How can business leaders manage long-term objectives while achieving short-term results? The former Chairman and CEO of Honeywell, David M. Cote, explains how to fight the evils of short-termism, overcome business process failures, and be a great leader.

David’s book, Winning Now, Winning Later, describes the process and leadership challenges facing Honeywell when he joined the company and the changes he made to fix it. 

David Cote has been chief executive officer, president and secretary, and chairman of the board of directors for Goldman Sachs Acquisition Holdings since April 2018. Prior to that, David Cote served as chairman and chief executive officer of Honeywell from July 2002 to March 2017. He was executive chairman of the board at Honeywell until April 23, 2018. He is currently chairman of Vertiv.

When David Cote became CEO of Honeywell in 2002, the company was a “train wreck.” But by pursuing both short and long-term results under Cote’s leadership over 16 years, Honeywell’s market cap grew from $20 to $120 billion, delivering returns of 800 percent and beating the S&P by nearly two and a half times.

Transcript

This transcript has been lightly edited for length and clarity.

Introduction

Michael Krigsman: We're speaking about the evils of short-termism. Our guest is David Cote. He's the former chairman and CEO of Honeywell. His new book is called Winning Now, Winning Later.

David Cote: I took the job and then the chairman and the board told me that they didn't want me to spend any time on the financials until I became chairman and that the current chairman would focus on that. I would see a finance guy and say something like, "So, how is the quarter going?" and they would literally say, "I'm sorry, David, but I've been instructed not to answer any of those questions from you."

I thought, "Oh, well. Okay. This is pretty weird, but all right. I'm here and it's only four and a half months, so I'm not going to get hung up on it." Little did I know what was awaiting me.

Michael Krigsman: You showed up and, eventually, you saw the financials. What did you discover?

David Cote: It wasn't just the financials. I ended up learning that, culturally and strategically, we were deficient also. On the financial side, we had a significantly underfunded pension plan. It was 79% or 80% funded.

We had a pile of environmental issues that a 100-year-old chemical company has. Our strategy, I was told, was to fight it in court until we lost and then pay whatever it was. We had asbestos liabilities that hadn't been addressed or reserved for.

Over the previous decade, for every dollar of income, we only generated $0.69 of cash. Meaning, there was a hell of a lot of aggressive, let's say, unhealthy bookkeeping going on. A lot of focus on, just make the quarter regardless of what the next quarter or next year meant. You'd worry about that when you got there.

Culturally, it was three different companies: AlliedSignal, Honeywell, and Pittway that had been brought together and not integrated. It was three separate cultures.

When I started to try to understand, "Well, where are we going? Where are our investments for the future?" I found out we were only spending about 3% of sales on R&D. We'd cut a lot of our global focus. We didn't have much in the way of any process work going on.

I was really pretty astounded and then, remember, I was not regarded as the guy who was going to be able to save this company. In fact, on CNBC, one of the commentators had said, "We don't think this company can be turned around and, if it can, this is probably not the guy to do it. He didn't make it to the first tier of the GE succession race and he wasn't even the first choice to run Honeywell," both of which were true.

Right out of the box, I ended up taking my numbers down for what the ensuing 6 months were going to be and then, 3 weeks later, had to take it down about an additional 20% because estimated that we'd bulled together were just so ridiculously aggressive and unmakeable. They were completely right. I mean I looked like a complete fool. Even though I had, let's say, not a very good reputation going into it, I made it even worse when I had to do that.

From that road on, to end up generating an 800% overall return, 2.5 times the S&P 500, and taking the market cap from $20 billion to $120 billion, we generated 2,500 401(k) millionaires, that felt pretty good. In retrospect, kind of interestingly, nobody remembers what they thought of me back 16 years ago when I had started. They were very happy with the success as it was. I'm the only one who seems to remember it.

Michael Krigsman: During those early days when you discovered this, what kept you going? Why didn't you just throw up your hands and say, "You guys misled me. I'm done"?

David Cote: I had two choices. One was that to run away. The second one was to figure my way out of it. I don't know. I guess I don't think of myself as a runaway kind of guy. [Laughter]

Sometimes things are better than you think. Sometimes they're worse. In this case, they were worse and it felt like it was up to me to figure it out.

Balancing Short-Term Results with Long-Term Goals

Michael Krigsman: A lot of the focus of your book is how to balance or manage things that we typically think are mutually exclusive such as the need to address short-term results while at the same time needing to focus on the long-term. Maybe weave that aspect into this story now, please.

David Cote: Well, it's fundamental to how I think about business and how we ran Honeywell. Human nature makes people want to know, "What's the one thing you want me to do, boss?" But, at the end of the day, the point I always used to make is, success in business—and I'd argue, in life—is always about achieving two seemingly conflicting things at the same time.

If you want some examples, do you want low inventory or do you want good product delivery? Do you want people closest to the action empowered for quick decisions or do you want to have good control so nothing bad happens? Do you want to have low functional costs for HR, finance, et cetera, or do you want to make sure there's great internal service? Do you want good short-term results or do you want good long-term results?

In every case, the trick is figuring out how do you accomplish both. It's not so much balance as it is figuring out how do you accomplish both of those things at the same time.

I first came across this when I ran an inventory reduction effort. God, it was like 35 years ago now, I guess. It really struck me, what we were trying to do. The name of it was an inventory reduction taskforce, but we quickly glommed onto the idea that it would not be successful unless we could improve customer delivery at the same time.

I started referring to it as my any-ninny theory saying any ninny can do just one thing. The trick is to figure out how to do both.

The same is true when it comes to short-term/long-term. I was just very frustrated by everything I read out there that talked about short-termism as if you either chose to be a short-term focused or a long-term focused. They were mutually exclusive, to your point. I always viewed it as mutually reinforcing. You had to do both.

Michael Krigsman: How does one do both? Obviously, this is an extremely difficult thing. It's very easy to talk about but extremely difficult to do. Just look at public companies and the way public companies are run. I think that establishes the difficulty. How do we do it?

David Cote: The first thing I usually suggest is the leader has to change their own mindset. Getting back to that inventory reduction taskforce, because of its huge success, I had to go around the company, GE at the time, talking about it everywhere. In the audience, somebody would always say, like, "Okay, Dave. Well, what's the number one thing you get?" They always want that, okay, what's that one thing.

I would say, "Well, it's a matter of changing the mindset. If you can change the mindset, you can get there." People would nod their heads and go, "Yeah. Yeah, that's interesting."

Then two minutes later, someone would say, "So, Dave, though, what was the number one thing you did to make this successful?" It's like nobody wants to accept that it starts with the leader's headset first. You've got to get that mindset right that says, "Okay, this is doable and this is how I'm going to go about it." Then the leader needs to talk about it and, most importantly, they need to walk the talk.

If they hear the leader talking about, "We need to make short-term numbers but we're going to do it the right way so that we're still achieving the long-term," but they see the leader agreeing to accounting adjustments, so no cash but money comes in, distributor loading at the end of the quarter, cutting some of the long-term funding in order to make it, immediately it's like parents. "Do what I say, not as I do." They'll do what they see and that's the way they're going to act.

The leader's role here is paramount in how they talk about but also how they walk the talk and the discipline they're willing to have. The biggest thing I think they can do, and we talk about this, is to grow sales and hold fixed costs constant. It sounds very simple and, if you do the math, it's very simple and you see variable margin falls through at a significant amount but holding fixed costs constant is not easy because most of fixed costs, 60% to 90% of it in most functions, is people.

