Marshall Loeb, the former managing editor of Money and Fortune, conducts a regular series of conversations with today’s leading chief executives on the Stern campus.

Interviews with: Dick Grasso • Joel Klein • John W. Rowe, M.D. • Jack Welch

ML: How do you measure success at the New York Stock Exchange?

DG: More important to us than the number of listings and the market capitalization is how the consumers feel; whether they are corporate, institutional, or retail users. If that small investor who’s buying or selling 10 shares of Home Depot doesn’t get the same quality of execution as the largest user, eventually our market franchise will erode. We also measure success in terms of how we evolve the business. In 1990, we were the world’s second largest market, behind Tokyo. Today, we are five times the size of the second largest market in the world. If you were to pull our non-United States franchise standing alone, it would be the third largest marketplace in the world. I’m proud of the fact that 10 years ago two-thirds of the companies that we trade today were not traded on the New York Stock Exchange. That reflects the dynamism of both the United States economy and the world economy.

ML: How badly has investor confidence in the free and honest workings of the market been shaken by the recent scandals involving Enron, Arthur Andersen, and stock analysts?

DG: Every day when you pick up the newspapers, you can’t help but think that the entirety of the system is broken. I have a brand new committee of my board, the Corporate Accountability and Listing Standards Committee, working to define the actions that we must take to restore the public’s good feeling about our markets. We did some opinion research recently. The good news is that the American investing public is willing to watch what the system does in response. Historically, when we’ve had dark chapters it has been private sector initiative that has routed out the cancer.

We trade 2,800 of the greatest companies in the world. In the total landscape of public America today, there are about 12,000 companies as defined by the SEC’s (Securities & Exchange Commission) reporting standards for public ownership. However many we can count in this dark chapter, they are a very, very small minority of a system that the whole world admires.

We have 85 million Americans who are directly participating in the equity market. When you add indirect ownership we’re a nation of owners. We have to step back and ask, “Where did we fail?” But we should never apologize for a system the whole world admires.

ML: What do you think should be done? Give me one or two reforms that should be enacted.

DG: Well, it’s not just what we will do. It’s what we will advocate and support. The NYSE was around long before the SEC was created and long before there were professional organizations in the accounting and legal fields. In the late 1870s, through its listing agreements, the NYSE took the bold move of telling its publicly traded companies that they had to report their results of operations.

Roll the clock forward to the turn of the century. We began to require annual comparative financial reporting and quarterly reports. Back in 1978, for the first time, we required of our listed companies the creation of an independent audit committee. It wasn’t an SEC mandate, it wasn’t a congressional initiative, it was the Exchange again reacting to a period of crisis.

Today, our new committee is looking at the issues of how many independent directors should populate a board. I think we need to tighten the definition of what is an independent director. Some believe a former employee can be deemed independent after the passage of time. In some cases, say that former employee is drawing a big pension, one would question the independent definition. We’ve got to look at nominating committees. How do public or independent directors get chosen in corporate society today? We’ve got to look at compensation committees. I mean, clearly those two latter committees need to be populated, if not entirely, then certainly in a strong majority, by independent directors.

“Every day when you pick up the newspapers, you can’t help but think that the entirety of the system is broken. . . [But] However many we can count in this dark chapter, they are a very, very small minority of a system that the whole world admires.”

The Exchange can take a certain number of actions in the governance area. I think that the Exchange must take an advocacy role in what other people should be doing. For instance, taking a very supportive role of the SEC’s initiative on the creation of a self-regulating organization in the accounting profession.

ML: What role is the New York Stock Exchange taking in the analysts’ research scandals? Is the Exchange itself putting any pressure on the brokerages to keep their analysts totally independent?

DG: At our board meeting in February, the Exchange, working with the NASD (National Association of Securities Dealers) and the SEC, developed a series of new rules designed to deal with the issue of analyst conflicts including how they’re compensated and when they may talk to investment bankers.

Again, I think it’s important that we as a self-regulating organization make certain that we’ve got the proper insulation, so that banking doesn’t become an extension of the analyst community and vice versa. On the other hand, where the system has clearly broken down, we’re not going to gloss it over. We’re going to lay it right out to the American public to read. The real beauty of our system is that when people devise short cuts and in some way affect the system, the system has the ability to self correct.

ML: What do you think of New York State Attorney General Elliot Spitzer’s steps in this direction?

