Principal-Agent Redemption at Motorola
In the posting on the 1928 RCA Radiola 18 I included some notable events that happened in that year. Turns out that in 1928 Paul and Joseph Galvin incorporated Motorola as the Galvin Manufacturing Corporation.
The Galvin family ran Motorola from 1928 up until 2003. Then this happened
On Wednesday, September 17, 2003, Motorola’s board had a routine meeting at the company’s headquarters, in Schaumburg, Illinois, and discussed its unhappiness with Galvin. During his tenure, Motorola had made some disastrous mistakes. He oversaw the launch of the Iridium satellite-phone system, which cost Motorola $2.6 billion before it went bankrupt. He clung to the money-losing semiconductor division despite the board’s insistence that he sell it. Perhaps worse, he allowed the company to miss the transition in the late 1990s from analog cell phones to digital ones, enabling Nokia to blow past Motorola in handset market share. At the time, Motorola’s being bested by Nokia was the equivalent of the New York Yankees losing the World Series to a Finnish baseball squad.
Galvin had flaws as a young C.E.O. Executives who worked with him say he stood by senior managers even after repeated screwups. “He had a hard time pulling the trigger,” says Glenn Gienko, who was Galvin’s head of human resources. “His heart got in the way.”
The following Friday, Motorola euphemistically announced that Galvin had decided to retire. Galvin made a bitter statement—unusual in such situations—saying he did not agree with the board’s decision.
So that ended the reign of the Galvin family at Motorola’s helm after about 70 + years.
So, I wanted to connect the dots with the posting on the Principal-Agency problem and this comment from the head of HR… “His heart got in the way.” There is much unsaid about “His heart got in the way”. What is missing is any talk about the different constituency groups. It wasn’t that Galvin’s heart got in the way; it was just in the wrong camp.
From the perspective of the Principal-agent problem there are two constituency groups: the Motorola employees and the Motorola investors. The Motorola investors are the owners of the company. The Motorola C-Suite executives down to the lowest level of employee are entrusted as agents of the owners. They are entrusted to act in the best interest of the owners.
So for the head of HR at Motorola to say that Galvin’s “heart got in the way” to the point that he could not “pull the trigger” on senior managers after “repeated screwups” is to say that Galvin implicitly set one constituency group above another. Galvin set the welfare of these senior managers (agents) over the owners (principals). And this is exactly the principal-agency problem exemplified. It’s not that Galvins heart got in the way; his heart was with the wrong consistency group. If his heart was with the investors then Galvin would have pulled the trigger on these senior managers. And perhaps. Chris Galvin would still be CEO to this day.
The Board stepped in and ended the Galvin family rule of Motorola after nearly 80 years. The Board brought in an outsider, Ed Zander
Zander told me that when he started, the company was a wreck. “Customer-satisfaction levels were the lowest I’ve ever seen in my life,” he said. Product quality was poor; the company was in businesses that didn’t make sense for it—semiconductors and automotive electronics, for example; and employees felt a sense of entitlement and lacked killer business instincts.
“The board basically told Ed the place had to be gutted and redone,” says former H.R. head Gienko.
Zander wrote weekly emails to employees about how the culture had to change. Top executives, including Zafirovski and Gienko, bailed.
“One of the things I underestimated,” Zander told me, “is that this is a company that has 70, 80 years of culture. After three or four months, I realized I wasn’t going to come in here and say, ‘Change the culture.’ So I pulled back a little bit.” But by then, many at Motorola felt confused and demoralized, even as the company’s financial picture brightened.
Did the Board make the right decision?
The article in Porfolio.com is interesting. Galvin wants his reputation back
The mess gave Galvin the opening he’d been waiting for. He commissioned Peter Schwartz, a partner at Monitor Group, a consulting firm, to study Motorola’s publicly available financial numbers. The results, assembled in PowerPoint, make the case that Galvin—not Zander—laid the groundwork for the 2004 turnaround. Galvin says he wants Motorola’s story to be a warning about what can happen to long-established companies when boards and investors focus on quarterly earnings at the expense of long-term strategy. And he’s got a point.
Yet it also seems clear that this is personal. Galvin wants his reputation back. Besides, he needs potential investors in Harrison Street Capital to think of him as a success, not a failure. They’ll invest more money that way.
