Who Needs Co-Chief Executives
from Summer 1999
by Susan Caminiti
No less an authority than the Bible makes it perfectly clear: “No man can serve two masters” (Matthew 6:24). While the apostle was addressing the far weightier issues of love, hate, and faith in God, the same warning hovers over the outcome of some of last year’s biggest mergers. Witness the management pecking order that followed the marriages of Travelers Group and Citicorp and of Daimler-Benz and Chrysler. Sanford Weill (formerly of Travelers) and John Reed (Citicorp) share a crown at Citigroup, while Jürgen E. Schrempp (Daimler) and Robert Eaton (Chrysler) share top billing at DaimlerChrysler.
This sort of arrangement just has to be unnatural, particularly when the same folks are also co-chairmen, as is the case at these two behemoths. Even under the best of circumstances, a two-headed boss can be a nightmare—confusing to employees and, surely, Wall Street. As for the executives themselves, sharing authority must grate on anyone who has spent a career in pursuit of the corner office. “CEOs tend to have rather large egos,” observes Ray Hilgert, a management and industrial relations professor at Washington University in St. Louis. “To share that locus of authority is not what they are all about.” Even though co-CEOs remain the exception, some boards still opt for this kind of power structure. Should they? Examples of co-CEOs who have fallen out (think Time Warner) come far more easily to mind than those that have succeeded (quick, think of one!). That said, however, boards shouldn’t be closed minded. A co-CEO arrangement may be just what your company needs.
Reasons for considering this sort of structure vary. Mergers lie behind many of them, often because power sharing is the only way to get a deal done. Indeed, some mergers have fallen through because neither CEO was prepared to yield the top job. In October 1998, for example, the planned $35 billion get-together between Monsanto and American Home Products unraveled when their CEOs failed to agree on how to share the power—and neither was prepared to step down.
In other cases, a board might appoint a co-CEO because it is the only way to hang on to talent that otherwise might choose to walk out the door. Then, too, some directors go along with two CEOs on the grounds that the workload is so demanding and complicated that it is simply beyond the ability of any single human being to handle.
But are boards just wimps to go along with such arguments? GE’s business mix and scope isn’t exactly uniform, but the company seems to run along quite nicely under its lone helmsman, Jack Welch. To Ram Charan, a Dallas-based governance consultant, having two chief executives “is not going to be the new best practice in business. It will not overthrow what we know, which is unity of command. The fact that it hasn’t been adopted widely should tell you something.” Adds Michael Holland, a former chairman of asset management at Salomon Brothers who now runs his own investment and consulting firm: “If one person can run the Vatican and one the White House, then why does an insurance company need two CEOs?”
And maybe it doesn’t. At Citigroup, which includes insurance among the financial services it provides, the company line is that Reed, 60, and Weill, 66, are getting along like lovebirds. But alleged rifts between the two are the stuff of constant rumor and news leaks. Things are smoother at DaimlerChrysler, but perhaps only because Eaton, 60, has said he is likely to step down in three years, after which Schrempp, 55, probably will go solo.
Indeed, the structure of the chairman’s job significantly influences how well a co-CEO arrangement works. A lone chairman who serves as one of the co-CEOs will be the first among equals and will, thereby, remove some possible confusion. At Ameritrade, for example, the board went along with Chairman and CEO J. Joe Ricketts, 57, the founder of the Omaha online brokerage, when he asked for a co-CEO. The proposal was part of a succession plan, and Ricketts remains the only chairman.
Directors who are asked to go along with power-sharing CEOs should do so only after a lot of thought, says consultant Holland. “The first and most important question is why? As a board member, why should you go against conventional wisdom and have two people run a company? If a director can’t find a compelling answer, he or she shouldn’t vote for it.” (See box above for other questions directors should ask.)
Even those who endorse a co-CEO setup recognize the potential pitfalls. Offers Ricketts: “Having co-CEOs is not something I would necessarily recommend to other companies. It sends a message that two are in charge, and that’s always awkward. There’s going to have to be a tremendous amount of communication between my co-CEO, Tom Lewis, and me to make this work.” And do the directors think that will happen? Admits Ricketts: “Their anxiety level is still quite high.”