If you're giving people 3% raises a year with comp and benefits and you're trying to hold it constant, that means it has to go down. Headcount needs to go down 3% every year when everybody wants more. That's where the process work comes in. You have to be doing the process work in order to be able to do that so that you don't devastate the company as you try to accomplish it.

Those are just some of the initial thoughts. There are a lot more, of course, but that's, I think, a pretty good, broad brush to start with.

On Financial Engineering

Michael Krigsman: Let's take a question from LinkedIn. Sarbjeet Johal, a very interesting fellow who I know. He asks, "How important is financial engineering as opposed to core engineering in running a company?"

David Cote: It depends on what you mean by financial engineering. There's a disparaging approach to it where you just load up a company with a big amount of debt and that's obviously not good. But I do think running any company with a reasonable amount of debt makes sense because if you can get that debt inexpensively, so you're paying 3% for it but you're able to invest it at 15%, your investors are seeing a 12% return on the investment you made. That's a pretty good deal.

If by financial engineering you mean loading up with debt, booking income from accounting, the distributor loading that we were just talking about, no, I think that stuff is hard because that's just not a smart practice at all. You're going to destroy the very thing that you're trying to create, which is a great, long-term growth company. That long-term is important because, eventually, the long-term becomes the short-term. If you haven't done that seed planting, then it never comes.

Michael Krigsman: Where do you focus and can you say that the product development is more or less important than the financial aspects of the company? I think that's also what he was probably trying to get at.

David Cote: From my perspective, again, what you want to do is accomplish both. That's the whole point of the story is how you generate good enough short-term results so that your bosses, your investors, whomever are going to stay supportive of you but, at the same time, do the seed planting that you need to, to grow.

As you might imagine, I'm very big on the R&D side. We took R&D from 3% of sales to 6% of sales. At the same time, we doubled the size of the company so, in effect, quadrupled our spending. That was a big increase in product engineering but I didn't do it overnight because the organization, if there is just too much stuff too fast, they can't absorb it. What you end up with is just a bunch of wasted money, a bunch of wasted ideas.

I tried to do it in a way that, we'll say, externally, our peers were committing to an 8% earnings increase. I would commit to a 9% earnings increase but I would have a plan internally that generated an 11% earnings increase including funding for all those long-term initiatives. That's why doing things like holding fixed costs constant and having growth programs that you've initiated that start paying off become so important.

The Challenge of Short-Termism

 

Michael Krigsman: Why then do so many business leaders find this incredibly challenging and they take a reference point of the short-term even though it's obviously at the expense of long-term value?

David Cote: Well, it's easier, right? [Laughter] Like I was saying before; human beings want to focus on just one thing or be able to blame somebody else for why they have to focus on just one thing. That's why the title of the first chapter is "Banishing Intellectual Laziness" because the first thing you have to do is the leader's headset/mindset needs to change. Whether you're running a group of 5 people, 5,000 people, or 50,000 people, that headset change has to start there.

If it was easy, everybody would be doing it and I wouldn't have to write this story. But the fact is, it's not easy to do but I think it's going to be fundamental to our success as an economy and for any companies around the world, but especially for U.S. companies to start to be able to do this.

Michael Krigsman: We have some more questions from Twitter and LinkedIn. Number one from LinkedIn, "How do we handle the growing mistrust in government and corporations?"

David Cote: I guess the first thing we all need to do is act in a way that's trustworthy. Some companies don't and that's always what gets all the attention, but I'd say at least 90+% of companies act the right way and it is possible to be doing the right things at the same time you're doing the right things for the shareowner.

If you take a look at Honeywell for an example, yes, I like to talk about the $20 billion going to $120 billion in market cap. But, at the same time, we put in $10 billion to funding our pension plan because I felt like we had a commitment to retirees and we ended up with an overfunded pension plan. We reserve for all of our asbestos liabilities. We started resolving those and we spent $3.5 billion in 15 years resolving all of our environmental liabilities so that we could have a clean company going forward for my successor.

The first thing is to act that way. Then the second one, I think, is to talk about it. Most companies don't want to and that included me. I didn't want to talk about the environmental progress we were making as a company because it would attract all the people who never think you're doing enough.

Even though I was spending $3.5 billion to fix all this stuff, for some it's not enough and you're just always going to be evil and I didn't want to track those folks. I wanted to just focus on running the company. I think there's probably going to be more required of companies to say what they are doing and to kind of call some attention to it.

Michael Krigsman: How important is transparency in this?

David Cote: Well, I guess it depends on what kind of transparency people are looking for and on what. But I would say, at Honeywell for example, getting back to the nervousness I had about it, my environmental folks wanted to create an environmental-focused website to just talk about the progress we were making on improving energy efficiency in our operations, reducing greenhouse gases, water usage, our safety improvements.

I was dead set against it and said, "Look. I don't want to attract all the brickbats. Let's just keep doing our job. Let's just keep getting it done. We'll be doing the right thing and that's what matters to me."

Well, they kept prevailing on me until I finally said, "Okay, I'm willing to give it a chance but this is on you. If this goes south, this is not what I'm looking forward to." [Laughter]

Well, son of a gun, it worked really well. I said, "Look. Nobody is going to believe it because it's coming from a big company. They're just not going to believe it," even though it's accurate and we could be audited and all that. But they did and it ended up working out very well for us.

Yeah, I kind of like the idea of transparency on a lot of things, but you've got to be careful how far do you take it. It's very easy, I think, to get so transparent that you can't make a move or do anything without somebody objecting. In general, I like the idea but you've got to be thoughtful about your spots.

Creating Trust with Leadership

Michael Krigsman: In this example, why did it work? What were the attributes of the situation and of the actions that you and your team took that engendered that trust?

David Cote: First of all, we did have the results. If anybody audited them, government, or anything else, the results were there and were accurate.

I think it also helped that, on the environmental side, I'd hired people who had tremendous credibility in the environmental community so that they would never be viewed as corporate shills by the, say, more negative people in the community. I think that added to the credibility of it.

You could see the results if you walked through any plant or saw the amount of discharge that we might have reported externally to government agencies. You could see the results.

Michael Krigsman: Arsalan Khan says, "Leadership is about setting an example but what about politics and culture that can destroy that example? How do you manage that?" Again, it's this issue of what breaks down trust and how do you overcome that prevailing feeling that often exists out there?

David Cote: The first thing to do is to keep acting in a trustworthy way and have a point of view and be open about it. Most CEOs, as I said, everyone I've ever run into, there are some who, yeah, do bad things and end up being a bad example for the rest of us. It's true of society in total. I always used to say 90% of people are good and want to go home at night bragging to their spouse and kids about what they accomplished; 10% aren't.

That 10% exists everywhere in the world at all levels of society. You've got them in your family. They're everywhere. You don't want to judge the 90% based on the 10% but the 10% are what get all the attention, generally.

I would argue, 90% of CEOs want to do the right things. They're not looking to screw anybody or get away with something or do something illegal. They're just not like that. They're human beings like everybody else.

I would say it would be helpful if people would give them the benefit of the doubt a little bit. But acting in a trustworthy way so that anybody looking at your actions would say, "Okay, that person, that CEO, that leader, they're real. They talk about this but you can also see that they're actually doing it," that's got to be the biggest thing.

