Interview Call with Mr. Knight - Fleishman-Hillard
Wednesday, September 14, 2005, 10:45 - 11:15 am
If you could pick one message for readers to take from your book, what would that single message be?
Many people think of management as an activity or a profession, but I believe management is really a process, and that a sustained management process is key to creating shareholder value over a long term. That's the most important message. Sure, management is a profession and an activity, but in the end people's success is going to depend on having a process, and having the discipline and the continuity of management to carry it out.
Twenty-seven years at the helm of a very profitable multinational corporation is a tremendous achievement. In looking back, please identify your greatest accomplishment and why; and, if you could change one decision or action, what would it be and why?
Please identify your greatest accomplishment:
The ultimate measure is the growth and earnings per share over the long term. To have 27 years where sales grew over 16-fold, to over $15 billion, and net earnings increased 18-fold, to over $1.4 billion, and total return to stockholders averaged 15 percent per year is probably the thing that I'm most happy about, and hopefully the shareholders are most happy about.
If you could change one decision or action over the course of your years at the helm, what would that be?
We were originally a component manufacturer and each of our companies had great autonomy, so we could control profitability at the lowest possible level. Each company operated under its own brand. To serve our customers better and to grow faster - and growth is the biggest challenge for management - Emerson evolved to a series of business platforms with less autonomy for our individual companies and more shared resources. We adopted a common brand - Emerson - that enabled us to go to market more effectively. We also launched a successful service and solutions business. In essence, we changed the entire way we approach customers, and this new approach has worked well. If I had it to do over, we would have tried that sooner.
Talk to me about the six principles or tenets that you define in the book that are paramount to Emerson's success.
Well, you know number one is keep it simple. My predecessor, Buck Persons, was a great believer in Drucker, who had a view that you make good plans, good programs, follow up to make sure they work, and pay people for results. His message was, don't get fouled up in things that don't make sense and won't work. And Buck, who I dedicated the book to, really believed in that. So from that perspective, in the late '50s, our management process began to evolve. Of course, keeping it simple becomes a complex problem the bigger a company gets. As I said, in the beginning we believed in the autonomy of each of our individual companies, and we believed that you planned and controlled profitability at the lowest possible level to have real accountability. But as we have grown and moved from a components business to a systems and services business, some autonomy gets sacrificed. We discuss issues like this in detail in the book.
A second point in our management process, and I would say the most important point, is the commitment to planning. We defined management's job in one sentence: to identify and implement the business investment opportunities that support the company's targets for growth and profitability. That's our simple definition, and when we go into a planning conference, which we did with every company every year, we try to lay out plans to reach good aggregate growth across the corporation. Of course there were some ups and downs over those five-year periods, as you can imagine. By sitting in 25, and then 30 and then 40 and then 45 planning conferences every year, as our number of companies increased, we started to see inflection points that represented issues to be dealt with across the corporation. If we hadn't had that intensity and continuity of planning every year, we might have missed some of those inflection points. One of those points was the whole issue of low-cost competition from outside the U.S., which started popping up all around the corporation and required us to improve our operational excellence so we could compete globally. In the book, we outline all of the different inflection points - there are about five or six - where we made important changes because of what we saw in the planning process. Even with the size of Emerson today, we still plan every company every year, except if the plan is going well, and then we go out and meet with management on their terms and talk about how things are going. If it isn't going well, we replan. We like to say that we are a blameless organization, though, because we, as management, agreed on every plan every year. So if something went wrong, we were as much responsible as the managers of that particular company. I always had good guys reporting to me, so I didn't pay a lot of attention to them, because they could do their jobs. I wanted to communicate with the 5,000 people who were involved in all of the planning conferences, and that worked well because we could communicate in those two-day meetings on just about everything that was necessary.
Execution and control make up the third point, which is an area where many fail. Emerson does an exceptional job in this area, and the book covers our processes in detail, including how we do financial reviews, organization reviews, strategy reviews, etc. There's no place to hide in Emerson, because if there's any program that's not going well, it comes to light in our control process every quarter. That's important, because if you have a five-year plan and you just put it in your drawer and maybe come back to it once or twice, it loses it's value.