Of course, there are companies that do seem to be making the dual power act work. Charles Schwab has shared the chief executive’s title at his eponymous firm with David Pottruck since 1997, though Schwab remains chairman. J. Patrick Mulcahy and W. Patrick McGinnis have run Ralston Purina together for almost two years and report to one chairman. Marion Sandler and her husband, Herbert, have shared both top jobs at Golden West Financial since 1963.
The reason a co-CEO arrangement is created says a great deal about its chances for succeeding. Leaders who agree to share the job when their companies merge, such as Citigroup, are the least likely to last. “A merger has its own difficulties without having to settle issues of job responsibilities between its two leaders,” says management professor Catherine Daily of Indiana University’s Kelley School of Business.
One of the most famous mergers of the ’80s—that of Time Inc. and Warner Communications—resulted in one of the most famous unravelings of a co-CEO arrangement. Time’s Nicholas J. Nicholas and Warner’s Steven J. Ross spoke enthusiastically of their working partnership, but the arrangement soon fell apart. Nicholas was eventually forced out in a coup engineered by Ross, who later picked another co-CEO, Gerald Levin, who was more to his taste.
Those who become co-CEOs for reasons other than a merger have a better chance of success. At Ralston Purina, Mulcahy and McGinnis—“the two Pats,” as they’re known at company headquarters in St. Louis—owe their jobs to former CEO William Stiritz, 64, who is still chairman. Stiritz had sold off parts of the company that he felt didn’t fit, among them a restaurant chain, a ski resort, and the St. Louis Blues hockey team. He essentially shrank the company down to its two big moneymakers: pet food and batteries. True, there are few synergies between puppy chow and the Energizer bunny, but that’s the whole point. With Mulcahy running the $2.1 billion battery business and McGinnis heading up the $2.6 billion pet food empire, Stiritz created an organizational structure that cried out for dual CEOs.
Stiritz called both Mulcahy and McGinnis into his office in the spring of 1997. He told them he was ready to step down and was offering them the chance to run the company as co-CEOs. The usual functions of a chief executive’s job—speaking with the investment community, strategic planning, and reporting to the board—they would do together. But each would remain in charge of his own division.
“I was very pleased, but a little surprised,” recalls McGinnis, 51, who has been at the company for 27 years. “Bill asked if we thought it would work, and of course we both said yes.” Mulcahy, 55, and a 31-year company veteran, recalls that although he and McGinnis always have had a mutual respect for each other’s abilities, he never really thought about a co-CEO arrangement before that day. “I remember Pat and I just looking at each other and smiling, because we saw the merit in it and we knew we’d work well together,” he says.
Would either man have walked if the other had gotten the job solo? Here diplomacy reigns. Says McGinnis: “I can only presume the board said, ‘The businesses are performing well and we like the two guys we have. Why gamble on losing someone?’”
The biggest challenge the two Pats say they faced was convincing employees that the arrangement would fly. “We didn’t want people to think this was some smokescreen for a horse race that was taking place,” McGinnis says. “We really went to great lengths to overcommunicate and relieve any apprehension people might have been feeling.” The pair videotaped a question-and-answer session moderated by a popular local news anchor and showed it to employees. “Both of them were wearing casual clothes,” recalls an executive who saw the tape. “It came off as warm and fuzzy, sort of like, ‘Gee, isn’t this great.’”
The two executives say that running the company as co-CEOs is just like a marriage. “We have to make sure we communicate about every issue,” says Mulcahy. When requests come in for the two men to attend industry meetings or to speak at civic functions, “we see which one of us has the time or the interest to do so. It’s a day-in, day-out, sometimes hour-in, hour-out negotiation.”
Their joint appointment came only after Stiritz talked over his idea with the board. Outside director Richard Liddy, CEO of General American Life Insurance, says the board was receptive to the idea of co-CEOs early on. “Bill Stiritz has always brought creative ideas to the board and this was one of them,” he says. “The two Pats are each exceptional, capable executives, and when we asked ourselves if one was better than the other, the answer wasn’t a resounding yes.”
During board meetings, Liddy says, each co-CEO reports on his own business without commenting much on the other’s performance. “It’s clear that they talk to each other before these meetings, but they don’t question each other’s data,” he says. “There’s not a lot of meddling in the other’s business.”
