Letting Go

When Compaq Computer announced a week and a half ago that its earnings for the most recent quarter were going to be half of what Wall Street had expected, the company’s management team–including CEO Eckhard Pfeiffer and CFO Ed Mason–insisted that the shortfall was due mainly to conditions beyond their control. Slumping demand for PCs, pricing pressures, and concerns about the Y2K problem had all eaten into sales and profits, we were told.

Given Compaq’s recent history, which has been characterized by a recurrent failure to manage its inventories well, by an incoherent strategic vision, and by difficulties in integrating its latest acquisition (Digital Equipment Corporation), Pfeiffer’s insistence that he wasn’t to blame seemed dubious. “Compaq’s woes are more company-specific than industry-driven, even though Compaq will tell you the opposite,” I wrote at the time. But there’s been so much hand-wringing over a supposed slump in the demand for PCs, and Pfeiffer had such a great reputation because of the way he turned Compaq around in the early 1990s, that it seemed possible that he might escape from this latest debacle unscathed.

Thankfully, Ben Rosen came to the rescue. Rosen is a co-founder of Compaq and the company’s chairman, and he runs Compaq’s board of directors the way it should be run: with a complete willingness to replace top executives when they come up short. In 1991, Rosen brought in Pfeiffer to replace Rod Canion as CEO when Canion refused to acknowledge that Compaq needed to alter its cost structure radically to compete in the new world of PCs. And this past weekend, Rosen dismissed Pfeiffer, both because of what he’s done in the past two years and because of what he was apparently incapable of doing in the future. (Until Compaq gets a new CEO, the company will be run by an interim triumvirate of directors, including Rosen himself.)

Although U.S. corporations have taken real strides in the field of corporate governance in the past decade, CEOs remain for the most part sacred cows. They’re incredibly overcompensated when they succeed and only rarely dismissed when they fail. After a rash of high-profile dismissals in the early part of this decade–including the replacement of CEOs at companies such as GM, IBM, and Kodak–we have for the most part settled into a comfy state of affairs, in which as long as a CEO isn’t actively conspiring to wreck a company, he can be pretty sure he won’t be fired. That’s what makes Rosen’s decision to let Pfeiffer go so welcome.

In an open letter to Compaq employees that was run as an advertisement on the back page of today’s New York Times’ business section, Rosen essentially said that while Pfeiffer had done a great job when he first arrived at Compaq, he was ill-equipped to deal with “a company on the frontier of change” and he was not “a leader capable of managing at Internet speed.” Some of this is simple Internet hype. But Rosen was right to suggest that Pfeiffer seemed locked in an old way of doing business. It’s not so much that Pfeiffer was necessarily incapable of managing in this new economy. It’s that he didn’t really seem to recognize that it existed.

Take Compaq’s acquisition of Digital, a deal that forced the company to devote substantial resources to the problem of integration at a time when its core PC business was under dramatic attack from the likes of Dell and Gateway. The Digital acquisition seemed mainly designed to allow Compaq to meet Pfeiffer’s goal of $50 billion in sales by the year 2000. But that goal itself seemed vaguely anachronistic. Who measures success by sales anymore? Who believes that size is in and of itself a good? At a time when the strongest technology companies seem driven by a single idea–Dell by its direct model, EMC by storage, Microsoft by software–Compaq decided that it wanted many different ideas under its umbrella. There are companies–most notably GE–that can do this and succeed. Compaq never showed signs of being one of those companies.

In that sense, Rosen can be faulted for having waited so long to pull the plug on Pfeiffer, since Compaq has been mired in deep trouble for at least a couple of years. But Pfeiffer’s record in the first part of this decade was stellar, which made it difficult to believe that he wouldn’t be able to pull the rabbit out of the hat again. You want to dance with the one that brung you. But sometimes you find out that he just can’t waltz.