DG: He rightly has the consumer’s interest at heart. Because what built this market? It’s public confidence. You don’t guarantee investors a profit. You have to guarantee them fairness. You have to guarantee them transparency. I think he recognizes that he cannot, as the Attorney General of New York, impose structural reform on the industry. Working closely with SEC Chairman Harvey Pitt and with the self-regulatory organizations, he is going to produce a benefit to consumers in New York State and to investors throughout the country.

ML: Can you give us some examples of things that you worry about that regulators or elected officials may try to impose upon the system now?

DG: There is not a silver bullet that will cure the system. You shouldn’t attempt to do in the public sector what is better done in the private sector – such as listing standards. There are those who would like to see legislated into the securities acts definitions of independent directors and compositions of committees. That’s better left to a listing standard. These issues should be bottom up, with the private sector driving towards best practices. And the investor in my mind, will always gravitate to those with best practices.

ML: A few years ago during the midst of the raging bull market we heard much talk of 24-hour trading. What are the NYSE’s plans for 24-hour markets?

DG: There was a period between 1997 through 2000 where people much preferred to trade online at 2:30 in the morning rather than sleep. I said at that time, and I’ll say it again today, 24/7 trading will come when the customer base wants it. Today, you can go to your work station and buy 100 shares of AOL at 11:00 p.m. But it certainly will look nothing like your experience at 11 a.m. During market hours, the stock trades on average 30 million shares a day. In the after hours on a very large day it’ll trade a half a million, or far less, and you’ll move the stock on a small number of shares. Right now consumers value liquidity more than they value instant gratification.

ML: Some people are trading stocks on electronic communications networks (ECNs) instead of on the New York Stock Exchange. How strong is the competition to you and what are you doing to counter it?

DG: Well, competition has been absolutely terrific for our institution. A week ago this Monday, 34 years ago, when I first walked into that building, we had very little competition. And it almost killed us. So as we saw the natural monopoly break as it did in May 1975, as we saw the birth of alternative market structures, it was a great propellant to reinvent the NYSE. But we love the way we’ve been doing things since 1792 – the full open outcry. We love the theater of the live. We love the fact that 130 million people watch that opening bell each morning and listen intently to Maria Bartiromo of CNBC do her post-bell commentary. But what you don’t see from a distance is the fact that more than 90 percent of our orders on an average day are on our e-commerce application.

“Where the system has clearly broken down, we’re not going to gloss it over. We’re going to lay it right out to the American public.”

The ECNs have been very good at being vertical competitors. They don’t try to trade all 2,800 securities. They pick their securities. They pick their customers. And they pick their trade size. And they do quite well.

Because that threat of extinction forces you to constantly change, the only constant in my business is that every year we rip it apart intellectually. Every year my senior most partners and I basically ask the question “What is it that made us very successful last year that we know will not help us in two years?”

Q & A with Students

Q: I’m an independent director of both a publicly listed and a private firm. In both cases it’s a hard role. And I’d like to know whether your organization is thinking about providing any type of support for the role of the independent director.

DG: Part of the work product coming out of this new committee is going to be an institute for independent directors. We’re going to take practitioners — people like Jerry Levin, the former CEO of AOL Time Warner; Ken Langone, one of the co-founders of the Home Depot; the attorney Marty Lipton (a partner with Wachtell, Lipton, Rosen and Katz) — and they’re going to become faculty for those who sit on public boards or who are considering sitting on public boards.

Q: There has been a trend fairly recently about socially conscious investing. Do you think that the socially conscious element will be incorporated into the listing standards for companies on the exchange such as Philip Morris?

DG: The issue is probably more hotly debated on the non-United States side. Particularly when you get to human rights issues in some parts of the world, and whether companies from those areas should be acceptable for listing. We’ve taken the position that our listing standards have historically measured quantitative measures, not qualitative ones. I will tell you that in certain instances we do have the right to deny a company listing, even though they meet all of our standards. But I don’t think you’re going to see as broad a listing application in the social area as tobacco or alcohol or fire arms. Rather you’re going to see what we’ve begun to experience, where those companies disaggregate their businesses so that investors can make choices as to which parts they want to invest in.

Q: Can you talk about the pros and cons of going public for NYSE?

DG: The driver for us in 1999, when we were thinking about going public, was a firm belief that I had then that we were about to see a very different breed of competitor in our business. Yes, we’re a transaction manager and yes, we’re a platform for economic activity, but what we really are is a data company.

