Ask business guru Jim Collins for an example of a board finding a truly great corporate leader, and he instantly offers up a name: Anne Mulcahy, he says, “one of the great chief executives of the last 20 years.”
No surprise. Few corporate executives have the depth of experience in both management and governance as the former Xerox CEO and chairperson. Widely admired for her operational skills, Mulcahy is a highly sought-after director who has served on the boards of Johnson & Johnson, Target and Citigroup, among others.
For good reason. From fending off activists to bolstering cybersecurity, Mulcahy’s seen it all, both as a director and as a business leader. Mulcahy’s own CEO role came about in 2001 after Xerox’s board ousted her predecessor, Dick Thoman, who only lasted 13 months in the corner office. Although she won praise for quickly addressing liquidity issues and slashing costs while maintaining a commitment to the innovation so essential to Xerox’s future, Mulcahy credits her success to the importance of followership.
“Your employees are volunteers, and they can choose to wait things out if they don’t believe,” she says. “That can be very damaging in a big company. So, it is absolutely this essence of creating followership that becomes the most important thing you can do as a leader.”
It’s a principle Mulcahy has sought to apply at every board she has served on since. Nearly eight years after she stepped down as chairperson of Xerox in May 2010, the company succumbed to a takeover in the wake of an activist attack, but Mulcahy’s currency continues to rise. She serves on the audit, nominating/governance and finance committees of Johnson & Johnson, where she’s been lead director since 2012, and is also a director at Graham Holdings and LPL Financial.
During a recent interview, Mulcahy acknowledged the vulnerability of today’s boards and urged CEOs and directors alike “to think like an activist.” Excerpts of that conversation, edited for clarity and length, follow.
How did your experience running Xerox prepare you for being a director?
The great thing about running Xerox was the diversity of experience, through both times of real growth and times of real crisis and financial restructuring. I had a breadth of education that would have been tough to get had I worked in other companies. Leading through difficult times is something that is important currency, even more so today.
Having been a decisive CEO, there must have been times when you heard some director at a board meeting spout, in your view, complete nonsense that made you wonder, what is that idiot talking about?
I hope I wasn’t thinking “idiot,” but as a CEO, you also don’t have to—I don’t know how to put this—suck up to every director’s whims. There are times when you know a lot more about the business than the people sitting around the table. And apart from taking fresh perspectives and respecting whatever their skill sets and wheelhouses are around the table, there are times to disagree and just say, “Hey, I hear you, but I don’t agree.” It’s a responsibility as a CEO not to be passive when you have strong views about an issue.
The best boards go beyond fiduciary responsibilities to constructively challenge management on a broad range of issues. Having been on both sides, where do you draw the line between governance and management when conflicting issues arise?
I wouldn’t want to have a board, and I wouldn’t want to be on a board, that limited its discussions to governance and fiduciary issues. The opportunity to get a lot more value from one’s board and, as a board member, the ability to have an impact on a broader set of issues is something that both management and directors should strive for. There’s a much broader agenda for boards today. Certainly strategy would be at the top of that list and capital allocation for sure, which is all about strategic decision making.
I’d worry about a CEO who doesn’t expect [directors to offer] a much broader contribution to the company. And yet, you do have to draw the line and make sure you’re not overstepping your bounds and getting into the weeds. One of the roles of the lead director is to make sure board members don’t get confused about their role versus management. From time to time, lead directors must draw that line.
“Constructive feedback or critique helps directors be better directors. It’s a mutual responsibility among directors to make sure we provide that for each other.”
What responsibility do directors have in that regard?
An engaged director sometimes needs to help coach other directors when they step outside the bounds of what you think is really helpful to the company. Yes, officially it’s the role of a lead director, but as a director, it’s important that you also help provide feedback in any circumstance. Constructive feedback or critique helps directors be better directors. It’s a mutual responsibility among directors to make sure we provide that for each other. It doesn’t happen enough, probably.