I use this phrase a lot. I didn't come up with it, but it's, "Walk the talk." If people can see you walking the talk, even though you're always going to get brickbats because there's 10% of people you can't convince no matter what you do. But the majority of them, I think, when they see how a leader is acting will then give them the benefit of the doubt.

Michael Krigsman: We had on this show, as a guest, Joel Peterson. He's the chairman of JetBlue. We were talking about this issue and he used the phrase, "It's important to solve for fairness." Meaning, in your business dealings that you're looking for fair outcomes for everybody. I'm wondering, as you were sort of dismantling, figuring out all the issues, uncovering the issues at Honeywell, and then reconstructing the business, how did this concept of solve for fairness come into play?

David Cote: I didn't use that phrase but I use that word a lot. Whether it's dealing with partners, customers, suppliers, employees, compensation, in every case fairness was a word I used a lot. It's because it's important to people and it's always true. People just have this kind of sense of wanting to focus on, okay, what's fair here. It was an important concept for me. Yes, I use not that phrase but that word "fairness" a lot.

Leadership to Fight Short-term Thinking

Michael Krigsman: This notion of fighting the short-termism by understanding both the short-term and the longer-term goals, how do you operationalize that? At Honeywell, how did you convert that kind of euphemistic concept into operational plans that would make a difference?

David Cote: First, you've got to talk about it. Second, you've got to walk the talk, as I said. The things that I did, I made it very clear to everybody. Once the extent of, say, the accounting issues were understood, I met with the top 100 finance people from around the world. They happened to have a gathering shortly after the earnings debacle we'd had.

When I understood what was going on, I said, "I want to talk to the whole group." I went there and spent an hour with them and said, "No more. No more of this. No more make the quarter meetings of the 11 items, 10 of them involve accounting or one-time items. I'm never going to agree to it again. I'm never attending one of those meetings. I don't want you to have a single meeting like that."

Well, the same thing with distributor loaning. I had the discussion with each of the business leaders and said, "I'm going to start putting in audit routines to make sure that this does not happen. No pricing terms at the end of the quarter."

Well, the thing I did do, as you might imagine, I did get calls as the quarter progressed with a business leader saying, "Hey, boss. I can make the quarter. But the only way I can do it is if you allow me to load this distributor or you allow me to proceed with this accounting transaction."

I got to say, there were some times when I thought, "Oh, man. I can't believe this is my choice." But every time, I said, "Do not do it. I refuse to allow it. I will not accept it. If you do it, this is an offense as far as I'm concerned."

Interestingly, we never missed a quarter even though I never agreed to do any of it. People end up learning, "Okay, that's not going to happen. He's not going to do that and he's not going to cut the short-term stuff because, in the strategic planning process, he has us layout exactly what those long-term initiatives are and how the funding profile is going to work. He tracks that.

Then, 6 times a year, he has 12 growth days—they'd be 2 days at a time—where, on key items, you actually have to come in and report out on how are you doing on those strategic items."

It's what we used to refer to as inch stones instead of milestones because too often you do a long-range plan, you have your strategic plan discussion, everybody boxes it back up, takes it home, and goes back to operating just the way they did before. But I would have these meetings as a way of starting to probe, are we doing the things that we need to?

Somebody would have a great initiative set up, for example. I'd say, "Oh, man, that's tremendous. That's great. What are you doing for resources?"

They'd say, "Well, you know, we doubled the number of people."

"Oh, oh, that's great. So, how many are on it now?"

"Four."

"So, you had two and now you have four and that's a big deal and this thing could be worth billions? Why don' you put on 20 right now?"

They'd say, "Oh, well, you know, with all the headcount restrictions, it's tough to do 20 people."

I'd say, "Well, how many people in your organization?"

"Twenty thousand."

"So, out of 20,000 people, you can't find room for 20 more to just focus on this?"

Then they'd realize how silly it was and they do the right thing and the growth effort would continue. But you run into this in businesses all the time. Like I said, whether it's 5, 5,000, 50,000 people, you run into that all the time, the same kind of issues. I call them excuses masquerading as reasons.

Overcoming Business Process Failures

Michael Krigsman: In your book, you described a very poignant example of this, this kind of thinking where somebody at a chemical plant owned by Honeywell died. Maybe tell us about that. Tell us about what happened, what the causes were, and then how you addressed it.

David Cote: One of the things I recommend to any leader, whether again you've got 5, 5,000, or 50,000, is do what you can to create what I call X-days in the year. X-days meaning nothing is scheduled for those days. You can use those days for whatever you want.

Obviously, the lower you are in the organization, the tougher it may be to do because of bosses' demands but, nonetheless, do what you can to do that. I would set aside two to three a quarter at the beginning of the year when we'd lay out the calendar and I'd probably be able to save one to two a month because something always comes up and you've got to give them up. Then you use those days to do what you want to do.

One of the things I used to do is set aside three or four of those days to just think about the company. Just freestyle think about strategies, geographies, businesses, people, macrotrends, everything that was going on out there, and what I might want to do.

I would also use those days to do surprise visits in places. We had had a fatality in Baton Rouge, Louisiana. It was in a chemical plant. A cylinder had been mislabeled by a supplier and the employee had not followed the protocol they were supposed to. The fact that it was mislabeled and then the employee didn't do what they were supposed to resulted in the fatality of the employee. As you could probably tell, it really bothered me that somebody died on my watch like that and it was preventable.

So, I sent in a team to audit and find out what the heck was going on down there. I was a little uncomfortable that the team was really getting to the facts of things, so I took one of those days. Didn't even tell my assistant where I was going. I just said, "Get me down to New Orleans." Then once I got there, I rented a car and drove up.

Went to the reception desk. This was kind of early on, so you could tell the receptionist didn't know who I was and had to call the plant manager who then came down and got me.

I went around the plant and just kind of looked around and just talked to people, talked to the union leaders, then met with the whole staff and just said, "How did this happen? How could this have been prevented?"

The part that concerned me was that somebody on the staff said, "Well, Dave, you know the thing you need to understand is chemical plants are inherently dangerous places. We were just unlucky that this happened to us. It could have happened anywhere."

I let the conversation run. Come to find out the whole staff believed that. I thought, "My God." I couldn't believe it and I just wrapped up by saying, "Do you guys realize a man died in this facility and that it could have been prevented? Yeah, he didn't follow his training, but why didn't he follow his training, why was the cylinder mislabeled, and how do we make sure this stuff never happens again?"

Well, as you might imagine, we changed out most of the people there. We really upped our health, safety, and environmental game, and it became a model plant after that. It's like people did realize the significance of what had happened and that it was preventable. As a result of that, we took our health statistics, safety statistics across the company up to the point where we were something like 80% above the average today. It's just a very safe environment.

Michael Krigsman: Cedric Wells on LinkedIn says, "What kind of support is needed or should one seek to shift the culture of short-termism thinking?"

David Cote: It's always easy in any job you're in to blame the people above you. But all that is an excuse for whoever that leader is to not start working on the things they can control. I advise everyone that, okay, most likely you're not going to change the point of view of the leader two levels above you. What you can do, though, is affect your own behavior and start thinking that way. Look at your own operation and say, "Gee, you know, what's the stuff that if I did just a little bit of seed planting now, would pay off very well three years from now, even if I'm not here? What are those things I can do?"