If you take that generic definition there are lots of names that can walk into your space. If my competitor was eBay, I was going to need capital at a very different level. I was going to need stock for acquisition and incentivization purposes. That whole temptation went away quite quickly with the dot-com explosion.

As far as the downsides, think of me as a manufacturing facility. Our utilization rate is less than 15 percent. Our average daily volume is 1.3 billion. Our capacity is somewhere between 10 and 14 billion. And I build that excess capacity for a very important reason. Chairman Greenspan comes on the tube and says, “I think I’d like to kick up interest rates 500 basis points.” We’ll light up like a Christmas tree. I might not trade 13 billion shares in a single day, but my flow rate will feel like it. So we have to maintain that capacity. As a public company I couldn’t afford to do that. We’re a private institution with a public purpose. That doesn’t lend itself to public ownership.

ML: Tell us briefly what you do, what you're responsible for and what Bertelsmann does in the United States.

JK: Bertelsmann grew up in an improbable place called Guetersloh. It started in 1843 as a Bible printing company and evolved into a religious book publisher. After World War II, it migrated toward book clubs and then music clubs. It kept moving up the value chain, and started to buy publishing companies such as Random House, music companies such as RCA, a magazine company (Gruner + Jahr), and then moved into European television with the RTL group. In the United States we are a significant, but obviously incomplete, media company; that is, we're missing some assets we would like to have in visual media. Also, we are very active in the Internet space. We co-founded AOL Europe with AOL Time Warner, and have invested in or extended credit to CDNOW, BN.com, and Napster.

My job is a combination of fundamentally three things. One is our United States strategy, including e-commerce. The second is to build corporate infrastructure for United States operations that we know will continue to grow. And third, to devise a long-term strategy for getting Bertelsmann better known and more comfortable in the United States economy and in Washington.

ML: Do you think that these interlocking industries of media, entertainment, and technology will shake down into five or six huge multi-national companies? Or will there be plenty of room for small and medium-sized companies?

JK: The answer is both. I do think there will be a handful of global powerhouses. The Internet is a worldwide global distribution system unavailable to us five years ago, and it's going to become increasingly available with broadband. This is going to put more and more pressure on companies to build scope and scale and to finance the risks of growing companies in China and India and throughout the rest of the world. Right now, there are clearly four or five or six companies that are dominant in the U.S.: AOL Time-Warner, Viacom, Disney, Vivendi Universal, News Corporation and Bertelsmann. And in the next three, four, or five years, I think you will see several of these companies look toward further mergers.

Having said that, there's going to be myriad opportunities for people who want to play in a particular space in a particular niche. There are still going to be magazines that grow up and take off. The cultural differences between the United States, Europe, Asia, Africa, South America, are still so vast that you can't simply develop content in one country and export it all over the globe.

ML: AOL Time Warner appears to be having some severe problems. Do its troubles suggest that there maybe something basically wrong with these megamergers between huge corporations?

JK: It was hard enough to merge Time magazine and Warner Media. But to take AOL, which grew up in an entirely different culture, and merge it with the old Time empire, even though you could see the potential for synergies, was very hard to execute. It takes a fair amount of learning to give up independence cheerfully and to see if you can make the whole greater than the sum of the parts. Still, I think it's been a rather effective integration of a variety of media assets. And all things considered, I think AOL Time Warner will work through some of these implementation issues and probably develop as a significant player.

“Nobody would walk into Tower Records and say, ‘I’d like to help myself to a handful of CDs today and not pay for them.’ On the other hand people are doing this by the minute on Kazaa and Morpheus.”

ML: What is your perspective on the issues of piracy and artists’ rights?

JK: Well, that's a very serious problem. I would be the first to tell you that anyone who comes forward with a simple solution is somebody who is missing key ingredients. On the one hand, we understand that technology is going to create opportunities for consumers that are going to create challenges for content providers. By and large, people in general have grown up under this model on the Web that somehow you get the eyeballs and then you monetize them. Well, companies have done a terrific job getting the eyeballs, but they haven't done such a hot job figuring out how to monetize them. So you have a culture that got used to free content.

But free is a very hard way to keep the content pipeline regenerating itself. No honest person would walk into Tower Records and say "I'd like to help myself to a handful of CDs today" and not pay for them. On the other hand, people are doing this by the minute on Kazaa and Morpheus. And I think that's a problem. Still, the music companies can't simply sit back and say "Look, we'd like to sell you CDs with 14 songs for $16.95 and if you don't like it, tough." We will find ways to make it more difficult for people simply to download for free or file share for free. And the courts are slowly going to throw sand in the gears of the pirates.

