IBM’S SAM PALMISANO

“You have to lower the center of gravity by moving decisions to where the local intelligence resides. You have to trust the people that are really smart. You have to let them operate and hold them accountable to a set of values and standards that are beyond those required by regulators anywhere on the earth.”

— Sam Palmisano

sam palmisano

IBM former CEO Sam Palimsano

Samuel J. Palmisano was chairman, president, and CEO of IBM from 2003 until 2011, a period of dynamic growth and change during which the company was transformed into a globally integrated enterprise (GIE), the modern version of what has traditionally been called a multinational.

Palmisano began his 39-year career at Big Blue after graduating with a degree in history from Johns Hopkins university. He currently serves on the boards of Exxon Mobil and American Express. Since his retirement from IBM, Palmisano has been quietly building a nonprofit think tank. The Center for Global Enterprise (CGE), which launched officially in April, is committed to improving the stewardship of global enterprises by working directly with CEOs and business schools.

In conjunction with the CGE, his recently published e-book, Re-Think, pays homage to the philosophy of IBM founder Tom Watson, who kept a one-word declaration on a notecard: “Think.” The book, as well as the work of the CGE, is designed to “advance awareness among private and public sector leaders of the worldwide benefits that can result in the 21st century from corporate best practices and economic success” in what Palmisano calls a “new age of discovery.” it details global efforts at IBM, China’s Geely, india’s bharti Airtel, and Mexico’s Cemex. The corporation of the future, Palmisano says, will organize around a single global supply chain for services, capital, talent, and intellectual property, managed as one entity, and with no duplication of services.

You believe that if companies employ the best practices of the globally integrated enterprise (GIE),then the perception of business will improve, shareholders will be rewarded, risks reduced, and society will be better off. Have I missed anything?

It may sound incredible at first, but I witnessed this example at IBM, where I spent 39 years and [which] quite literally was my laboratory for global experimentation. The experience gave me a bias that business does a tremendous amount of societal good and society wants business to be successful, and on the flip side business can do some unfortunate things from time to time that have hurt credibility. So we need to understand how to operate more effectively in different cultures, because without them our business would cease.

Can you give us the CliffsNotes version of a globally integrated enterprise?

Simply put, I believe companies need to go far beyond merely building a global supply chain and offshoring product manufacturing, or what I refer to as the “hub and spoke” method. Instead, we believe in developing a new type of global operation, one that is structured to cross borders both culturally and operationally, placing teams and divisions where they make the most sense, create the best work, and deliver a profit for shareholders. Driving cohesiveness in that structure is the challenge of the GIE, not necessarily finding the cheapest market for labor or production.

Where do you propose business leaders start to build a GIE?

Start by changing how you lead your company. Second, consider how business schools prepare future leaders, especially at the CEO level. To do that properly, you will need to have a global mind-set and a value system that connects both locally and globally. A commitment that transcends geography will be crucial.

What’s the downside to sticking with a traditional multinational mind-set?

If you bring a legacy mind-set to the modern business climate, I don’t think you’re going to be in the game very long. Sovereign countries simply aren’t going to give you the freedom to operate that business enjoyed, say, 25 years ago.

OK, so a major industrial company with a huge labor component has to to toe the line, but what about Silicon Valley or technology companies will they have the same challenges?

There may be misperceptions in certain industries that they are excused from this, as in “Our company is flying like a rocket. We are far beyond these kinds of things.” But my argument is that you are only in Act One. You will have to get to Act Two, and when you do, you’ll be globally integrated along the lines I am suggesting, or you may learn the hard way that nothing lasts if it doesn’t change and adapt.

What inspired you to develop the globally integrated enterprise?

The idea first came to me when I was in mid-career at IBM. I was heavily influenced by the time I spent working at IBM Japan, which was a truly Japanese company, and so I got to look at the world through a Japanese lens. I recognized that to be successful you needed to have more of a global perspective, not define yourself by any one particular geography. Second, I saw that it would be useful to take an outsider’s objective view, and even be a bit of a contrarian. This view was what led me as CEO to sell the PC business at a time when everybody thought that was crazy.

What made IBM Japan such a good role model for global integration?

IBM Japan was never a joint venture, and that’s the main takeaway. It was a country operation in the global IBM, and it was very successful, representing nearly 17 percent of the earnings of the company. So I asked myself the question, why? It turns out the reason was because we were fully integrated and we were committed to and embedded in Japanese society and business culture. From there the idea just sort of took hold for me.

What are the main practical benefits about operating as a GIE?

You’re going to be much more productive and, at the same time, you should be faster. Now, someone asked me, “What if you got your strategy wrong?” I said then we get to the wrong place faster. So, if you have the right strategy, or a wrong strategy, either way, you will find out sooner, and from a management perspective, you win.

What about corporate controls and risk management?

I say, get over it. You have to lower the center of gravity by moving decisions to where the local intelligence resides. You have to trust the people that are really smart. You have to let them operate and hold them accountable to a set of values and standards that are beyond those required by regulators anywhere on the earth.

Help me understand just what’s wrong with command and control then.

In today’s world, it’s too slow and redundant. You are engaged in a replicative process that might make headquarters feel warm and fuzzy, but in fact what you get is mirror versions of treasury, IT, training, [and] hiring, and essentially you are going to have many, many versions of IBM headquarters in 100 countries. I call that inefficiency. I also think it does not really control anything, which is the greater problem.