Now, by doing that, you don't just create a better operation but you start training yourself. You start training yourself to think that way so that as you get into bigger and bigger operations, you're already thinking that way. The higher up you go, of course, the longer you tend to be in the job and you will start to see the benefits of that.

Taking Time to Think

Michael Krigsman: From Lisbeth Shaw, talking about these X-days, she said, "Everybody talks about the fast pace of business and the chaotic situation that exists as a result. How can an executive create the space to think, to think critically?" as you were just describing.

David Cote: In any job you are in, it is very easy to become a victim of your own calendar. I was an early victim of my calendar. When I look at 2002, for example, when I first got there and I was just kind of running from one thing to another. You never had time to think.

What you'd find is, one day you might have four meetings booked at 9:00, 11:00, 1:00, and 3:00. What happens is, you end up with these, like, half-hour or one-hour interregnums where there really is no time to think and then the same thing the next day.

By creating X-days and just forcing all of those meetings into a single day, say the day before, yes, you end up with a very busy day before that may go to 8:00 p.m., but that next day is yours. If you don't set up that time, even if it's only four hours, not even a full eight hours, if you don't proactively set up that time then you will never get to it.

A couple of phrases: Donald Rumsfeld, love him or hate him, he had this great line that said, "Beware of letting the urgent get in the way of the important." It's very easy to get consumed by everything that's going on around you and I've got to really get to this.

If you're in a time like this, there's this old saying that I've always liked that says, "If you're up to your butt in alligators, it's tough to remember your original goal was to drain the swamp," and that's true. When you've got 120 hours' worth of work and 80 hours to do it, well, you stop doing a lot of it.

If you're a leader, you have to find a way to generate the time to put your head above the fray and say, "Are we going in the right direction?" Otherwise, in my view, you're not being a good leader. You need to make sure you find a way of carving out that time and that's how I used to do it.

Michael Krigsman: Sarbjeet Johal says, "Behavior is driven by policy and procedures. What can policymakers do to reduce short-termism? For example, there's an SEC rule of financial reporting that worked well for financials historically but doesn't work for the tech industry right now."

David Cote: I'm a big believer and I use this line a lot is that we are not going to regulate our way to long-termism. I don't think the government ought to be playing a role here. When I hear them talk about stuff like reporting twice a year instead of four times a year, that's not going to yield anything because it's just going to be a problem. You're not going to get a benefit from it.

The better thing to do is for investors to be asking for what are those possibilities, what are those opportunities, and drive them.

Role of the Chief Information Officer at Honeywell

Michael Krigsman: We have a question from Twitter. Arsalan Khan is wondering about the chief information officer role. He says, "CIOs are always looking to get a seat at the table. Did Honeywell involve its CIO in strategic planning activities?"

David Cote: Absolutely. I was a very big believer in IT and systems, in general, and the digital economy and how it was going to apply to an industrial company like Honeywell. Even if you take a look at our engineering folks, you would find we had 23,000 engineers.

You look at all the products and chemicals and stuff we're in and you'd have said, "Yeah, 90% of them have got to be mechanical, electrical, chemical type engineers." The fact is half were software engineers. That was just in engineering.

Then we had the IT folks, in addition. I was a big believer IT was going to be an enabler for everything: products, services, process improvements as we figure out how to standardize and mechanize processes. You're not going to find a bigger believer in it than me.

Michael Krigsman: Advice for business leaders who want to fight this curse of short-termism and they're ground down by the urgency rather than the priorities, as you described earlier. What should they do?

David Cote: The first thing is to go back to something we talked about at the beginning. If a business leader believes that and that they don't see a way out then, for that leader, there never will be a way out. There won't.

The first thing they have to do is start to reexamine their own headset and say, "Okay, how do I think differently about this? How do I think about where my costs go? Where am I spending my money? What are those long-term things that I would like to invest in and I can just start putting some seed money in to find out if there's something there? I don't need to get agreement on the total five-year program. All I need to do is put in a few dollars upfront to start to get a sense for, is there something here?"

Start with whatever it is you can control. But if you believe, "Gee, there's just too much short-term pressure," then it's just never going to happen.

Michael Krigsman: All right.

David Cote: Now, 10% of the time, yes, it probably will be like that; 90% of the time, you can do something.

Michael Krigsman: A lot of this, then, is examining your own capabilities and, frankly, seeing whether you are part of the problem, fundamentally.

David Cote: Exactly. Whatever level you're at, it begins with that leader.

Dealing with Activist Shareholders

Michael Krigsman: Another question from Twitter. How can executives and CEOs follow your approach when shareholders, especially activist investors, demand an extractive business approach which is short-termism?

David Cote: You know, as I've said about activists, they're kind of like a free press. Seventy percent of what they do is good. Thirty percent is not and just doesn't make any sense.

We got an activist in Honeywell stock, even though we had done extremely well, and we actually got along very well with the activist. We didn't do what they recommended. We did something different that we'd already planned on doing.

But we ended up with a very good conversation because we said, "All right, we want the stock price to go up. We want it to not just go up now but continue to go up, so how are we going to make sure we're doing the right things?" As long as we had that convincing argument that said, "Yes, we're doing better in the short-term but, more importantly, this is going to do really well for the long-term and you can believe it, it's not just kind of a hope and a prayer, we actually got along very well with the activist.

Now, 30% of them are not. But this is where you have to have a belief in your own case and it's got to be supportable. Oftentimes, you'll see stuff like a company ought to spin off a particular business. That actually may make sense. The company, the CEO, and the board may say, "Nobody is going to tell us what to do." But if at the end of the day that creates a higher stock price, meaning it's going to create more opportunity for all the employees there, then they ought to do it.

I've always thought with activists, you ought to really think about what they say because they may have a point of view that makes sense. You shouldn't just have a kind of retrenching kind of view saying, "Okay, now we're under siege." Really consider what it is they have to say, but you've got to have your own point of view about what will generate results and be able to support it because, at the end of the day, investors are going to weigh the two arguments and say, "Gee, you know, this company hasn't performed in ten years. This activist has an idea. Maybe I ought to listen to it."

Conversely, if you say, "Well, we have performed for ten years. This is management's view. Maybe we'll support them."

About Vertiv

Michael Krigsman: You're chairman of a company called Vertiv. Do you want to give us the quick sales pitch on Vertiv?

David Cote: I love all the things about Vertiv because it has all the same characteristics that I saw in Honeywell when I got there. It was very much in trouble but they hired the PE firm Platinum Equity, hired a very good leader. He hired a good team. They started to invest into IT to get it to where it needed to go.

As I said, when I managed to get into it, it was about where Honeywell had been after the first two or three years, and I liked it because the things I used to talk about Honeywell. It had a great position in a good industry. You could differentiate with technology. It had a lot of sales increase upside because the industry was growing and you can gain share because it's so fragmented, and a lot of margin rate upside. I put all that together and said, "Oh, this is a perfect place to be," and that's why I'm there.

Michael Krigsman: Everybody, we've been speaking with Dave Cote. He is the author of the book Winning Now, Winning Later. It's an outstanding book. Fortune called it the War and Peace of business books. Former Secretary of the Treasury Hank Paulson said it was the best business book he's ever read, so those are pretty good recommendations.