ML: One gets the impression that broadband has been something of a disappointment. What’s the state and future of broadband?

JK: There are 10 to 12 million people in the United States who have broadband. It will continue to move forward. I remember that back in 1996, during the debate over the Telecom Act, the cable people said they would go into the telephone business, and the telephone people were going to distribute content over their lines. There was a lot of entrepreneurial enthusiasm on the front end that didn't necessarily work its way through the system.

Still, the world today, with Internet access, is just different and it's clearly moving in one direction. AOL is not losing subscribers as time goes on. There are not fewer and fewer people spending less and less time on the Internet. By the same token, as more content gets digitized and is available to people, there will be more and more uses and demands for broadband.

ML: Let's switch the topic somewhat. You led many of the United States Government's landmark antitrust cases, including the monopoly challenge against Microsoft. Do you think Microsoft got off too easily?

JK: One of the things I did the day I left the Justice Department was make a point not to comment on cases after I leave.

ML: Bertelsmann is essentially a privately owned company. Does that give Bertelsmann certain advantages over stockholder owned companies?

JK: The principal benefit is you don’t have to look at the stock market each day and worry about your quarterly earnings and either feel pressure to make a lot of deals that have balance sheet impact but no economic impact or to make short-term decisions that maybe of marginal value as compared to executing on a longer-term strategy.

The bad side, I suppose, is that when the acquisitions come around, we have to use cash while everybody else uses stock. Stock is a better curren-cy with which to buy than is cash. And so, that's a competitive disadvantage that we need to navigate. I suspect that Bertelsmann will eventually go public.

ML: You’ve had the marvelous experience of being able to work at very high levels in the public sector and in the private sector. What do you think are the really important differences?

JK: For me, public service is the highest and greatest calling. I believe that. I grew up in public housing in Queens. My father was a postman, didn't graduate from high school. And I clerked on the Supreme Court, worked in the White House, and am now a senior executive at Bertelsmann. I don't think that happens by chance. I think the democratic infrastructure and values matter. When I was 26 years old, I clerked for Louis Powell on the Supreme Court. It was a transforming experience and I've always felt this need to pay back and to fight because I think otherwise values that I care about stand a lesser chance to be implemented.

By the same token, being part of a great company or a private sector opportunity where there's real entrepreneurship, where you could have wonderful ideas and see them implemented is a very exciting thing. And I don't in any way minimize the value of making a good living, being able to support your family well. But I've got to tell you, I've been rich and I've been poor and to me, it's not the organizing feature of my life.

Q & A with Students

Q: Bertelsmann is known as being a very ethical and very socially giving company — through the Bertelsmann Foundation in particular. Is there a conflict there with the Napster investment? And what is going to happen when or if you go public?

JK: Our involvement in Napster was designed to transition Napster to a lawful service. And frankly, I think the industry by choosing to litigate, rather than working with Bertelsmann, actually spawned this generation of Napster clones. Second, I am proud of the fact that Bertelsmann is an ethical company. When you start to read, as we read now, about Enron and Andersen, I think you want to be on the right side of those issues. However, that doesn't mean one doesn't have an obligation to worry about the bottom line in business. What made Bertelsmann different, frankly, is that Reinhard Mohn took one of the largest aggregations of wealth in the world and put it into a foundation dedicated to the public good. But if we were to monetize these shares in an IPO, there would still be money that would flow into the Bertelsmann Foundation and the Foundation could still continue to do the things that it does.

Q: Early on, you mentioned that you thought Bertelsmann Inc. had a few holes and you were certainly looking to fill them. In general, would you comment on where some of those holes are and, specifically, are there any that might be filled from the small company technology space?

JK: We're not in the TV or the movie business in the United States. That's not an easy hole to fill but I think it's something that certainly over time we need to think about. We've also got some challenges on where we go in music.

“If I were to say one thing generally about media and entertainment companies is that they don’t fully understand the impact that technology is going to have on them going forward.”

The third area is technology. If I were to say one thing generally about media and entertainment companies is that they don't fully understand the impact that technology is going to have on them going forward. And if they are under-invested, it is in technology R&D. And so, one of the things we're trying to do in Bertelsmann is to increase our sophistication, look for the right partnering opportunities, and try to get ahead of the curve in that respect.

Q: To what extent does the fact that you were asked to join Bertelsmann signal that regulatory affairs and government affairs are of primary importance in the media industry?

