Why a new CEO is right, Wall St is wrong and America needs more jails
McNealy's exit interview
Exclusive The emails have poured in all day. "Thanks for the memories, Scott. It was fun."
Sun Microsystems Chairman Scott McNealy says that most well-wishers seem to be treating his relinquishment of the CEO post as some kind of sad departure from the company he helped start. This reaction surprises McNealy to a degree - given that he'll spend the next few months traveling around the globe doing what he's done for the last quarter century - talk about Sun.
You can, however, understand how outside observers sense a more dramatic shift taking place. McNealy has thinned out the ever-shrinking list of elite, old guard Silicon Valley founder/CEOs a bit more. In addition, Sun has contributed far more than most to the nature of Silicon Valley over the last two decades, particularly via the diaspora of bright risk takers that have gone on to found their own companies. So, as McNealy shifts upstairs, an era does end to a degree. Now, it's just the Larry and Steve show.
McNealy and new CEO Jonathan Schwartz spent most of yesterday trying to explain the management flip to a bevy of reporters and analysts in 10 minute chunks. Wall Street still wants Sun to fire about 15,000 people, and the two executives explained again and again why they won't do this. Reporters too wanted an explanation as to why McNealy would leave now. Sun's performance has stabilized, but the company is far from rolling in GAAP black.
Instead of thrusting another 10 minute explanation on you, we went searching for more - and got it. The following is an exclusive extended interview with Sun's chairman and not CEO McNealy.
El Reg: How did a young pup out of Stanford end up with this CEO gig anyway?
SM: When we started this company, Vinod (Khosla) and I had a long running battle about who was going to be the CEO. It clearly was not going to be Bill Joy or Andy Bechtolsheim. We were the two MBAs.
We went back and forth, trying to get the other guy to take the job. I finally won the argument, and Vinod was the original CEO. Then, when he left under some strenuous circumstances, the board asked me to take the CEO post temporarily.
El Reg: Did you think the post would probably become permanent?
SM: No. In fact, my staff voted 8-0 at the time to go out and find a new CEO and just let me operate as a temporary replacement. And, I was eagerly helping out with the interviews, and we found a guy from HP that was going to come in and run the company.
Then, I called Kodak who was going to place a $20m investment in the company to tell them about this move.
They woke me up at 5 a.m. the next morning. I still remember it. They said, "The deal is off. We're not investing." Click.
Very few people actually know this, but I woke up, jumped out of bed and splashed some water on my face and said, "I just had a nightmare." So, I called back to Kodak and asked what was going on. This guy said, "We've heard who you are hiring as CEO, and we've worked with him. There is no way we are investing in a company with this guy running it."
So, then the Kodak guys came out and interviewed all of my staff and asked if I should stay on as CEO. By that time, there was actually an 11-0 vote to keep me on as CEO. Then, they interviewed the board.
At the end, the main guy from Kodak told me never to let someone else go talk to the board like he was doing and never to let my team go around me and then he gave me a few other pieces of advice. In short, he totally kicked my butt.
But then he said, "I'm going to the board and will tell them that we will invest under one set of conditions only. That is that you're the CEO going forward, and we have a board seat where we have a five-year veto over any other CEO."
So he stomps out to go meet with the board and tells them that they can basically have this bridge financing that would allow us to go another couple of years before we go public or hire this other guy from HP and lose the investment.
That's more or less how I got appointed.
El Reg: And by that time you were ready to take on the role?
SM: Well, I still went out that night with my mom and asked her if I should do it. She didn't really want me to take the job, but she told me to go ahead and do it for a couple years, since the company would need the money.
So, I told the board that I would do it, but they had an absolute responsibility to look for my replacement.
El Reg: Why wouldn't you want to take the CEO post? It seems in keeping with your competitive nature.
SM: It is a huge responsibility.
I'll share with you the quote under my senior yearbook picture. The caption says, "His shy and unassuming manner won him a wealth of friends."
At this point, we must pause the interview for a few moments, and gather our composure - Ed
That's a fact. I am not making this stuff up.
I wasn't planning on ever being the boss. I just wanted to help.
All through they have always had my letter of resignation.
El Reg: Have you almost left before?
SM: When I was 38 and got married and started having kids, I walked into the board and told them that I didn't want to be the CEO anymore. I told them that they needed someone who could give it more energy than I could. And this is just as we're heading into one of the most unbelievable growth periods of all time.