David Cote: [Laughter] Yeah, they are.

Michael Krigsman: Dave Cote, thank you for taking the time to be here with us today.

David Cote: Thank you.

Michael Krigsman: Everybody, thank you for watching, especially the folks who contributed questions. Now is the time for you to subscribe to our newsletter. Hit the subscribe button at the top of our website and subscribe to our YouTube page. Check out CXOTalk.com and we will see you back here very soon with great conversations. I hope you have a great day, everybody. Take care. Bye-bye.

This transcript has been lightly edited for length and clarity.

Introduction

Michael Krigsman: We're speaking about the evils of short-termism. Our guest is David Cote. He's the former chairman and CEO of Honeywell. His new book is called Winning Now, Winning Later.

David Cote: I took the job and then the chairman and the board told me that they didn't want me to spend any time on the financials until I became chairman and that the current chairman would focus on that. I would see a finance guy and say something like, "So, how is the quarter going?" and they would literally say, "I'm sorry, David, but I've been instructed not to answer any of those questions from you."

I thought, "Oh, well. Okay. This is pretty weird, but all right. I'm here and it's only four and a half months, so I'm not going to get hung up on it." Little did I know what was awaiting me.

Michael Krigsman: You showed up and, eventually, you saw the financials. What did you discover?

David Cote: It wasn't just the financials. I ended up learning that, culturally and strategically, we were deficient also. On the financial side, we had a significantly underfunded pension plan. It was 79% or 80% funded.

We had a pile of environmental issues that a 100-year-old chemical company has. Our strategy, I was told, was to fight it in court until we lost and then pay whatever it was. We had asbestos liabilities that hadn't been addressed or reserved for.

Over the previous decade, for every dollar of income, we only generated $0.69 of cash. Meaning, there was a hell of a lot of aggressive, let's say, unhealthy bookkeeping going on. A lot of focus on, just make the quarter regardless of what the next quarter or next year meant. You'd worry about that when you got there.

Culturally, it was three different companies: AlliedSignal, Honeywell, and Pittway that had been brought together and not integrated. It was three separate cultures.

When I started to try to understand, "Well, where are we going? Where are our investments for the future?" I found out we were only spending about 3% of sales on R&D. We'd cut a lot of our global focus. We didn't have much in the way of any process work going on.

I was really pretty astounded and then, remember, I was not regarded as the guy who was going to be able to save this company. In fact, on CNBC, one of the commentators had said, "We don't think this company can be turned around and, if it can, this is probably not the guy to do it. He didn't make it to the first tier of the GE succession race and he wasn't even the first choice to run Honeywell," both of which were true.

Right out of the box, I ended up taking my numbers down for what the ensuing 6 months were going to be and then, 3 weeks later, had to take it down about an additional 20% because estimated that we'd bulled together were just so ridiculously aggressive and unmakeable. They were completely right. I mean I looked like a complete fool. Even though I had, let's say, not a very good reputation going into it, I made it even worse when I had to do that.

From that road on, to end up generating an 800% overall return, 2.5 times the S&P 500, and taking the market cap from $20 billion to $120 billion, we generated 2,500 401(k) millionaires, that felt pretty good. In retrospect, kind of interestingly, nobody remembers what they thought of me back 16 years ago when I had started. They were very happy with the success as it was. I'm the only one who seems to remember it.

Michael Krigsman: During those early days when you discovered this, what kept you going? Why didn't you just throw up your hands and say, "You guys misled me. I'm done"?

David Cote: I had two choices. One was that to run away. The second one was to figure my way out of it. I don't know. I guess I don't think of myself as a runaway kind of guy. [Laughter]

Sometimes things are better than you think. Sometimes they're worse. In this case, they were worse and it felt like it was up to me to figure it out.

Balancing Short-Term Results with Long-Term Goals

Michael Krigsman: A lot of the focus of your book is how to balance or manage things that we typically think are mutually exclusive such as the need to address short-term results while at the same time needing to focus on the long-term. Maybe weave that aspect into this story now, please.

David Cote: Well, it's fundamental to how I think about business and how we ran Honeywell. Human nature makes people want to know, "What's the one thing you want me to do, boss?" But, at the end of the day, the point I always used to make is, success in business—and I'd argue, in life—is always about achieving two seemingly conflicting things at the same time.

If you want some examples, do you want low inventory or do you want good product delivery? Do you want people closest to the action empowered for quick decisions or do you want to have good control so nothing bad happens? Do you want to have low functional costs for HR, finance, et cetera, or do you want to make sure there's great internal service? Do you want good short-term results or do you want good long-term results?

In every case, the trick is figuring out how do you accomplish both. It's not so much balance as it is figuring out how do you accomplish both of those things at the same time.

I first came across this when I ran an inventory reduction effort. God, it was like 35 years ago now, I guess. It really struck me, what we were trying to do. The name of it was an inventory reduction taskforce, but we quickly glommed onto the idea that it would not be successful unless we could improve customer delivery at the same time.

I started referring to it as my any-ninny theory saying any ninny can do just one thing. The trick is to figure out how to do both.

The same is true when it comes to short-term/long-term. I was just very frustrated by everything I read out there that talked about short-termism as if you either chose to be a short-term focused or a long-term focused. They were mutually exclusive, to your point. I always viewed it as mutually reinforcing. You had to do both.

Michael Krigsman: How does one do both? Obviously, this is an extremely difficult thing. It's very easy to talk about but extremely difficult to do. Just look at public companies and the way public companies are run. I think that establishes the difficulty. How do we do it?

David Cote: The first thing I usually suggest is the leader has to change their own mindset. Getting back to that inventory reduction taskforce, because of its huge success, I had to go around the company, GE at the time, talking about it everywhere. In the audience, somebody would always say, like, "Okay, Dave. Well, what's the number one thing you get?" They always want that, okay, what's that one thing.

I would say, "Well, it's a matter of changing the mindset. If you can change the mindset, you can get there." People would nod their heads and go, "Yeah. Yeah, that's interesting."

Then two minutes later, someone would say, "So, Dave, though, what was the number one thing you did to make this successful?" It's like nobody wants to accept that it starts with the leader's headset first. You've got to get that mindset right that says, "Okay, this is doable and this is how I'm going to go about it." Then the leader needs to talk about it and, most importantly, they need to walk the talk.

If they hear the leader talking about, "We need to make short-term numbers but we're going to do it the right way so that we're still achieving the long-term," but they see the leader agreeing to accounting adjustments, so no cash but money comes in, distributor loading at the end of the quarter, cutting some of the long-term funding in order to make it, immediately it's like parents. "Do what I say, not as I do." They'll do what they see and that's the way they're going to act.

The leader's role here is paramount in how they talk about but also how they walk the talk and the discipline they're willing to have. The biggest thing I think they can do, and we talk about this, is to grow sales and hold fixed costs constant. It sounds very simple and, if you do the math, it's very simple and you see variable margin falls through at a significant amount but holding fixed costs constant is not easy because most of fixed costs, 60% to 90% of it in most functions, is people.

If you're giving people 3% raises a year with comp and benefits and you're trying to hold it constant, that means it has to go down. Headcount needs to go down 3% every year when everybody wants more. That's where the process work comes in. You have to be doing the process work in order to be able to do that so that you don't devastate the company as you try to accomplish it.