No doubt increasing the Ralston board’s comfort level is the presence of a strong CFO in the person of James Elsesser, 54. “I wouldn’t say it’s a troika, but he’s quite involved with the co-CEOs and the business,” Liddy says. Moreover, he says, “The board has never had to get involved in settling any disputes.”
Mulcahy and McGinnis work in separate buildings—something that may head off possible jealousies over the coveted corner office. California Pizza Kitchen’s Rick Rosenfield and Larry Flax found another solution: They constructed a corner conference room with their individual offices situated on either side. The arrangement worked well when they were co-CEOs and just as well today as co-chairmen of the Los Angeles-based company. The pair recently hired a CEO, just one, who has his own space. At Schwab, both Charles Schwab and David Pottruck have new, and nearly identical, corner offices down the hall from one another at the firm’s San Francisco headquarters. Like Mulcahy and McGinnis, Pottruck, 50, likens his role to that of a marriage partner. “The probability of marital success in this country is less than 50%, so you can imagine that this partnership with Chuck is something that we really have to work at,” he says. “It’s a brand new relationship in a pressure-cooker situation.”
Pottruck, who worked as a senior vice president of marketing at Shearson-American Express before joining Schwab in 1984, says he understands why the board was skeptical when first presented in the fall of 1997 with the idea of having co-CEOs. “There are so few, long-term, successful, co-CEO situations out there,” he says.
Before Schwab, 61, presented Pottruck with the offer to become his partner, he consulted with the outside board members to get their feedback. Schwab wanted to send a signal that he valued Pottruck far above his then-role as chief operating officer. Even so, it was not an easy sell. So to help persuade the more reluctant directors to go along with the idea, Schwab and Pottruck met with them individually to explain how this new plan of shared power would work. Schwab said that he would be the long-term visionary of the organization, acting as a liaison with outside shareholders and as an advocate for customers. Pottruck’s role would involve an extension of his COO duties, with the added responsibility of mapping out the company’s strategic development, an undertaking he shares with Schwab, who remains chairman. “Once the directors saw how carefully Chuck and I had thought this out they were convinced it would work,” Pottruck recalls. After all, he says, “no one could imagine losing Chuck Schwab from the company, but I don’t think they necessarily wanted to lose me either. Now they don’t have to worry about me being attracted to a CEO job someplace else.”
Dangling a co-CEO title in front of a valued senior executive makes sense to Raj Chaganti, professor and chairman of strategic management at Temple University in Philadelphia. “There are so few good men or women out there who can fill a top spot,” he says. “When you have one, you’ll do what it takes to make sure you don’t lose that person.”
Without knowing for sure how successful a co-CEO pairing is likely to be, directors may be tempted to put the arrangement to a test. After a set time has elapsed, this theory suggests, the board should judge whether the two chiefs are getting along, or plotting each other’s demise. But setting such parameters is a temptation best ignored. Time limits send up “a huge yellow flag to shareholders that something isn’t right,” says consultant Holland. “Either the board believes that the co-CEOs will work well together and gives its full support, or it shouldn’t approve of the arrangement in the first place.”
One exception might be with newly merged companies, where one of the CEOs agrees in advance to step down within a certain time period, as Eaton has at DaimlerChrysler. Professor Daily believes “test periods like this are an emerging take on CEO succession.”
Joe Ricketts at Ameritrade agrees: “This company was growing so fast we needed to add to our executive ranks someone who really understood technology and where we are headed.” Hence his choice of Tom Lewis, a co-founder of global technology consultant Seer Technologies, as his heir apparent. Lewis had previously transformed USF&G, a near-bankrupt property and casualty insurer, into one of the country’s most technologically advanced insurance companies. Ricketts admired Lewis’s skills as well as his leadership abilities. But Ricketts was looking for more than just a partner. He wanted someone who, with himself staying on as chairman, could run the company as its sole CEO within a year. “I’ve been working 80-hour weeks since I started this company,” says the father of four grown children. “I’ve denied myself a lot of things, and now I want to enjoy what I’ve made.”
And if he finds at the end of the year that Lewis isn’t working out? “We’ll part company. He knows that, I know that, and so does the board,” Ricketts says. “Look, taking this step has scared the hell out of me, but I know it’s the right thing for the company."