David Beatty, a former CEO who has served on 35 boards and is also a business and ethics professor at the University of Toronto’s Rotman School of Management, once observed that if boards were doing their jobs, there would be fewer activist opportunities. What do you think?
I don’t see it quite that starkly. Even good companies and boards that are doing their jobs [can] have vulnerabilities due to competitors or market conditions or whatever that can create an opening for an activist. This isn’t necessarily a commentary on the quality of the leadership of the company or the board. Name me a company that goes for 20 or 30 years without a few bumps in the road. I can’t think of one. Challenges, issues and occasional misses on performance aren’t necessarily an indictment of leadership or the board.
There are good, well-run companies with very competent boards that an activist sees as an opportunity because of whatever set of vulnerabilities are there. On the other hand, activists are smart, too. They go after companies that have vulnerabilities, and some of them are due to board and leadership issues. And in that case, I think they can provide a service.
I’m not always in agreement about the way activist investors intersect companies and how they choose to provide the drama around those positions. But oftentimes, companies do get themselves into trouble, and that leaves them vulnerable to activists.
During the turmoil you were going through at Xerox, you must have dealt with disaffected directors and activists who were concerned and frustrated by the company’s performance. How did you handle this?
We were in tough shape. I think directors had a right to be concerned, upset and frustrated. My overwhelming objective was to make sure that frustration got channeled into something helpful to the company. I had some stellar directors, and they were extraordinarily helpful. So it’s about turning that frustration into something constructive.
Ralph Larsen from Johnson & Johnson was one of the most esteemed CEOs ever, and when he saw the depth of the issues at Xerox, I got tremendous counsel from him. He was one of the ones who really encouraged me to move quickly on things. When he saw an issue that wasn’t going to get any prettier in a crisis, he encouraged me to move quickly, take a risk and make some mistakes. Providing that tolerance for not getting it perfect, but being ambitious about getting the problem solved was really great advice for me.
P&G’s John Pepper, who was the head of our audit committee, was steadfast in his support. We had some really serious issues with regard to accounting. John stood for values. He stood by my side at the SEC and helped me work my way through my issues, despite the fact that that’s not territory he had ever visited personally before.
These people were amazing. I embraced their help. They were very willing to roll up their sleeves and be a part of the solution. That’s important. We actually had an activist investor who I will not name come into Xerox in the early days, and he sold out very quickly because he saw that we were doing everything possible to correct the situation. This was a great lesson to me—thinking like an activist is something CEOs need to do when they’re vulnerable. Also, move quickly and be decisive.
Have you ever asked a question or challenged a CEO’s direction and received little but silence from your fellow directors?
I’m sure I have, because I’m not a quiet director. I hope I don’t speak too much, but I think you can tell when you’re out there on your own on an issue. And that’s a signal, right? That if it’s not shared by the board and you’ve pursued it as far as you can, that’s one you let go of.
Or maybe you’re onto something.
And maybe you are, and then you need to make that judgment and pursue it further. But part of getting out there on the edge occasionally is about doing your job as a director. I think shareholders would worry about a bunch of directors who just operate in groupthink all the time.
Even if you don’t agree with another director’s point of view, it should give you pause to make sure you’re thinking outside the box, too. So, I’m comfortable with that. That’s part of the role, and I don’t expect consensus. It’s something that’s great when it happens naturally, but it’s not necessarily the best outcome.
Bill George, the former chairman and CEO of Medtronic who now teaches at Harvard, observed that nearly all independent directors say that selecting the right leadership is their most important role. Yet, in Bill’s experience, the time spent on succession is far too limited and the discussion not nearly candid enough. “Too often,” he says, “board members settle for a ‘hit by a bus’ contingency plan.”
I respect Bill—I am a big fan—but this observation is a bit dated. Boards are doing a better job in terms of the quantity and quality of time they’re spending on succession. We are all aware of the hit-by-a-bus scenario. We are more focused on what if it happens quicker than we’re planning for? What happens over the next one to three years? Who is on the radar screen? Let’s look at the layers of talent beyond and what the plans are to make sure that those people are ready.
