The Dictator's Handbook (11 page)

Our account of coming to power began with the story of Liberia's Sergeant Doe. His end provides a useful cautionary tale for those seeking
power. Coming to power and staying in power, as the rest of this book makes clear, are very different things.

Sergeant Doe knew where Liberia's money was. And so long as he knew where it was and used it to keep the army faithful he was able to survive numerous attempts to overthrow him. The trouble is that you only have to lose once, and that question—Where's the money?—ended up being the last thing that Sergeant Doe ever heard.

With the end of the cold war, the United States no longer needed Doe's assistance, and in 1989 the US government cut off his future aid. Rivals Charles Taylor and Prince Johnson, backed by the governments of Burkina Faso and Côte d'Ivoire, saw their opportunity and launched an insurgency. Doe sent soldiers to counter them, but rather than act as a professional army ought to, his soldiers proceeded to rape, pillage, and kill, not exactly endearing themselves to the very people whose support might have saved Doe.

Civilians flocked to join the revolt. Showing his characteristic lack of statesmanship or judgment, Doe decided to take a car and personally go off in search of recently arrived Nigerian peacekeepers. Following a gun battle that killed all of Doe's entourage, Prince Johnson captured the president and videotaped his subsequent interrogation. The interrogators repeated the same questions over and over again before Johnson turned to cutting off Doe's ear and eating it: “Where is the money? What is the bank account number?” Doe didn't answer. Maybe, knowing he was going to die regardless, he figured at least by keeping silent his family could enjoy the fruits of his labor, living out their lives in a comfortable exile.

Doe was incompetent at running a country. He drove an already poor nation into even deeper poverty and civil war. But he knew the essence of coming to power. Although dressed up in many forms, successful challengers follow basic principles. They offer greater expected rewards to the essential supporters of the current leader than those essentials currently receive. Unfortunately for the challenger, the incumbent has a significant advantage because the members of the established winning coalition can be confident that their leader will keep on lining their pockets or providing the public policies they want. But if the incumbent is known to be dying, takes too much for
himself, chooses the wrong policies, or is seen to have only weak loyalty from his critical backers, then the door swings wide open for a challenger to step in and depose the incumbent.

To achieve power means recognizing the moment of opportunity, moving fast, and moving decisively to seize the day. And, for good measure, coming to power also means seizing any opponents, figuratively in democracies, and physically in dictatorships. Coming to power is not for the faint of heart.

Politics, however, does not end with becoming a leader. Even as you take up the reins of power and enjoy its rewards, others are gunning for you. They want the same job that you so desperately sought! Politics is a risky business. As we will see, successful leaders manage these risks by locking in a loyal coalition. Those who fail at this first task open the door for someone else to overthrow them.

A
T LONG LAST, THE ASPIRANT TO HIGH OFFICE HAS triumphed. Whether through inheritance, coup, election, revolt, murder, or mayhem, he has seized power. Now he faces a new challenge: hanging on to it.

As Sergeant Doe's brutal career has taught us, rising to a high position often requires skills altogether different from those needed to maintain control. And even the rules for surviving in power do not always resemble the skills necessary for ruling
well
. The novelist Italo Calvino has clearly and succinctly described the tribulations of those who have risen to power: “The throne, once you have been crowned, is where you had best remain seated, without moving, day and night. All your previous life has been only a waiting to become king; now you are king; you have only to reign. And what is reigning if not this long wait? Waiting for the moment when you will be deposed, when you will have to take leave of the throne, the scepter, the crown, and your head.”
¹

What, then, must a newly minted leader do to keep his (or her) head? A good starting place is to shore up the coalition of supporters. This may seem like a simple enough task. After all, as we've seen, the heights of power are unattainable without the backing of a coalition strong enough to beat back rivals. However, a wise leader does not count too much on those who helped her gain power. Remember the fate of many of Fidel Castro's closest allies. After toppling the previous leader, it's only a matter of time until they realize that they can do the same again.

A prudent new incumbent will act swiftly to get some of them out of the way and bring in others whose interests more strongly assure their future loyalty. Only after sacking, shuffling, and shrinking their particular set of essentials can a leader's future tenure be assured.

Nor is this only true of dictators. To see this urge to build a modified coalition at work in the seemingly less ferocious world of business, let's take a look at Carly Fiorina's rise and fall as CEO at Hewlett-Packard.

CEOs, just like national leaders, are susceptible to removal. Being vulnerable to a coup, they need to modify the corporate coalition (usually the board of directors and senior management), bringing in loyalists and getting rid of potential troublemakers. Usually, they have a large potential pool of people to draw from and prior experience to help guide their choices. But, also like national leaders, they face resistance from some members of their inherited coalition and that may be hard to overcome.

Most publicly traded corporations have millions of interchangeables (their shareholders), a considerably smaller set of influentials (big individual shareholders and institutional shareholders), and a small group of essentials, often not more than ten to fifteen people. In a group of this size, even seemingly minor variations in the number of coalition members can have profound consequences for how a company is run. As we will see, this was particularly true for Hewlett-Packard (HP), because, as in all companies, small shifts in coalition numbers can lead to large percentage changes in the expected mix of corporate rewards.

In the case of HP, the CEO's winning coalition made up a relatively large fraction of the real selectorate because ownership is heavily concentrated in a few hands. That is, we might count corporate coalition size in terms of the number of its members or in terms of the number of shares owned by them. In HP's case, the essential bloc and the influential bloc are a tiny part of the total selectorate
because the families of the company's founders, William Hewlett and David Packard, retain significant ownership just as was true of the Ford Motor Company, Hallmark Cards, and quite a few other businesses for many years.