Those are just some of the initial thoughts. There are a lot more, of course, but that's, I think, a pretty good, broad brush to start with.

On Financial Engineering

Michael Krigsman: Let's take a question from LinkedIn. Sarbjeet Johal, a very interesting fellow who I know. He asks, "How important is financial engineering as opposed to core engineering in running a company?"

David Cote: It depends on what you mean by financial engineering. There's a disparaging approach to it where you just load up a company with a big amount of debt and that's obviously not good. But I do think running any company with a reasonable amount of debt makes sense because if you can get that debt inexpensively, so you're paying 3% for it but you're able to invest it at 15%, your investors are seeing a 12% return on the investment you made. That's a pretty good deal.

If by financial engineering you mean loading up with debt, booking income from accounting, the distributor loading that we were just talking about, no, I think that stuff is hard because that's just not a smart practice at all. You're going to destroy the very thing that you're trying to create, which is a great, long-term growth company. That long-term is important because, eventually, the long-term becomes the short-term. If you haven't done that seed planting, then it never comes.

Michael Krigsman: Where do you focus and can you say that the product development is more or less important than the financial aspects of the company? I think that's also what he was probably trying to get at.

David Cote: From my perspective, again, what you want to do is accomplish both. That's the whole point of the story is how you generate good enough short-term results so that your bosses, your investors, whomever are going to stay supportive of you but, at the same time, do the seed planting that you need to, to grow.

As you might imagine, I'm very big on the R&D side. We took R&D from 3% of sales to 6% of sales. At the same time, we doubled the size of the company so, in effect, quadrupled our spending. That was a big increase in product engineering but I didn't do it overnight because the organization, if there is just too much stuff too fast, they can't absorb it. What you end up with is just a bunch of wasted money, a bunch of wasted ideas.

I tried to do it in a way that, we'll say, externally, our peers were committing to an 8% earnings increase. I would commit to a 9% earnings increase but I would have a plan internally that generated an 11% earnings increase including funding for all those long-term initiatives. That's why doing things like holding fixed costs constant and having growth programs that you've initiated that start paying off become so important.

The Challenge of Short-Termism

 

Michael Krigsman: Why then do so many business leaders find this incredibly challenging and they take a reference point of the short-term even though it's obviously at the expense of long-term value?

David Cote: Well, it's easier, right? [Laughter] Like I was saying before; human beings want to focus on just one thing or be able to blame somebody else for why they have to focus on just one thing. That's why the title of the first chapter is "Banishing Intellectual Laziness" because the first thing you have to do is the leader's headset/mindset needs to change. Whether you're running a group of 5 people, 5,000 people, or 50,000 people, that headset change has to start there.

If it was easy, everybody would be doing it and I wouldn't have to write this story. But the fact is, it's not easy to do but I think it's going to be fundamental to our success as an economy and for any companies around the world, but especially for U.S. companies to start to be able to do this.

Michael Krigsman: We have some more questions from Twitter and LinkedIn. Number one from LinkedIn, "How do we handle the growing mistrust in government and corporations?"

David Cote: I guess the first thing we all need to do is act in a way that's trustworthy. Some companies don't and that's always what gets all the attention, but I'd say at least 90+% of companies act the right way and it is possible to be doing the right things at the same time you're doing the right things for the shareowner.

If you take a look at Honeywell for an example, yes, I like to talk about the $20 billion going to $120 billion in market cap. But, at the same time, we put in $10 billion to funding our pension plan because I felt like we had a commitment to retirees and we ended up with an overfunded pension plan. We reserve for all of our asbestos liabilities. We started resolving those and we spent $3.5 billion in 15 years resolving all of our environmental liabilities so that we could have a clean company going forward for my successor.

The first thing is to act that way. Then the second one, I think, is to talk about it. Most companies don't want to and that included me. I didn't want to talk about the environmental progress we were making as a company because it would attract all the people who never think you're doing enough.

Even though I was spending $3.5 billion to fix all this stuff, for some it's not enough and you're just always going to be evil and I didn't want to track those folks. I wanted to just focus on running the company. I think there's probably going to be more required of companies to say what they are doing and to kind of call some attention to it.

Michael Krigsman: How important is transparency in this?

David Cote: Well, I guess it depends on what kind of transparency people are looking for and on what. But I would say, at Honeywell for example, getting back to the nervousness I had about it, my environmental folks wanted to create an environmental-focused website to just talk about the progress we were making on improving energy efficiency in our operations, reducing greenhouse gases, water usage, our safety improvements.

I was dead set against it and said, "Look. I don't want to attract all the brickbats. Let's just keep doing our job. Let's just keep getting it done. We'll be doing the right thing and that's what matters to me."

Well, they kept prevailing on me until I finally said, "Okay, I'm willing to give it a chance but this is on you. If this goes south, this is not what I'm looking forward to." [Laughter]

Well, son of a gun, it worked really well. I said, "Look. Nobody is going to believe it because it's coming from a big company. They're just not going to believe it," even though it's accurate and we could be audited and all that. But they did and it ended up working out very well for us.

Yeah, I kind of like the idea of transparency on a lot of things, but you've got to be careful how far do you take it. It's very easy, I think, to get so transparent that you can't make a move or do anything without somebody objecting. In general, I like the idea but you've got to be thoughtful about your spots.

Creating Trust with Leadership

Michael Krigsman: In this example, why did it work? What were the attributes of the situation and of the actions that you and your team took that engendered that trust?

David Cote: First of all, we did have the results. If anybody audited them, government, or anything else, the results were there and were accurate.

I think it also helped that, on the environmental side, I'd hired people who had tremendous credibility in the environmental community so that they would never be viewed as corporate shills by the, say, more negative people in the community. I think that added to the credibility of it.

You could see the results if you walked through any plant or saw the amount of discharge that we might have reported externally to government agencies. You could see the results.

Michael Krigsman: Arsalan Khan says, "Leadership is about setting an example but what about politics and culture that can destroy that example? How do you manage that?" Again, it's this issue of what breaks down trust and how do you overcome that prevailing feeling that often exists out there?

David Cote: The first thing to do is to keep acting in a trustworthy way and have a point of view and be open about it. Most CEOs, as I said, everyone I've ever run into, there are some who, yeah, do bad things and end up being a bad example for the rest of us. It's true of society in total. I always used to say 90% of people are good and want to go home at night bragging to their spouse and kids about what they accomplished; 10% aren't.

That 10% exists everywhere in the world at all levels of society. You've got them in your family. They're everywhere. You don't want to judge the 90% based on the 10% but the 10% are what get all the attention, generally.

I would argue, 90% of CEOs want to do the right things. They're not looking to screw anybody or get away with something or do something illegal. They're just not like that. They're human beings like everybody else.

I would say it would be helpful if people would give them the benefit of the doubt a little bit. But acting in a trustworthy way so that anybody looking at your actions would say, "Okay, that person, that CEO, that leader, they're real. They talk about this but you can also see that they're actually doing it," that's got to be the biggest thing.

I use this phrase a lot. I didn't come up with it, but it's, "Walk the talk." If people can see you walking the talk, even though you're always going to get brickbats because there's 10% of people you can't convince no matter what you do. But the majority of them, I think, when they see how a leader is acting will then give them the benefit of the doubt.