JK: This is your polite way of saying, "Why would a sophisticated company hire a non-businessman like me, right?" I didn’t come to Bertelsmann to be a regulatory lawyer player, although obviously antitrust, FCC, and foreign ownership issues will impact us. I've spent five years looking at virtually every major media merger in the globe and saw all the technology and media issues from both sides. I used to jokingly say to the people at AOL and Time-Warner, "Each of you think you understand why the other guy did the deal. But I'm the only one who's seen documents from both sides of the transaction."

Interview conducted by Robert Kavesh, Marcus Nadler professor of economics and finance at NYU Stern.

RK: Analysts have referred to a “perfect storm” that may create a crisis in healthcare. What does that mean?

JR: The “perfect storm” in healthcare is brought about by three coincident factors. The first is the recession, which I guess is over, but it puts pressure on corporations’ ability to spend on benefits. The second factor is rising healthcare costs. And the third is 44 million uninsured people, which is a national disgrace.

What’s very important to understand is that in American healthcare, in general, people don’t buy insurance. You’re either a beneficiary of the Medicare or Medicaid program, or get your healthcare through an employer-based program. So it is the large employers in America who really determine what healthcare benefits people are going to get and what they’re willing to pay. This January, which is when most healthcare contracts get recontracted, we expected the perfect storm to land. We increased our prices more than 19 percent at our company and, surprisingly, the prices stuck.

One of these days either the American public is going to get fed up with the number of uninsured and get the politicians to do something, like regulate costs, which is unlikely, or the employers are going to say, “We’re not going to pay it anymore.” And that’s going to be when the storm hits the beach.

RK: So how do we control healthcare inflation?

JR: The fact is that Americans have a tremendous appetite for choice and for healthcare. And up until now, when faced with the decision of paying more or not having choice, they’ve always decided to pay more. But there is a way to control healthcare inflation. It’s called an HMO. HMOs came to the forefront in response to employers’ demands for a reduction in the rate of inflation of healthcare. When they came in, healthcare inflation rates fell and there was a backlash. People wanted more choice. They didn’t want these restrictions. The economy was booming. The labor force was tight. Employers had to offer bells and whistles to recruit and retain workers in a tight labor force. So we evolved to what I call managed care light.

One of the things that may happen is that corporations may come back and say they’re willing to take some heat from their employees and switch back to traditional HMOs. The alternative is defined contribution plans, where they give employees more responsibility and autonomy and in return they’re going to have to pay more.

RK: What about the so-called “death spiral,” when you give individuals discretion as to how they spend their benefit dollars and take them out of a reasonable network. You’re left with those who perhaps are higher-risk so the premiums go up and up?

JR: In this case – defined contribution for consumers – employers give employees money and say, “Okay, you can put this into a medical savings account and you get coverage, but beyond a certain amount you’re on the hook.” Aetna has a product like that called the Aetna Health Fund. The IRS has ruled that you can roll-over the medical savings account balance year after year after year. It gives the employee an incentive to spend less on healthcare. So, for example, you might use the generic medicine rather than the special brand medicine.

RK: That doesn’t sound so bad.

JR: It doesn’t sound so bad with a couple of exceptions. We want to avoid the moral hazard associated with the woman who feels a lump in her breast and decides not to spend money on the X-ray. Secondly, we have to pay for all of the preventative services. I think it’s bad healthcare, bad business, and unethical not to do so. Still, we think that this brand of defined contribution probably has legs. It may become very common.

If the money isn’t used and accumulates, the employee has control over it. We would like to have a situation where people could use it to buy long-term care insurance or disability insurance but we rolled this product out a month ago and we’ve gotten a lot of interest.

RK: What kind of adjustments have you had to make going from the not-for-profit sector to become CEO of one of the nation’s largest companies?

“Americans have a tremendous appetite for choice and healthcare. And up until now, when faced with the decision of paying more or not having choice, they’ve always decided to pay more.”

JR: Much of what I do as a CEO and chairman for this very large company is not that much different than what I did as a CEO of a $2 billion organization which was one of the largest employers in New York City. And as you manage individuals, do strategic planning, and try to control the budget expenditures, you have a variety of external relationships. Mine were with the community and the unions. Now they’re with Wall Street and the City of Hartford, for instance.

RK: What else?

JR: In academia, the focus was on the process. It had to be transparent. People wanted to give input at every step. And even if they didn’t give input, they wanted to be asked. There were committees, town hall discussions, and referendums.