Involvement in a corporation can yield benefits, just like any other form of government. These benefits can take the form of rewards given to everyone or private payments directed just to the essentials. In a corporate setting, private benefits typically come as personal compensation in the form of salary, perks, and stock options. Rewards to everyone—what economists call “public goods”—take the shape of dividends (an equal amount per share) and increased stock value. When the winning coalition is sufficiently large that private rewards are an inefficient mechanism for the CEO to buy the loyalty of essentials, public goods tend to be the benefit of choice. Usually, coalition members are eager to receive private benefits. However, dividends and growth in share value are preferred over private rewards by very large shareholders who happen also to be in the winning coalition—this would make them the biggest recipients of the rewards that go to all shareholders. That was precisely the situation in HP, where the Hewlett and Packard families owned a substantial percentage of the company.

 

Who makes up the essentials in a corporation? The coalition typically includes no more than a few people in senior management and the members of the board of directors. These directors are drawn from a mix of senior management in the company, large institutional shareholders, handpicked friends and relatives of the CEO (generally described as
civic leaders
, no doubt), and the CEO herself. In the parlance of economists who study corporations, the makeup of these boards boils down to insiders (employees), grey members (friends, relatives), and outsiders. One part of any corporate board's duties is to appoint, retain, or remove CEOs. Generally CEOs keep their job for a long time and that certainly was true of HP's first CEO, founder David Packard. He was replaced in 1992 by an insider, Lewis Platt, who had worked for the firm since the 1960s. Platt retired in 1999 and was replaced by outsider Carly Fiorina. The HP board has repeatedly deposed CEOs since then.

It should be obvious that any board members involved in deposing the former CEO have the potential to be a problem for a new CEO. Having once been a coup maker, there is little reason to doubt that they stand ready to start trouble once again if they think the circumstances warrant it. And what could those circumstances be but application of one or more of the rules of governance we set out earlier, especially if that application harms their interests.

Research into CEO longevity teaches us, not surprisingly, that time in office lengthens as one maintains close personal ties to members of the board. Just as sons and daughters may make attractive inheritors of the mantle of power in a dictatorship, friends, relatives, and fellow employees can generate the expectation of more loyal supporters after power is achieved. This logic probably contributed to Lewis Platt's elevation to CEO of HP. Putting more outsiders on a board translates on average into better returns for shareholders, a benefit to everyone. At the same time, it also translates into greater risk for the CEO.
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Since the CEO's interest is rarely the same as the shareholder's interest, CEOs prefer to avoid outsider board members if they can.

Corporate problems, especially those serious enough to oust a sitting CEO, can serve to galvanize attention and enhance oversight by the board, making existing coalitions less reliable. Furthermore it is likely that the new, replacement CEO will face real impediments to his efforts to create and shape a board of directors in the wake of an older CEO's deposition. After all, the old board members did not get rid of the prior incumbent with the idea that they would also make it easy for the successor CEO to get rid of them. Nevertheless, any new CEO worth her salt will try to do just that. The long-lasting CEOs are the ones who succeed.

Carly Fiorina became Hewlett-Packard's CEO in 1999. After six turbulent years she was deposed from that position and as chairwoman of the board in early 2005. Prior to being removed she was the target of an unsuccessful proxy fight mounted by Walter Hewlett and David Woodley Packard, sons of HP's founders. The board, in keeping with the power of inherited insider influence, also included Susan Orr, founder David Packard's daughter. All were individuals with big financial stakes in HP. Furthermore, as big shareholders Hewlett, Packard, and Orr were more concerned about HP's overall performance
than about any private benefits they got from being on the board. Good news for shareholders—potentially bad news for Fiorina.

The board that selected Fiorina as CEO consisted of fourteen members. As we've seen, three were relatives of HP's founders; three more were current or retired HP employees.
³
Fiorina's initial board, in other words, had a substantial group of insider and grey members who were not of her choosing and who had big stakes in the corporation's stock value. It is not hard to see that Carly Fiorina needed to make changes to build a leaner board with stronger attachments to her. It would not be easy—while the previous board selected her, they were not
her
handpicked loyalists.

She achieved results, nonetheless. A year after Fiorina's ascension, HP's proxy statement to its shareholders in 2000 listed only eleven board members, 20 percent fewer than the group that selected her. Three, including David Woodley Packard, were gone. As Fiorina became more entrenched in her position, the board continued to shrink—the 2001 statement listed only ten board members, a reduction of nearly 30 percent from the board she originally inherited. Seemingly growing more secure in her control, Fiorina launched an effort to merge Compaq with HP, an effort with both beneficial prospects and serious risks for her continued rule.

Naturally, Fiorina presented the merger as a boon for HP and its shareholders. As Fiorina explained on February 4, 2002,

There is no reason to doubt the sincerity of Fiorina's expectations for the Compaq merger. But it is instructive to examine a major indicator
of how Fiorina's appointment and how her views meshed with broader market sentiments. The day before the announcement of Carly Fiorina's appointment as HP's new CEO, HP's shares traded at $53.43. The market's reaction to her appointment can reasonably be described as uncertain. The price of HP shares was flat immediately following the announcement and then began a decline, falling to under $39 by mid-October 1999, about three months later. Of course, markets are forward looking and so investors were watching and learning, modifying their expectations as Fiorina took charge. The news and modified expectations must have been good for a while because by early April 2000, HP's shares had risen markedly to about $78. But good feelings and good circumstances were not to prevail for long. After April 7 the share price went into a tailspin, bottoming out in September 2002 at around $12 a share, and significantly underperforming the major stock market indexes. By the time Fiorina resigned in February 2005, HP's share price had only rebounded to about $20.