Much of what passes for corporate governance today has little to do with the actual business of running companies, Andy Grove, chairman of Intel, told Wharton students in San Francisco – and Philadelphia, over a live Internet link – on Sept. 17. Instead, members of many corporate boards seem obsessed with merely making sure that they’re not cited by regulators or sued by shareholders.
“If a board is preoccupied with protecting their rear-ends or talking about whether the latest member qualifies under the definition of independence and can serve on the audit committee, then the company’s real business is not even being considered,” said Grove, inaugural speaker in the Dean’s Lecture Series at Wharton.
The Dean’s Lecture Series is an offshoot of Wharton’s collaboration with Nightly Business Report, the most-watched weekday business program on U.S. television, to identify the top 25 business leaders of the past 25 years. A group of Wharton judges considered more than 700 nominees proposed by NBR viewers and unveiled the final 25 on a special report that aired in January. Grove headed the list and was named the most influential business leader of the past 25 years. Knowledge at Wharton collaborated with NBR to produce a book about these leaders. Titled Lasting Leadership: Lessons from the Top 25 Business People of Our Times, the book will be available in October. (Click here to preorder it from Amazon.com.)
Long before the recent wave of corporate scandals made governance a chic topic in business circles, Grove believed in activist boards and aggressive governance. In 1997, the famously combative executive ceded the job of Intel’s CEO to Craig Barrett and became chairman of the board. He then set about reforming the board of the Santa Clara, Calif.-based semiconductor maker.
Before becoming chairman, Grove had been CEO for more than a decade. Under his stewardship Intel grew into one of the country’s top technology companies. In 2003, it had a profit of $5.6 billion, or 86 cents a share, on sales of $30.1 billion, compared with a profit of $3.1 billion, or 47 cents a share, on sales of $26.8 billion a year earlier.
In Intel’s early years, Grove was part of a trio of executives who, in effect, co-managed the company by combining their talents. Bob Noyce was Mr. Outside, acting as the company’s public face. Gordon Moore, Grove’s mentor at Fairchild Semiconductor, their former employer, was the thinker. He’d cloister himself in his office and unravel knotty technological problems. Grove was the doer – the man of action. “Somebody had to make the ideas of Gordon’s calculations into factory realities, and that was me, pounding tables, kicking butt and knocking heads together.” Both Noyce and Moore were older than Grove, and by the time he became chairman were no longer involved in the company’s day-to-day operations.
From the beginning of his tenure as chairman, Grove’s ideal board wasn’t a conclave of cronies willing to rubberstamp his and Barrett’s decisions. Rather, it was a group of informed, independent thinkers who immersed themselves in the company’s affairs and played a key part in crafting its strategy. “The mission should be, ‘How do we, as outsiders, add value to the process of running the business?'” Grove said.
Few other boards have followed Intel’s example. Grove said he suspects that many of them have been too distracted by the embarrassments of the last several years. In trying to make sure they don’t become the next Enron or Adelphia, they are focusing on mug shots, not the big picture.
“Since the wave of awareness started with a bunch of purportedly criminal actions, the weight of the new board activities has been to avoid being caught in criminal action. The process has been defensive – ‘How do we keep out of jail? How do we keep from getting sued? How do we keep ourselves out of the newspapers?’ A lot of the board activities that take place under the banner of governance are compliance actions that are far away from being strategic participation in the key decisions a company makes.”
Grove became convinced of the need for an activist board after Intel faced a crisis of its own back in the 1990s. In the fall of 1994, a math professor found a tiny flaw in the company’s Pentium microchip – a problem that could potentially have compromised advanced mathematical calculations. Initially, Intel resisted taking responsibility. Consumers demanded that the company replace their Pentium chips, but Grove believed his firm wasn’t obligated to do so. It hadn’t sold them their personal computers; rather, it had sold the chips to computer makers, who then peddled PCs containing them. “I got irritated and angry because of user demands that we take back a device that we didn’t sell.”
Gradually, though, Grove was persuaded that Intel had a duty to these consumers. “Although we didn’t sell to these individuals directly, we marketed to them” – with the famous Intel Inside campaign – “and we established an identity that was imprinted on millions of people’s brains. It took me a while to understand this.”
