New rule: Hire a courageous CEO.
Old rule: Hire a charismatic CEO.
By Betsy Morris, Fortune senior writer

NEW YORK (Fortune) -- As big shareholders began to throw their weight around in the 1980s, boards sacked their CEOs and named dazzling replacements. And the celebrity CEO was born.

The stars of that era were a varied crew: Jacques Nasser, Lou Gerstner, George Fisher, Michael Armstrong, Jack Welch, Ken Lay, Al Dunlap, Sandy Weill, Carly Fiorina. Some got more credit than they deserved, others more blame. A voracious business press helped burnish (or break) reputations.


The bull market fueled the myth that a truly superior CEO could hit earnings targets quarter after quarter and propel the stock price unrelentingly higher.

But the tactics used by this generation of leaders - squeezing costs, deftly managing financial and accounting decisions, using acquisitions to grow - did not always provide long-term solutions. (A McKinsey study of 157 companies that bulked up through acquisition in the '90s found that only 12 percent grew significantly faster than their peers, and only seven firms generated returns that were above industry-average.)

Today many of those methods have fallen out of favor. Tellingly, one top management tool du jour is the stock buyback, which can buoy share prices and pacify investors - but also indicates that the CEO has no better ideas for deploying capital.

If the celebrity CEO needed a spotlight, then today's leaders need internal fortitude. Of 940 executives surveyed by Boston Consulting Group last year, 90 percent said organic growth was "essential" to their success. But less than half were happy with the return on their R&D spending.

And therein lies the rub: Organic growth is not a quick fix.

Real growth requires placing big bets that probably won't pay off until far into the future - and today's impatient culture offers little incentive. What practically killed Xerox (Charts) was its leaders' resistance to making the technological leap from analog copying to digital, which was almost guaranteed (as most such changes are) to cut margins.

By the time they were finally forced to, their business was in free fall. The company was eventually charged with improperly accelerating revenues and overstating earnings. (It settled without admitting wrongdoing and paid a $10 million fine.)

"You have to change when you're at the top of your game in terms of profit," says Mulcahy, who cleaned up the mess, made the changes to digital and color, and is now trying to jump-start revenue.

"It's hard to do. Your business looks its best. Your margins are at their best. All that makes your job easier. Then you're like, 'Oh, shit, here we go again.' You've got to jump into that risk pool, and once again you're in this mode of 'You know, this could fail.' "

Never before has a CEO more needed to take risks, but rarely has Wall Street been less receptive. A recent Booz Allen study found that a CEO is vulnerable to ouster if his stock price has lagged behind the S&P 500 by an average of 2 percent since he took the top job.

Cisco Systems (Charts) CEO John Chambers says he knows a number of colleagues who are planning to step down because of the difficulty of balancing the shortterm pressures of the Street with what's in the longterm best interest of the company.

But standing tall is precisely what all those corner- office pros get paid the big bucks for, isn't it? "You have to have the courage of your convictions," says Chambers. Immelt agrees that you must be willing to spend time "in the wilderness with no love."

And directors need some courage too: to resist pressure to judge a CEO by the company's stock price today and get back to harder measures like return on invested capital.

Hark back again to that seminal Jack Welch speech in 1981. It hardly took the world by storm - in fact, Welch has talked about how little it seemed to impress analysts that day, barely moving the stock.

But leadership is not about following the rules of the past. It is about standing up for what you believe is best, regardless of the consequences.


7: Old rule: Admire my might. New rule: Admire my soul.


The new rules

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REPORTER ASSOCIATE Patricia Neering Top of page

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