Gerstner, Louis V. Jr. 1942–

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Louis V. Gerstner Jr.
1942–

Chairman, The Carlyle Group

Nationality: American.

Born: March 1, 1942, in Mineola, New York.

Education: Dartmouth College, BA, 1963; Harvard Business School, MBA, 1965.

Family: Married Elizabeth Robin Links; children: two.

Career: McKinsey & Company, 1965–1978, consultant; American Express Company, 1978–1981, executive vice president and head of charge card business; 1981–1983, vice chairman of the board; 1982–1985, president, Travel Related Services; 1985–1989; chairman and chief executive officer, Travel Related Services; RJR Nabisco, 1989–1993, chairman and chief executive officer; International Business Machines Corporation, 1993–2002, chairman and chief executive officer; The Carlyle Group, 2003–, chairman.

Awards: Honorary Knight of the British Empire, Queen Elizabeth II, 2001.

Address: The Carlyle Group, 1001 Pennsylvania Avenue, NW, Suite 220 South, Washington, DC 20004-2505; www.thecarlylegroup.com.

■ Louis V. Gerstner Jr. saved International Business Machines Corporation at a time when most people, including Gerstner himself, wondered whether the company was beyond repair. The first outsider to head the computer giant, Gerstner inherited an organization crippled by bureaucracy and created a culture that placed a premium on continually adapting business practices to better serve customers. Gerstner's fierce, competitive spirit and tough-as-nails management style were not for everyone, and Gerstner made his fair share of enemies. When Gerstner left IBM in 2002, the company was once again a relevant player in the technology market. In 2003 IBM, the world's top provider of computer hardware, generated $89.1 billion in revenue. As of 2004 it was one of the largest providers of software, being second only to Microsoft, and semiconductors. IBM's ever-expanding service arm was the largest in the world.

Gerstner, the second of four sons, grew up in what he described to Amanda Hall of the Sunday Times of London as a "warm, tightly knit, Catholic, middle-class family" (December 15, 2002). His father drove a milk truck, and his mother was a secretary and a college administrator. Both parents placed high priority on education. Gerstner wrote in his book, "Whatever I have done well in life has been a result of my parents' influence." Gerstner and his brothers attended Chaminade High School, a competitive Catholic school. The culture was extremely demanding. Teachers announced grades as they passed back tests to students, and all students knew where they stood relative to the rest of the class. Robert C. Wright, the head of NBC, who was two years behind Gerstner at the school, recalled in Fortune : "It was straight in your face. 'Do it once, stay late. Do it twice, leave school. Do it three times, we'll throw you out.' And there was physical discipline—they wouldn't hesitate to give you a solid slap."

Gerstner earned a scholarship to Dartmouth College, where he graduated magna cum laude with a degree in engineering. After Dartmouth, he went to Harvard Business School. At age 23 Gerstner took a job as a consultant at McKinsey & Company. Whereas most McKinsey consultants made partner in six or seven years, Gerstner claimed the title in a mere four years. After 12 years at the venerable consulting firm Gerstner was recruited by American Express Company, one of McKinsey's clients, to run its travel services business. Gerstner told Leslie Wayne of the New York Times, "I wanted to try my hand at running things. I didn't want to spend my whole life as a consultant" (June 30, 1985).

AMERICAN EXPRESS

Gerstner joined American Express in 1978 as executive vice president and head of its charge card business. A year later he was named president of the Travel Related Services group, which was responsible for American Express cards, traveler's checks, and travel-service offices. When Gerstner began his career at American Express, MasterCard and Visa had begun to compete for the company's market share. But Gerstner found new uses for the card and found new users. In 1980 most department stores did not accept American Express cards, and Gerstner attacked. By 1985 retail sales were the second-largest use of the card, following airline tickets. College students, physicians, and women were singled out in various marketing pushes. Corporations were persuaded to issue cards as a more effective way of tracking business expenses. Gerstner created marketing hooks for new cards. The gold card carried an annual fee of $65 and offered a $2,000 line of credit. The platinum card had a $250 annual fee, a $10,000 check-cashing benefit, and private club memberships for traveling executives.

As sales and profits rebounded, Gerstner was promoted to chairman and chief executive officer of Travel Related Services in 1982 and president of the parent company in 1985. Although he claimed the number two position at the young age of 43, Gerstner dismissed the speculation that his success was the product of being a workaholic. Gerstner told Wayne, "I hear that and I can't accept that. A workaholic can't take vacations and I take four weeks a year" (June 30, 1985).