By contrast, the for-profit public company is outcome oriented and bottom-line oriented. Early on in my experience at Aetna I had a problem and I suggested to some top executives that we needed an interdisciplinary group from around the company to meet and think about how to solve this issue. And as I walked out of that meeting, one executive came up to me and he said: “Why don’t you just tell us what you want to do?”

That never happened to me in academia. In this instance, I didn’t know what we should do and I needed the wisdom of a group of people from around the company. And I think the for-profit environment could use more of that.

The other thing I have noted is that in academia, there is a neglect of culture. Culture is a constituent element of academia. It is what it is in a given institution. But in business, culture is to be managed. If you talk to Lou Gerstner about what he did at IBM, he’ll say he managed the cultural change over the course of 10 years. No one would ever stand up in an academic institution and say “I’m here to change the culture.” And I think it’s a reflection of the interest that people have on the outcome. If what you have to do to help us get to this outcome is to change the culture, then let’s change the culture.

RK: What’s the least desirable aspect of your job?

JR: Laying off 11,000 people in the last year and a half.

RK: Could you expand upon that a little bit?

JR: You rationalize about the greater good for the greater number and shareholder value, but the fact is, you’re putting people out of work at a time when the economy is softening. It’s so hard because not only do you put people out of work but the ones who are left feel they are overworked because they are now doing the work of the people who left. They have survivor guilt. You have to manage the residual workforce intensively to try to orient them and energize them and support them.

I had the sense that if I had the right management and I had the right strategy and I fixed the operations and I got rid of the bad business, that I could get the company to the point where it was improving its function in a couple of years. But doing those things per se did not yield a distinctive, discernable competitive advantage in the marketplace. We have to change the organization’s culture so that once we are functioning effectively, we can take the next step.

RK: You wrote a book called Successful Aging. How did you get into that?

JR: In the early 1980s, I received a MacArthur Award and had started a long project with several colleagues. A bunch of us decided that the field of aging was preoccupied with death and disease and disability and lists for getting into nursing homes. And no one was looking at the positive elements of aging. So we assembled an interdisciplinary group that I chaired. I spent 10 years supervising that study and the book sold very well.

RK: Any words of wisdom, or insight or suggestions, that you might impart to people, most of them at early stages in their career or just getting going?

JR: The one thing that strikes me as I think about my own career is the extraordinary non-linear nature of it. I trained as a physician with all seriousness of purpose to take care of patients, and I trained as a scientist; I did research in a laboratory at Harvard for years and years. And then I kind of found myself as a manager, and now I find myself in this current position. I didn’t plan it. It happened. I think there are a couple of lessons there. One is don’t overplan your career. And two, be willing to take risk. If I had been too cautious, I would still be a professor at Harvard Medical School, which is not a bad thing. But I would not have had any of the fabulous experiences that I’ve had and been able to make a contribution to the American healthcare system in any way.

Q & A with Students

Q: How do you deal with situations with the tension of wanting to be a national, comprehensive provider and working in markets where you may be losing money insuring a particular area or group of people?

JR: Aetna is, in most markets, a licensed HMO, a health plan that is community-rated and an insurance company that is experienced-rated. So in many instances we can stop offering a given product in a community- rated area if we’re getting creamed, and go to an experienced-rated basis only.

You have to look at the strategic importance to the company of the given market. Ten million of my members are the employees or the beneficiaries of national employers. If Dupont is one of my national customers and Wilmington, Delaware is community-rated, I’m not going to walk out of Wilmington. Because that means that I’m walking out of Dupont, which has 250,000 members nationwide.

Q: What are some of the ways you can use information technology to add value?

JR: We have the largest healthcare database in the industry. We know more about patients than doctors. When I was a physician writing a prescription for a patient, I knew every prescription that I had written for that patient but I didn’t know what her gynecologist had written or what an orthopedist that she saw in the emergency room on the weekend when she sprained her ankle and forgot to tell me about it. But I know because Aetna pays for every one of those prescriptions.

We should be able to develop a personalized customized approach to using the medical information available in the literature and the patient’s condition to enhance the patient’s capacity to make healthcare related decisions.

ML: What did you view as the primary responsibilities of your job as CEO? What issues did you choose to delegate and what issues did you want to deal with directly?