This is happening a lot more frequently than most people realize. I am aware of this more acutely because I was the product of a failed succession plan, so I am sensitive about getting it right. When succession goes wrong, it’s really ugly.
Sometimes even good boards and good CEOs have succession misses. Starbucks had to bring its founder back. The board of P&G brought A.G. Lafley back after his hand-picked successor, Bob McDonald, did not work out.
I know. Lafley was on my board. In situations like that, we often don’t see the company changing, and all of a sudden the person you picked isn’t as equipped to deal with a new set of challenges as [he or she] might have been with the old set of challenges. But also, people can be great number twos or number threes, or they can be great running a division. But, as a CEO, they’re not quite as good.
There’s risk inherent in that decision, particularly when you’re promoting from within, and it’s somebody’s first time in the CEO role. Although promoting from within is definitely more successful than bringing people in from the outside, statistically, you can do all the right things and find that it still doesn’t work. And in that case, you’ve got to address it quickly, and it’s always painful.
Boards feel very accountable in these circumstances. And it’s something they should feel accountable for and learn from so they’re a bit more enlightened when they’re thinking through the next set of decisions on succession.
At Xerox, you maintained that to be a leader, you had to build up an army of people who wanted to be in your court as opposed to watching from afar. Now, as an independent director, how are you able to advance talent within the organization when you’re not in management?
The director’s role is one of influence. I run a couple of comp committees now where talent development and succession planning are a big part of the agenda. I spend a lot of time making sure we’re thoughtful about what the talent pipeline looks like and how well prepared we are in terms of succession, diversity and the various skill sets necessary to build for the future. Directors have the obligation to influence the thinking of how talent is managed. To do this, we must interact with people at all levels of the company.
One of the things we do at several of my boards is we don’t ever waste a lunch or dinner, [so] we’re meeting with young high potentials in the company to make sure we really get a sense of that community. Directors should not only interface with the talent at all levels of the company but also provide feedback to the CEO and the CHRO. When I uncover a gap in talent, I immediately alert the CEO or CHRO and ask them to assess it and tell me how they plan to close that gap and why it opened up in the first place.
Nearly 90 percent of CEOs worry that cyber threats could adversely impact growth prospects. Yet, 80 percent of technology leaders reported that they had not briefed their boards on cybersecurity in the past 12 months, according to a recent survey. How can directors help guard against the risk of cyber breaches?
Chairmen or lead directors shape the agenda of the board. It’s part of the job. You’ve got to make sure that your briefings are in place to deal with this [issue]. The responsibility for reviewing this lays with both the risk committee and the full board. Whether it’s a risk committee or an audit committee matter, a deeper dive into cybersecurity should be undertaken. The full board should understand how the company is dealing with cybersecurity risks as a whole.
It’s the most public risk in the last five years, so if the CEO isn’t providing direction, shame on [him or her], but it’s also shame on the lead director or chairman, because it ought to be high on anyone’s agenda.
Boards have to focus on two things: Early detection— making sure you have a system so you will know quickly if something should happen—and what to do when you have a breach. What gets companies in trouble is not that they had [a cyber crisis], it’s that it went on for months, and they didn’t really respond as crisply and quickly as they should have.
What did you learn from your experience on Target’s board during the company’s cyber breach crisis?
Those were early days; there weren’t many breaches of that size at the time. My chief takeaway was the importance of understanding the skills and the competencies of your people. Having a dedicated line of sight to your cybersecurity department—not one buried within the company—is all-important. I always ask our inside experts what the action plan is if we have a breach. It’s important to establish who has what accountabilities to make sure this is well understood and documented.
Obviously, we’ve all learned to tighten controls over identity access, [beyond what existed] five years ago. The best learnings are the ones that come through painful, difficult situations. Unfortunately, you don’t learn as much when things are going great.
How should directors approach the digital transformation issues that today’s companies face?
If directors haven’t had the experience themselves, they need to be learners. They need to put in some extra effort to make sure they understand what’s happening inside the company, that they spend time both outside and inside talking to the relevant leaders in the company. Read the newspapers every day, and you have a context for what’s going on.