In the end, Intel paid to replace the defective parts, a move that cost the company a hefty $450 million. During this period, Grove kept the Intel board well informed – several ad hoc meetings were called to discuss the crisis. But the board only participated passively in its management, he said. It checked off on his decisions but otherwise laid back.
That passivity was consistent with the board conduct that Grove had long observed. Part the reason for that behavior, Grove suspected, was simply human nature. “You don’t want to be a skunk on another guy’s board, and you don’t want him to be a skunk on yours. The social dynamic of boards traditionally frowns on troublemakers.”
In addition, Grove had found Intel’s own board to be something of a paradox. It was a panel of esteemed, powerful people, but when they came together, some members seldom spoke. “I would see ex-CEOs join the board and not make a meaningful comment for years because they felt intimidated by the combined body,” he recalls. “I had to coax them into participation. Sometimes it took five, six or seven years. I think it’s the idea of the board, rather than the board itself, that creates this behavior.”
Besides coaxing, Grove has forced his board members to speak up by requiring that each one visit at least one Intel site each year and report back to colleagues. They all also attend seminars on such topics as Intel’s technology and its regulatory environment. “Today’s expectations of boards and executives are a lot less ceremonial and a lot more activist,” he explains. “I’m still trying to move closer to that picture where the board is a knowledgeable and involved partner with management in making key decisions.”
Intel’s new ethos will soon undergo a tough test. Within the next year, Paul Otellini will take over as CEO, replacing Barrett, and Grove soon will step down from his chairmanship. How the board handles the transition will show whether it’s the independent body that Grove envisions.
No matter how sturdy the board proves to be, Intel will continue to grapple with a challenge that Grove has struggled with for the last several years – how to extend its brand to products besides microchips. Grove has tried to diversify Intel’s product line, offering, for example, microscopes and digital cameras. So far, these consumer products have failed to catch on. “The fact that we’ve had a hell of a time broadening the strong presence we have in one segment of the market into other areas is my biggest failure,” he noted.
Even so, Grove is not worried about Intel’s main product – microprocessors – becoming a commodity, as some analysts have predicted. For one thing, he said, chips have long been commodities – that’s a fact of life with any mass-produced good. For another, “commodity isn’t a dirty word,” he stated. Starbucks has built a hefty business out of selling a commodity. Ditto for Nike. “The world is full examples of how – through branding, added convenience or better technology – you can endow a commodity with differentiation,” he pointed out.
Intel, for its part, is the only chip maker that has a consumer brand that is as strong – if not stronger – than that of Starbucks or Nike. To some extent, that protects it (and them) from the pricing pressures that come with selling a commodity.
The real worry for the company, then, isn’t that it sells a commodity. It’s that Intel, like any big firm, may be blindsided by the next leap forward in computing, no matter what it is. “A situation like this is ripe for disruptive technologies – for developing approaches that can take a task that today requires 500 engineers and reduce it to one that requires 50 engineers. If a better way exists, it’s not going to be Intel that comes up with it. It’s going to be a moderate-sized startup that finds it.”
The term “disruptive technology” makes it seem as if the change, when it comes, will wallop Intel and other big technology companies like a sledgehammer. In fact, it might sneak up on panthers’ paws, only obvious in retrospect, Grove pointed out.
Either way, it’s likely to be what Grove in his book, Only the Paranoid Survive, called a “strategic inflection point,” that is, a juncture at which a business or its context changes irrevocably. An example might be Starbucks’ popularization of gourmet coffee. Before Starbucks, coffee was something consumers bought for 50 cents a cup, and gourmet brew was sold only at the rare urban espresso bar. Now, thanks to Starbucks, a flavorful, if costly, cup of coffee seems as ubiquitous as a Big Mac.
For Intel, the Pentium crisis was such an inflection point. “The process of transforming Intel into a consumer-branded company had started three years earlier with our own action [that is, the Intel Inside campaign]. But the consequences, the costs, didn’t sink in until we reflected on what happened with the Pentium flaw,” Grove said. “We certainly didn’t sit around and think, ‘Hey, we’re in the middle of a strategic inflection point.’ We were in a bunker trying to stop attacks by the press, consumers and the financial community. It didn’t feel like a moment in which you want to philosophize. Only when you ask, ‘What the hell happened here?’ do you realize that it was a moment when we’d changed our perception in the minds of our consumers.”