Is there a CEO management style that best suits the GIE?

It’s not about your reputation for brilliance in the corner office. It’s about your team and about having the best people you have in the critical functions of your business, anywhere in the world, and letting them run their show. When Joe Montana got on the foot- ball field, his coach would let him throw the ball to [wide receiver] Jerry Rice. He didn’t go out and put his hand on Montana’s and help him toss the ball over the offensive line.

Does training play a role in building GIE culture?

It takes training, to be sure, but it’s on behalf of something very potent, a standard of behavior and comportment. I think all companies should have a standard we call the value system. And at IBM the highest of those values was integrity and trust in all rela- tionships. We did this in person and online so that we could train literally everybody, half a million people, including the CEO, so I went through it as well. That’s what takes the place of command and control in a GIE culture.

Does training mold people, or does it, like the SEAL team bootcamp, weed out those who can’t hack it?

IBM’s secret was its onboarding program. When you join IBM, part of the onboarding process is to learn the value system, what it means to be an IBMer, and what the brand stands for. You will learn with certainty, it stands first for integrity. And you can’t com- promise the brand identity regardless of the temptations. I don’t care how strong of a performer you are.

Did everyone get the value system?

Most, yes, but not all. Those that don’t quickly decide they don’t want to work in a place like that, which is why we never had a prob- lem with people leaving during the onboarding process.

So, to some this probably sounds great for companies with a legacy of appropriate behavior, but does it work in other industries, particularly in what I will call more cynical geographies?

Jeff, we had people in 170 countries, and one thing I have learned is that the United States may be culturally different but not culturally superior. People have told me more times than I can recount, “Sam, really, it’s different there.” I’ve got news for you, it is not different there. You have to teach your value system all over the world. Then you have to put your money where your mouth is, and you have to reward them for conducting themselves in a certain way. You have to reinforce the value system. The U.S. doesn’t have a monopoly over integrity and trust.

You had a 39-year career at IBM and rose to CEO. What inspired you most?

I was the eighth CEO in 100 years, and I learned that I was a steward of a wonderful enterprise for a defined period of time. I found it was important not to try to be defined by what I’ll call charisma, or making yourself the brand or the headline, or showing up on TV, you know, waxing eloquently about whatever you want. I’m not knocking CEOs who favor that approach, I’ll just say it wasn’t for me, and I don’t think it’s particularly effective over the long term.

To me, as a CEO, you are given the opportunity to be a steward of an incredible legacy and your job is to leave it better than you found it. It’s not about yourself, it’s not about how much you got paid, it’s not about how many press releases you issued, it’s not about how many conferences you went to with heads of states. It’s about the value of that enterprise and was it stronger after you left.

I think many would agree. But sometimes things go wrong.

Yes, stuff happens, as the expression goes. The question I ask myself is: “How did you react when it did? Were you totally transparent? Did you ’fess up and deal with the financial implications? Were you out front taking responsibility and staying on the case until it was solved?” I really still have a bias that you’re much better off standing up and speaking factually, when you know the facts, or keep your mouth shut until you have the facts, and state that you may not have them. But don’t hide behind public relations, lawyers, and allow rumor to set the agenda. Transparency, action, resolution—then put it behind you.

Sometimes we find American companies have trouble operating in countries where rules can be more ambiguous than ours. What would you say in those cases?

You have to choose your countries of operation, that’s for certain. It’s not just where there is growth and we will go there and figure out how to do business. There has to be a fit in the value systems. To the country, I would say, “We want to do business, but we are not going to legitimize your behavior until you have a rule of law, you’re going to agree to the international arbitration, you’re going to have stronger intellectual property regulation, and so we’ll come back when you’re ready, when your society is ready to enter into what we will call global international compliance.”

Is it about fundamental ideologies?

At IBM we were OK with whatever ideology a country had. And frankly, it wasn’t any of our business. We never got ourselves confused by ideology. It’s more about consistency. And if they were consistent with us over the long term, we felt that was a very good place to operate. So even during the [business] cycles of Mexico, IBM did pretty well because there was consistency.

Are there new sets of stakeholders for the GIE?

At the end of the day, you work for your owner, and your owner is the shareholder. I feel there is an equation for GIEs that makes sense and is quite simple: You have to work for the shareholders; they own. You have to serve your clients or you don’t have any rev- enue. And then if you did those two things right, well, you should reward your employees and give back to society.

Is there a new role for board directors in the GIE, and does it require new skills?

It gets back to looking for directors that have broad global experience. I am on two boards, Exxon Mobil and American Express, that are splendid examples of boards that meet this kind of challenge. As far as having to change out directors, more likely, if you see yourself playing this role of becoming a GIE, you need people on the board that understand what you’re going to go through. So I would start with your specification of a job, and as director assign- ments come up as they always do every year or two, I would basically take that opportunity to build out the right skill set.

What made you start the Center for Global Enterprise?

I thought about that as I was getting ready to retire. There are lots of different ways to spend your time. You could be a resident executive at a business school, for instance, but I was looking for something that would provide the same involvement but at more scale. So the CGE sort of appeared from that thinking. Our plan is to engage global CEOs to help us guide the research, and then expand the primary data so that future generations of leaders are better prepared than I when I became the CEO of IBM. It’s going to be exciting.