That's when they said, "Okay, let's really start grooming your replacement."
El Reg: So Ed Zander was the first person you looked at as a successor?
SM: Yes. I created the COO position and offloaded some of the work to Ed. But he went off to do the Motorola thing.
So, Jonathan became the second real attempt at looking at a successor.
He's passed every litmus test that I've thrown at him. There is no question he is smart, bright and all the rest of it. The one thing that I can't ever, ever tolerate is even the slightest chink in the integrity and character armor. I have had a chance to watch this guy for over ten years, and he has never shown me even the slightest inclination of any of that.
He's very tough. He can be strong-willed. But, hey, so am I. That's a good thing, and I don't want a leader who isn't that.
He fit the bill just perfectly, and he's younger than me. And it allows me to go do what I want to do, which is working with the US government, Japan and our top 20 accounts. Then I can come home jet-lagged and sleep it off instead of having to run into the staff meeting or the Sarbanes-Oxley compliance meeting.
El Reg: Did you make this move now thinking that you might lose Jonathan?
SM: I've never tested this theory out, but I think that if I had gone into the board and said, "We might lose Jonathan, but I'm really ready to sign up for another five or 10 years of this," that the board would have been alright with that.
I wouldn't have been alright with it though. I think Jonathan is a huge treasure, and I'm tired of people swiping all of my good people to become CEOs.
El Reg: Have you handed Jonathan a healthy company?
SM: I want the new guy to get all the glory.
I took all the hits, and I think the timing is actually perfect because I am taking all these non-cash hits, so that he doesn't have to. He can start showing year-over-year growth, year-over-year earnings improvements, and reductions in the non-cash hits.
I need Jonathan to get established as a whiz kid. I think the timing is absolutely perfect.
El Reg: You guys are getting pounded more than ever by Wall Street analysts for not making more layoffs, and that doesn't look like it will change under Jonathan. It seems to us like there is an almost philosophical underpinning to your reluctance to lay people off.
SM: It's funny because I read these random articles where people say that the board is putting me under tremendous pressure and that the board is under tremendous pressure. Well, I tell you what. The guys we have on the board let that kind of pressure roll off them like water off a duck.
They know what their job is. They are stewards of the long-term shareholder value.
It's a joke, man. The pressure I care about comes from my employees, our developer community and our customers. They can apply pressure to me. If you want to see me hop to action, have one of those guys come talk to me about a problem.
I'm sorry if some guy named Tony [sic] is upset that I don't follow his advice. He's not my dad.
El Reg: Probably more than half of the folks that wish you would do things differently have similar education backgrounds with an MBA from a fancy school.
SM: I went to Harvard and to Stanford and let me tell you, there is nowhere near the diversity of thought at the major education institutions around the world that you might expect.
How can anyone with tenure teach me about capitalism? They're saying, "I have checked out of capitalism. Now I can teach you about it." They are so confused.
El Reg: There has to be a time when you're willing to layoff people though.
SM: Here's when we layoff folks. We do it when there is a better way to buy it than make it.
So far, everything everyone of my employees is doing is adding value.
Everybody is doing good stuff that's adding customer value and adding margin opportunity. In the meantime, we're spewing cash.
I don't have the same sense of urgency to go blow away customer value that someone who is trying to make a buck this quarter on the street who has no vested interest in the long-term shareholder value of this company has. I don't listen to that garbage.
We will get to GAAP profitability. We will get there in due course.
I don't want to rush and destroy the two things that are so hard to keep and that is customer faith and a strong product line.
El Reg: It always seems weird to hear a golf-major, Harvard grad with a buzz cut talk like that. Shouldn't you fit a bit more comfortably in the conservative frat boy role?
SM: I am probably a political anomaly in the sense that I am very libertarian with respect to government but not an anarchist. I believe there are roles for government around making laws, enforcing laws and defense. I believe in anti-trust, the Sherman Act and that sort of thing.
I am way into personal responsibility to the point where I would probably build a lot more jails than the normal human would. If we ran out of jails, then maybe we would have to get more extreme.
I am a raging capitalist and a flaming social liberal. I just absolutely agree with diversity.
El Reg: And a lot of this conviction carries over to your business?
SM: Yeah. Look, I've thought long and hard about this stuff and my business, and I don't care what anybody says. We're right. And that's how I live my life. ®