So Galvin fires up the slide show for me. Amid all the charts and graphs and points and counterpoints lies a simple question: If Motorola dies, who will take the rap?
I don’t think anyone (any CEO and senior executive leadership) can choose the correct strategy all the time under conditions of uncertainty (fast-moving technology, disruptive technologies, competitive moves, changing consumer preferences). So, the Board that oversees strategy and evaluates CEO performance along with the investors that expect a good return on their equity stake in the company should cut these guys a break – within limits.
Is Galvin’s Strategy the central issue?
Galvin says he wants Motorola’s story to be a warning about what can happen to long-established companies when boards and investors focus on quarterly earnings at the expense of long-term strategy.
So Galvin made a few bad calls. OK, who doesn’t? But there is one thing that could be completely controlled during the 70 years of the Galvin family rule; and that was the creation and perpetuation of the Motorola corporate culture.
According to Zander, what he found at Motorola, and what Galvin and the executive team created and sustained for decades was a culture of entitlement disconnected from performance. As Zander discovered, being “Galvin-ized” at Motorola meant that such a person could not be fired without CEO approval. You got this status after 10 years of service. How many employee’s did this apply to? What are the implications of this?
I think that there are several responses by employees. For some of the top performers, to learn that Motorola was not a meritocracy may encourage them to leave. For others, it could be the biggest chance of a lifetime. After 10 years, they essentially had tenure. What more was there to do? Do as little as possible to get by, spend time analyzing your benefits, and simply “wait it out” until retirement.
Zander cites examples of employees overly concerned with status (what color are my business cards); employees treated like royalty (given cars and other perks), and in general lacking the “killer business instincts” (read: “ambition”, “aspiration”,”vision”)) that perhaps Zander was used to coming from the mindset of Silicon Valley.
Like-minded people seek like-minded people. Once a company opens the way to entitlement and mediocrity then those like-minded people will stay or flow in while high performing people will seek more challenging opportunities at places like RIM, Google, and other places where innovation and performance are the rules of the day. In short, talented people will flee a dysfunctional organization; others may not have a choice since few other options are available to them.
Only half the battle…
So, in the Portfolio.com article, Galvin pulls out his Powerpoint slides to show that he, and not Zander, set the stage for the turnaround. That’s an argument that he was on to the correct strategy. But this argument on strategy is silent on the issue of Motorola’s corporate culture of entitlement which the Board and Zander saw as undermining the company.
Something that seasoned Venture Capitalists (VC’s) know is this: VC’s invest in people more than they do ideas – when you pitch to a VC you are pitching your management team more than the idea. VC’s know that the right assembly of people, even if they get the idea wrong at first, are smart enough and tenacious enough to refine the idea over time and get it right. Bottom line: first, get the right people on the team.
Applied to the corporate culture at Motorola, if Galvin was able to “pull the trigger” on poor executive management, creating a meritocracy rather than a culture of entitlement then perhaps Motorola would have the right people in place to make the correct call on the Iridium satellite-phone system, the semiconductor business, digital phones, and all the rest.
By not “pulling the trigger” when a change was needed Galvin inverted the Principal-Agent relationship placing the welfare of the Agents (employees) over the Principals (owners/investors). But the board, on behalf of the Principals, did “pull the trigger” – on Galvin.
If Galvin wants his reputation back, as the Portfolio.com article suggests, then his Power Point slides on strategy is only half the battle. What remains is the issue of the corporate culture that he created and sustained – what Zander tried so hard to change – and mostly failed.
No matter how many “second chances” one gets on strategy, if you don’t get the priority of principals (investors) over agents (employees) right then no venture can succeed – no matter how good the strategy. If you don’t have a demonstrable record of the primacy of the investor then who would ever entrust you with their financial resources?
Was former CEO Zander, and current co-CEO’s Greg Brown & Sanjay K. Jha able to reinvigorate the Motorola Culture? Read reviews by Motorola employees
“Trouble in River City” at RIM (Research in Motion) makers of Blackberry
From Crain’s Chicago Business. What Ed Zander found at Motorola
Another take on employee performance – from Jack Welch, former CEO of General Electric
Making winners out of everyone…