The fourth point is having an action-oriented organization. After our planning conferences, we would analyze each company's organization to make sure they had the right people to get the job done. They might be changing their technology; they might need a new plant somewhere and we had to make sure they had the right people to help on the implementation. So we plan our organization with the same intensity that we plan the businesses, and that's important. We didn't lose many people. Part of that was being a blameless organization, and we also had no politics. I hate politics - they dilute the effectiveness of an organization.
The fifth point is operational excellence, which is defined in terms of the standards we must reach to excel in a fast-changing, competitive world. We've kept our margins high, we've kept our return on investments (ROI) high and we've made all kinds of changes around the world.
And the final point of the process is creating an environment in which people can and do make a difference. This requires leadership, and as you know there is no single, correct view on leadership. I do have a perspective, which is in the book.
Your book talks about transformation from follower to a leader - how vital is that in today's world?
When I became CEO, we were a follower in technology. We were very good at cost control and we had reasonably good profitability. But we calculated that if we were to play the game and win, we had to be a leader in technology because technology leadership creates a sustainable competitive advantage. Today we are a technology leader in every one of our businesses. We spend about $500 million a year on technology. We provide customers with integrated systems that are smart and talk to the customer and tell them when a plant is about to have a problem, for example. All of this has evolved from a small St. Louis company with a components orientation and about $800 million in sales back in the '70s, so that was a dramatic shift over time. It's the single most important thing that we were able to accomplish.
What do you believe is the reason for Emerson's low executive turnover rate?
We started doing an MBA program in 1974; we've done it every year. We keep a large percentage of these young people, where in many companies there is large turnover. There are probably several reasons. First, we give them jobs they're not qualified for - jobs with real responsibility where we can determine their true abilities. Second, I think they like the environment; we don't have a large staff and we have no bureaucracy. Third, we are a blameless company, as I mentioned. Everybody's in the game together and if we make a mistake, fine, we fix it and get moving. We create opportunities for these young people and they do great jobs. The present CEO was one of the people we hired under this program in about 1980, and our CFO was also hired in the program. It's unbelievable how many people have stayed with the company and grown, and I think newer people see that and also recognize that we pay them for success.
As you know, MBAs are looking to come out of the Johnson School and make a mark on corporate America and I would say that if you could give them one bit of advice or insight as to being as successful as you have been and are - what one bit of advice would you offer them?
When I reflect on my time at Cornell, I got through and that's a pretty good thing to say when you're in the Engineering School. I played football and tennis, and while I did well, I never made the complete commitment to really take advantage of these sports opportunities at Cornell. That has bothered me a lot. I promised myself that I would never, never make that mistake again, and I hopefully have never made or compromised my commitments anywhere since then. That's what I suggest for young people coming up - make sure that you take a hard look at yourself and what you did wrong and right and whether you have fully committed, and line that up in terms of what you want to do as you go into the business world.
Talk about the growth of Emerson. Which acquisition do you remember the most as a defining purchase?
The defining point was when we decided that we were no longer going to be only a components manufacturer. We decided we were going to take our components and make the best and smartest systems in the world, and that we were then going to provide services and solutions to our customers, expanding our share of markets substantially. As a result, we now have a platform in process management, and some of the key companies there are Rosemount and Fisher, which were acquisitions. We have Emerson Network Power; there we have Liebert and some other companies that we've acquired. We have Emerson
Climate Technologies, which is anchored by Copeland and its scroll compressor technologies. Copeland was an acquisition. We've got Appliance & Tools, which includes motors and temperature and other controls that go with the appliances, as well as tools. Our big customers are Whirlpool and companies like that. And then we have Emerson Industrial Automation, so we have five very, very strong business segments where we moved away from the individual autonomy of the divisions. That was the key move that we made and it's having tremendous success today under David Farr, Emerson's chairman and CEO, and his management team. I think I said earlier in our discussion that I wish I had done that a little sooner.
Forty-three years of consecutive increases in earnings per share and dividends per share - if you could pick just one main reason for that success, what would it be?
This began under the leadership of Buck Persons, and extended through the years when I was CEO. But once we got the planning and execution and control processes in place, we found we could organize the company to do most of the right things, and over the years it worked. The record was broken following the biggest drop in the U.S. economy in 2001, except maybe for the great crash. Our new management team, which has now been in place for five years, did an excellent job getting through that, and today the company is really strong. And the management process continues to work, through all of these changing times and circumstances.