JW: One of the breaks I had in a leading company as complex as GE was, I knew my job. I knew what I could do, and what I had no idea about. I didn’t know anything about making a Seinfeld show. I knew very little about designing a jet engine. All I really knew were people. This business game is all about winning and the only way you win is if you field the best team. And so I spent all my time trying to field the best team. We gave our business leaders the money to go do it! If they did it well, we’d hug them, take care of them. If they didn’t do it so well too often, we’d probably part company.

ML: It would seem to be a really daunting, almost hopeless task to find out what each one of your hundreds of thousands of employees could contribute in the way of her or his specific talents. Surely you couldn’t have done it with more than 20 people?

JW: No, I did it with about 500 to a thousand.

ML: You were personally acquainted with that many people?

JW: Absolutely. And I evaluated them and worked with them. We had a 20/70/10 system, in which the 20 best, the middle 70, and the bottom 10 are rigorously looked at every year. Now, at most groups I meet with people think it’s Darwinian. Well, if the bottom 10 are identified and dealt with early in their career, they can be launched into careers elsewhere.

ML: You mean they’re fired?

JW: They’re asked to leave or they know they’re on the bottom end and they leave on their own — no one wants to be where they know they’re in the bottom 10. Now I’m going to ask you a question here: How many of you have worked for three or four years? How many of you, in the time you were there, got a straightforward appraisal of what was good about you and what your weaknesses were? Only about 30 percent. Think of it. How do you instill integrity when 70 percent of you were never told how you stood? Recently, a company I consult with flew in 38 of their “top executives” under 40, for four-hour teaching session. I asked them “Why do you think you’re here?” And they sort of mumbled, “Well I guess you were here, so....” And, I said, “No, the reason you’re here is, somebody said you’re the top 38 people in this company.” And they looked at each other in shock. Because no one had told them. A top 20 is worth 10 middle 70s. If you get a star, hang on.

ML: With the people who are on the top 20, how do you find out what you and the corporation have to deliver in order to keep and develop them?

JW: We probably don’t get it all right. But we know one thing we have to do is challenge every single manager to create an atmosphere where people want to be filled with passion about their work and about their company. Never let them come to work in a mundane, dull job. If you do, shame on you.

ML: Would you like to comment more on what issues you chose to delegate and which ones you dealt with directly?

JW: Generally, I wasn’t involved in pricing, styling, or product design. But when I was involved, I took deep dives. When I’d go to a doctor, and get a CAT scan, and I’d see a Siemens machine, I’d make sure I found out why it was there. And, that would drive meetings. In our medical business, designing the CAT scanner is a jazzy, exciting job. Making the tubes for that CAT scanner is a backwater job. But the tube is the heart of the machine. So I saw that our tubes aren’t lasting as long as Phillips’ were, and that our engineers are all not excited about them. So I became a lunatic and became a tube manager. I visited the facility frequently, had the place cleaned up, made it look prettier than the CAT-scanner facility, brought the best people over there, and changed the game. And I didn’t do a damn thing other than use the power of the position to create a frenzy. The same thing held when we wanted to transform GE from a products company into a service company. People didn’t think highly of service. So how do you change that? You don’t change things with a speech. You take your best design engineer, the most respected in the group, and you put him in charge of service. And then, all of a sudden, he or she hires only great people. And before you know it, service is the place to be.

“Your job is to create an atmosphere where people fight to get there, where you have more people with more passion than anybody else.”

ML: Jack, how do you instill a culture in which people are willing to take those kind of chances, and lift the entrepreneurial spirit and the general intellectual atmosphere of the whole environment?

JW: By making heroes out of those who find new ideas from somewhere else and spread them. We just found companies that could serve as role models and learned from them. Wal-Mart showed us how to be more responsive to customers. Toyota taught us about inventory management. Big companies don’t communicate as well as small companies, so they have a lot going against them. What do they have going for them? Muscle. Strength. Capital. So what does that say to you? Go to bat more often. Take more swings. The small company’s got to be right. They can knock themselves out of the water with a bad move. Big companies don’t have to be right all the time. And so the idea of being big is just to let people let ‘er rip. Try stuff.

Q: Of your many accomplishments, what are you most proud of?

JW: Oh, without question, unleashing spirit in thousands of people. Having them share the rewards. Spreading the option plan way across the company. Having people that we’ve rewarded both in the soul and the wallet, because they had fun. Just think of the winning locker room, and the losing locker room. Where do you want to hang out? Look, this is all about giving people self-confidence. Some people get it at their mother’s knee. Some people get it because they played sports. There’s a fine line between arrogance and self-confidence. But building self-confidence is a huge deal, and when you can get a company that feels good about itself, people are proud to be there.