Also, like anything else, directors aren’t expected to be an expert on everything. You come on with a [skill] set that you bring to the table. But it’s our ability to identify and rely on and get advice from experts and act accordingly on behalf of the company that’s important. It’s not to close your eyes and say, “That’s not my job because that’s not what I understand.”
Does your background as a former technology company CEO give you an edge?
Yes, although I would say that digital transformation is a lot more than just technology today. Digital transformation is a value chain of capabilities. Sometimes we confuse what we’re looking for on boards when we talk about digital technology. We’re really looking for people who understand digital transformation and how that impacts companies going but we need to get up to speed, and we need to identify the people we can depend on.
In 2014, a Hong Kong firm called Deep Knowledge Ventures put a robot on its board—actually an algorithm called VITAL. Does it give you pause to know that you or one of your fellow directors could be substituted for a robot with highly advanced AI?
Anyone who thinks they cannot be displaced in some way is foolish. It forces the issue of how high up the value chain [is] the value we, as human beings, deliver and what we’re responsible for. Advances in data usage and AI will create a lot of ugliness economically in terms of disruption.
Are you fearful you could be replaced by an algorithm?
No, because I’m old. But I’m worried for my kids.
What is your take on the “#MeToo” movement and how it will play out across boards?
It would be hard not to feel that there’s an opportunity for change here that’s pretty compelling. So far, we see it in the media and politics, but it exists in the business world as well. This is a huge opportunity to create a different climate for women in all workplaces, regardless of sector. Companies should recognize that this is a wake-up call.
I’ve encouraged every company with which I am associated to send out a communication that acknowledges the seriousness of the situation. If it’s your company, you work hard to make sure you have a culture and values where [inappropriate] behavior is unacceptable. But we all know that bad stuff happens, which is why people [should] know what is expected of them. People should feel safe about reporting such behavior and have anonymous ways to communicate things they’re uncomfortable with inside the company. So, use it as an opportunity to remind all employees how they should deal with something, because as much as you hope that that doesn’t occur in your company, it does.
The disappointing thing for someone like me is that, after all these years, this is somehow still happening and the silence around it continues. The silence is the really dangerous part. If companies remain silent, they’re not doing what they need to do. Both women and men need to hear that companies have a voice in speaking about this issue, because silence has been the real ugly part of all of this.
Shareholder anger over CEO comp never seems to go away. How will this issue ever get resolved?
Compensation is always a difficult issue to get resolved because it’s so much about perspective. It’s one of the things I dislike about the pay ratio between the CEO and so-called average worker because, of course, CEOs appear to make an extraordinary amount of money, and they do. In the eyes of critics, this will never appear to be earned or justified. So, I’m not sure it’s a solvable problem. But there are abuses that we as directors should purge from the system.
How should directors approach this?
Like many such issues, the best constituency to address is investors. If investors are unhappy with the level of pay and performance of the company, they have to take a more active role. It’s a voice companies cannot ignore.
You sit down with [an institutional investor like] Vanguard and if it says a CEO is overpaid for the performance that’s being delivered, that’s a big deal. This is where say on pay, although not perfect, is a pretty healthy tool. I’ve been on a board that had a perilously close say-on-pay vote at one point, and we listened. We talked to shareholders and we addressed it, and that’s what should happen.
Shareholders need to be vocal and vigilant on pay, and companies and boards have to respond, especially comp committees. All directors are accountable, and when pay for performance doesn’t synch up, shareholders rightfully should scream.
Any final thoughts on your role as a director or how your perspective has changed over time?
As a director, you must think about changing all the time. That’s what keeps you valuable, right? Re-evaluating. I had a meeting with a CEO this morning in which after we concluded our discussions I said, “How can I be a better help to you? How can I be more valuable on the board?” I look forward to that discussion, because part of the job of being a director is constantly self-evaluating and making sure you’re trying to be a better resource for the company. It’s a continuous process, but it’s what good directors do.