Michael Krigsman: We had on this show, as a guest, Joel Peterson. He's the chairman of JetBlue. We were talking about this issue and he used the phrase, "It's important to solve for fairness." Meaning, in your business dealings that you're looking for fair outcomes for everybody. I'm wondering, as you were sort of dismantling, figuring out all the issues, uncovering the issues at Honeywell, and then reconstructing the business, how did this concept of solve for fairness come into play?

David Cote: I didn't use that phrase but I use that word a lot. Whether it's dealing with partners, customers, suppliers, employees, compensation, in every case fairness was a word I used a lot. It's because it's important to people and it's always true. People just have this kind of sense of wanting to focus on, okay, what's fair here. It was an important concept for me. Yes, I use not that phrase but that word "fairness" a lot.

Leadership to Fight Short-term Thinking

Michael Krigsman: This notion of fighting the short-termism by understanding both the short-term and the longer-term goals, how do you operationalize that? At Honeywell, how did you convert that kind of euphemistic concept into operational plans that would make a difference?

David Cote: First, you've got to talk about it. Second, you've got to walk the talk, as I said. The things that I did, I made it very clear to everybody. Once the extent of, say, the accounting issues were understood, I met with the top 100 finance people from around the world. They happened to have a gathering shortly after the earnings debacle we'd had.

When I understood what was going on, I said, "I want to talk to the whole group." I went there and spent an hour with them and said, "No more. No more of this. No more make the quarter meetings of the 11 items, 10 of them involve accounting or one-time items. I'm never going to agree to it again. I'm never attending one of those meetings. I don't want you to have a single meeting like that."

Well, the same thing with distributor loaning. I had the discussion with each of the business leaders and said, "I'm going to start putting in audit routines to make sure that this does not happen. No pricing terms at the end of the quarter."

Well, the thing I did do, as you might imagine, I did get calls as the quarter progressed with a business leader saying, "Hey, boss. I can make the quarter. But the only way I can do it is if you allow me to load this distributor or you allow me to proceed with this accounting transaction."

I got to say, there were some times when I thought, "Oh, man. I can't believe this is my choice." But every time, I said, "Do not do it. I refuse to allow it. I will not accept it. If you do it, this is an offense as far as I'm concerned."

Interestingly, we never missed a quarter even though I never agreed to do any of it. People end up learning, "Okay, that's not going to happen. He's not going to do that and he's not going to cut the short-term stuff because, in the strategic planning process, he has us layout exactly what those long-term initiatives are and how the funding profile is going to work. He tracks that.

Then, 6 times a year, he has 12 growth days—they'd be 2 days at a time—where, on key items, you actually have to come in and report out on how are you doing on those strategic items."

It's what we used to refer to as inch stones instead of milestones because too often you do a long-range plan, you have your strategic plan discussion, everybody boxes it back up, takes it home, and goes back to operating just the way they did before. But I would have these meetings as a way of starting to probe, are we doing the things that we need to?

Somebody would have a great initiative set up, for example. I'd say, "Oh, man, that's tremendous. That's great. What are you doing for resources?"

They'd say, "Well, you know, we doubled the number of people."

"Oh, oh, that's great. So, how many are on it now?"

"Four."

"So, you had two and now you have four and that's a big deal and this thing could be worth billions? Why don' you put on 20 right now?"

They'd say, "Oh, well, you know, with all the headcount restrictions, it's tough to do 20 people."

I'd say, "Well, how many people in your organization?"

"Twenty thousand."

"So, out of 20,000 people, you can't find room for 20 more to just focus on this?"

Then they'd realize how silly it was and they do the right thing and the growth effort would continue. But you run into this in businesses all the time. Like I said, whether it's 5, 5,000, 50,000 people, you run into that all the time, the same kind of issues. I call them excuses masquerading as reasons.

Overcoming Business Process Failures

Michael Krigsman: In your book, you described a very poignant example of this, this kind of thinking where somebody at a chemical plant owned by Honeywell died. Maybe tell us about that. Tell us about what happened, what the causes were, and then how you addressed it.

David Cote: One of the things I recommend to any leader, whether again you've got 5, 5,000, or 50,000, is do what you can to create what I call X-days in the year. X-days meaning nothing is scheduled for those days. You can use those days for whatever you want.

Obviously, the lower you are in the organization, the tougher it may be to do because of bosses' demands but, nonetheless, do what you can to do that. I would set aside two to three a quarter at the beginning of the year when we'd lay out the calendar and I'd probably be able to save one to two a month because something always comes up and you've got to give them up. Then you use those days to do what you want to do.

One of the things I used to do is set aside three or four of those days to just think about the company. Just freestyle think about strategies, geographies, businesses, people, macrotrends, everything that was going on out there, and what I might want to do.

I would also use those days to do surprise visits in places. We had had a fatality in Baton Rouge, Louisiana. It was in a chemical plant. A cylinder had been mislabeled by a supplier and the employee had not followed the protocol they were supposed to. The fact that it was mislabeled and then the employee didn't do what they were supposed to resulted in the fatality of the employee. As you could probably tell, it really bothered me that somebody died on my watch like that and it was preventable.

So, I sent in a team to audit and find out what the heck was going on down there. I was a little uncomfortable that the team was really getting to the facts of things, so I took one of those days. Didn't even tell my assistant where I was going. I just said, "Get me down to New Orleans." Then once I got there, I rented a car and drove up.

Went to the reception desk. This was kind of early on, so you could tell the receptionist didn't know who I was and had to call the plant manager who then came down and got me.

I went around the plant and just kind of looked around and just talked to people, talked to the union leaders, then met with the whole staff and just said, "How did this happen? How could this have been prevented?"

The part that concerned me was that somebody on the staff said, "Well, Dave, you know the thing you need to understand is chemical plants are inherently dangerous places. We were just unlucky that this happened to us. It could have happened anywhere."

I let the conversation run. Come to find out the whole staff believed that. I thought, "My God." I couldn't believe it and I just wrapped up by saying, "Do you guys realize a man died in this facility and that it could have been prevented? Yeah, he didn't follow his training, but why didn't he follow his training, why was the cylinder mislabeled, and how do we make sure this stuff never happens again?"

Well, as you might imagine, we changed out most of the people there. We really upped our health, safety, and environmental game, and it became a model plant after that. It's like people did realize the significance of what had happened and that it was preventable. As a result of that, we took our health statistics, safety statistics across the company up to the point where we were something like 80% above the average today. It's just a very safe environment.

Michael Krigsman: Cedric Wells on LinkedIn says, "What kind of support is needed or should one seek to shift the culture of short-termism thinking?"

David Cote: It's always easy in any job you're in to blame the people above you. But all that is an excuse for whoever that leader is to not start working on the things they can control. I advise everyone that, okay, most likely you're not going to change the point of view of the leader two levels above you. What you can do, though, is affect your own behavior and start thinking that way. Look at your own operation and say, "Gee, you know, what's the stuff that if I did just a little bit of seed planting now, would pay off very well three years from now, even if I'm not here? What are those things I can do?"

Now, by doing that, you don't just create a better operation but you start training yourself. You start training yourself to think that way so that as you get into bigger and bigger operations, you're already thinking that way. The higher up you go, of course, the longer you tend to be in the job and you will start to see the benefits of that.

Taking Time to Think

Michael Krigsman: From Lisbeth Shaw, talking about these X-days, she said, "Everybody talks about the fast pace of business and the chaotic situation that exists as a result. How can an executive create the space to think, to think critically?" as you were just describing.