Q: What was your most challenging time at GE?

JW: Well there were several. It was no fun being Neutron Jack.

Q: Explain that to those who might not know what it means.

JW: Well, we had 440,000 people doing $26 billion worth of work. We were making television sets in Syracuse, New York and Matsushita was selling them in Syracuse for less than our manufacturing cost. It didn’t take a brain surgeon to figure out you had to get out of Syracuse. Today we have 300,000 people, and we do $140 billion worth of business – five times the volume with 35 percent fewer people. America was just top heavy. It’s the worst thing in the world, the layoff. You shouldn’t have a manager in your company that enjoys doing it. But you shouldn’t have one there that can’t do it.

Q: What personal lessons can you share with MBAs, and students, about how you develop and enhance your career?

JW: First I’ll talk about curriculums. In the schools that I’ve been at, there sure isn’t enough conversation on what constitutes management, leadership, in real terms. I talk to kids who are telling me they’re taking Dysfunctional Technology Transfer. What is that going to do for you? You should see some of the courses I’ve seen on my book tour to business schools. Business is sweat, and human behavior. And common sense. And logic. And it is not a perfect science. How many times are you talking about caring more? About being open to ideas from everywhere? That’s what’s going to make you a great leader. Dysfunctional Technology is not going to get you there. Yes, you have to know some numbers. But a lot of resource allocation is not because somebody taught you how to do an internal rate of return calculation. It’s because you’ve got a good nose.

Q: When you’re considering hiring someone, what characteristics and qualities do you look for?

JW: Well, obviously, grades count. I really think passion, with a capital P, is an enormous ingredient. Somebody who cares about people. Somebody who’s open and self-confident.

Q & A with Students

Q: Many people say that the best opportunities are often found in the worst economic times. Where do you see the opportunities in the years ahead?

JW: Well, there is no question that there is going to be a massive marriage of information technology and medical diagnostics, and therapy treatment. This is all coming together in a way that’s going to improve life, and expand life expectancy. But to speak more broadly it’s more important to be able to be agile, to be ready for anything, and to respond quickly, than to predict.

And I’d take issue with the notion that these are the worst economic times. I talked to 300 CFOs in Colorado Springs two weeks ago. They’re scared, because the media has called this the most tumultuous time in history. But when I took over in 1980, the Japanese were going to take over America. Inflation was at twenty percent. The prime rate was 21 percent. It was going to be double digits forever. In 1918, the war between Europe and the States was called the Great War. By the time World War II came, they had renamed it. World War I. Because it wasn’t the greatest war anymore. World War II was. We’ve created 20 million new jobs in the last twelve years. We’ve lost four. Now, if you’re one of those four, you don’t like it; and it is awful, but unemployment is relatively low. Today, inflation in negligible. We have the strongest economy we’ve had in a long time, with one quarter down. We’ve got narrow sectors that are hurt. We had a bubble, but we were left with a great technology to build great businesses around. We are at the beginning of the greatest period in the world. It just feels lousy if you hadn’t been in the other periods.

“It’s the worst thing in the world, the layoff. You shouldn’t have a manager in your company that enjoys doing it. But you shouldn’t have one there that can’t do it.”

Q: What is the role of the corporation as an agent of change in our society?

JW: The corporation has an enormous role: to win. A winning corporation has excited people, growing jobs, security in where they’re going. They’re paying taxes in the community, they’re mentoring and giving back, their spirits are high, they’re involved in PTAs. What is a losing corporation? They don’t pay taxes. The people are scared to death. They don’t know where their next meal’s coming from or if they’ll get laid off. They can’t give back, they’re trying to just stay alive. Globalization is the greatest thing that ever occurred. You see it in Ireland, where the per capita income is off the chart compared to what it was twenty years ago. You see it in the faces in Budapest and Warsaw and India. Yes there is a sweat shop here or there, and we shouldn’t have them. But are the plants better than they were in these places because we have global standards? Is the environment better because we are puttingup plants that don’t spew out coal dust next to the existing plants in developing countries. Yes. Now, globalization has not cured cancer. It didn’t solve Afghanistan. But find a better system that’s brought the have-nots closer to the haves. The governments don’t do it. So winning corporations, globalizing, are the best shot at giving back, and bringing the have nots closer to the haves. And that, in the end, is what we’re all about.