. However, the media is rushing to give full credit to Sol for the strategy.
Trujillo is no stranger to big payouts. He received US$72 million just for walking away from his old employer, US West, after a bitter merger with Qwest. If the Welch experience is any lesson, the larger the celebrity, the greater the cost to shareholders. And when you have a celebrity as CEO, performance can become a secondary issue.