David Cote: In any job you are in, it is very easy to become a victim of your own calendar. I was an early victim of my calendar. When I look at 2002, for example, when I first got there and I was just kind of running from one thing to another. You never had time to think.

What you'd find is, one day you might have four meetings booked at 9:00, 11:00, 1:00, and 3:00. What happens is, you end up with these, like, half-hour or one-hour interregnums where there really is no time to think and then the same thing the next day.

By creating X-days and just forcing all of those meetings into a single day, say the day before, yes, you end up with a very busy day before that may go to 8:00 p.m., but that next day is yours. If you don't set up that time, even if it's only four hours, not even a full eight hours, if you don't proactively set up that time then you will never get to it.

A couple of phrases: Donald Rumsfeld, love him or hate him, he had this great line that said, "Beware of letting the urgent get in the way of the important." It's very easy to get consumed by everything that's going on around you and I've got to really get to this.

If you're in a time like this, there's this old saying that I've always liked that says, "If you're up to your butt in alligators, it's tough to remember your original goal was to drain the swamp," and that's true. When you've got 120 hours' worth of work and 80 hours to do it, well, you stop doing a lot of it.

If you're a leader, you have to find a way to generate the time to put your head above the fray and say, "Are we going in the right direction?" Otherwise, in my view, you're not being a good leader. You need to make sure you find a way of carving out that time and that's how I used to do it.

Michael Krigsman: Sarbjeet Johal says, "Behavior is driven by policy and procedures. What can policymakers do to reduce short-termism? For example, there's an SEC rule of financial reporting that worked well for financials historically but doesn't work for the tech industry right now."

David Cote: I'm a big believer and I use this line a lot is that we are not going to regulate our way to long-termism. I don't think the government ought to be playing a role here. When I hear them talk about stuff like reporting twice a year instead of four times a year, that's not going to yield anything because it's just going to be a problem. You're not going to get a benefit from it.

The better thing to do is for investors to be asking for what are those possibilities, what are those opportunities, and drive them.

Role of the Chief Information Officer at Honeywell

Michael Krigsman: We have a question from Twitter. Arsalan Khan is wondering about the chief information officer role. He says, "CIOs are always looking to get a seat at the table. Did Honeywell involve its CIO in strategic planning activities?"

David Cote: Absolutely. I was a very big believer in IT and systems, in general, and the digital economy and how it was going to apply to an industrial company like Honeywell. Even if you take a look at our engineering folks, you would find we had 23,000 engineers.

You look at all the products and chemicals and stuff we're in and you'd have said, "Yeah, 90% of them have got to be mechanical, electrical, chemical type engineers." The fact is half were software engineers. That was just in engineering.

Then we had the IT folks, in addition. I was a big believer IT was going to be an enabler for everything: products, services, process improvements as we figure out how to standardize and mechanize processes. You're not going to find a bigger believer in it than me.

Michael Krigsman: Advice for business leaders who want to fight this curse of short-termism and they're ground down by the urgency rather than the priorities, as you described earlier. What should they do?

David Cote: The first thing is to go back to something we talked about at the beginning. If a business leader believes that and that they don't see a way out then, for that leader, there never will be a way out. There won't.

The first thing they have to do is start to reexamine their own headset and say, "Okay, how do I think differently about this? How do I think about where my costs go? Where am I spending my money? What are those long-term things that I would like to invest in and I can just start putting some seed money in to find out if there's something there? I don't need to get agreement on the total five-year program. All I need to do is put in a few dollars upfront to start to get a sense for, is there something here?"

Start with whatever it is you can control. But if you believe, "Gee, there's just too much short-term pressure," then it's just never going to happen.

Michael Krigsman: All right.

David Cote: Now, 10% of the time, yes, it probably will be like that; 90% of the time, you can do something.

Michael Krigsman: A lot of this, then, is examining your own capabilities and, frankly, seeing whether you are part of the problem, fundamentally.

David Cote: Exactly. Whatever level you're at, it begins with that leader.

Dealing with Activist Shareholders

Michael Krigsman: Another question from Twitter. How can executives and CEOs follow your approach when shareholders, especially activist investors, demand an extractive business approach which is short-termism?

David Cote: You know, as I've said about activists, they're kind of like a free press. Seventy percent of what they do is good. Thirty percent is not and just doesn't make any sense.

We got an activist in Honeywell stock, even though we had done extremely well, and we actually got along very well with the activist. We didn't do what they recommended. We did something different that we'd already planned on doing.

But we ended up with a very good conversation because we said, "All right, we want the stock price to go up. We want it to not just go up now but continue to go up, so how are we going to make sure we're doing the right things?" As long as we had that convincing argument that said, "Yes, we're doing better in the short-term but, more importantly, this is going to do really well for the long-term and you can believe it, it's not just kind of a hope and a prayer, we actually got along very well with the activist.

Now, 30% of them are not. But this is where you have to have a belief in your own case and it's got to be supportable. Oftentimes, you'll see stuff like a company ought to spin off a particular business. That actually may make sense. The company, the CEO, and the board may say, "Nobody is going to tell us what to do." But if at the end of the day that creates a higher stock price, meaning it's going to create more opportunity for all the employees there, then they ought to do it.

I've always thought with activists, you ought to really think about what they say because they may have a point of view that makes sense. You shouldn't just have a kind of retrenching kind of view saying, "Okay, now we're under siege." Really consider what it is they have to say, but you've got to have your own point of view about what will generate results and be able to support it because, at the end of the day, investors are going to weigh the two arguments and say, "Gee, you know, this company hasn't performed in ten years. This activist has an idea. Maybe I ought to listen to it."

Conversely, if you say, "Well, we have performed for ten years. This is management's view. Maybe we'll support them."

About Vertiv

Michael Krigsman: You're chairman of a company called Vertiv. Do you want to give us the quick sales pitch on Vertiv?

David Cote: I love all the things about Vertiv because it has all the same characteristics that I saw in Honeywell when I got there. It was very much in trouble but they hired the PE firm Platinum Equity, hired a very good leader. He hired a good team. They started to invest into IT to get it to where it needed to go.

As I said, when I managed to get into it, it was about where Honeywell had been after the first two or three years, and I liked it because the things I used to talk about Honeywell. It had a great position in a good industry. You could differentiate with technology. It had a lot of sales increase upside because the industry was growing and you can gain share because it's so fragmented, and a lot of margin rate upside. I put all that together and said, "Oh, this is a perfect place to be," and that's why I'm there.

Michael Krigsman: Everybody, we've been speaking with Dave Cote. He is the author of the book Winning Now, Winning Later. It's an outstanding book. Fortune called it the War and Peace of business books. Former Secretary of the Treasury Hank Paulson said it was the best business book he's ever read, so those are pretty good recommendations.

David Cote: [Laughter] Yeah, they are.

Michael Krigsman: Dave Cote, thank you for taking the time to be here with us today.

David Cote: Thank you.

Michael Krigsman: Everybody, thank you for watching, especially the folks who contributed questions. Now is the time for you to subscribe to our newsletter. Hit the subscribe button at the top of our website and subscribe to our YouTube page. Check out CXOTalk.com and we will see you back here very soon with great conversations. I hope you have a great day, everybody. Take care. Bye-bye.