As chairman and chief executive officer of the Travel Related Services division, Gerstner spearheaded the successful "membership has it privileges" promotion. Gerstner's division was continually the most profitable in the company and in the entire financial services industry. Despite these successes Gerstner faced a ceiling at American Express. The chief executive, James D. Robinson III, was not expected to retire for another 12 years. The analyst Perrin Long at Lipper Analytical told Jesus Sanchez of the Los Angeles Times : "Lou is a very personable guy. But more than anything else, he is a leader more than a follower" (March 14, 1989). After 11 years at American Express, Gerstner left to become chairman and chief executive officer of RJR Nabisco. During Gerstner's tenure at American Express membership had increased from 8.6 million to 30.7 million.

FROM CREDIT CARDS TO TOBACCO

Some analysts were surprised by Gerstner's career move, because he lacked experience in the food and tobacco industries. Members of Gerstner's inner circle, however, believed he had the right skills to run a company like RJR Nabisco. Adam L. Starr, an analyst with First Manhattan Corporation, told Vivian Marino of the Associated Press, "A good manager can work in any industry" (March 14, 1989).

At RJR Nabisco, Gerstner earned praise at the executive level for steadying a company that had lacked financial discipline. Employees in the lower ranks, however, were divided in their opinions. Jason Wright, a senior vice president of worldwide communications at RJR, told Betsy Morris of Fortune, "He's an acquired taste. He gets everybody to buy in on a strategy, and then he doesn't micromanage. If you expect to be stroked, forget it." Gerstner also irked some executives with his self-important air. Some workers at RJR Nabisco reported that Gerstner was picky about who could take advantage of the corporate jet and about where they could sit. James W. Johnston, Gerstner's boss at RJR Nabisco, told Morris, "There's an element about Lou I don't get, given how talented he is. He is incredibly concerned about stature, particularly his own."

Gerstner's legacy at RJR Nabisco, where he spent only four years, was too short-lived to be definitive. He helped increase market share by pushing more aggressively into the low-end cigarette market, a strategy that seemed to be a success. Philip Morris & Company, however, responded to RJR Nabisco's move into low-priced cigarettes with a pricing war that ultimately hurt RJR Nabisco's profits and stock. Gerstner may have seen the writing on the wall, or he may have been uncomfortable selling tobacco. In addition, the onslaught of lawsuits in the industry was beginning, and the company had been viewed as going downhill as far back as the 1970s.

TAKING OVER A BELEAGUERED GIANT

Thomas J. Watson Sr. formed IBM by taking over the Computing Tabulating Recording Company in 1914. The leadership of his son, Thomas Watson Jr., led IBM into the computer age from 1952 to 1972. Gerstner became chairman and chief executive officer of IBM in April 1993 as declining sales of mainframe computers led to crippling losses. The year Gerstner was hired, the company lost $8 billion. Gerstner had to be persuaded to take the job. Although he believed he could bolster the company's performance, Gerstner was immediately overwhelmed by the task. "I was scared to death," he told Amanda Hall (December 15, 2002).

Bureaucracies that placed little confidence in employees' abilities to think for themselves had bogged down IBM's culture. Employees dressed in the corporate uniform of blue suits and white shirts and followed rigid instructions on every aspect of life in the office, including how to run a birthday party. According to Hall, one guide produced for the administrative assistant to Walter E. Burdick (WEB), the personnel director at IBM, contained the following directives: "Surprise birthday parties for WEB staff should be scheduled under the heading 'miscellaneous' for 15 minutes. Birthday cakes, forks, napkins and cake knife are handled by WEB's secretary. AA takes seat closest to door to answer phones" (December 15, 2002).

Employees had lost sight of IBM's reason for being in business. In an interview with Hall months before his retirement, Gerstner looked back on that time: "It was amazing to me when I arrived that we could go for hours in meetings and nobody would talk about a customer. I'd never been to a meeting before where we didn't start with a customer. Driven by its historical success, the company stopped listening to the outside world. It lived inside a cocoon. When the outside world finally pierced that cocoon and everything began to tumble, the company didn't know how to respond" (December 15, 2002).

A TURNAROUND STORY

Early in his tenure Gerstner told employees, according to William J. Cook of U.S. News & World Report, "Look, guys, we've lost $16 billion in the last three years; Fortune magazine says we're a dinosaur. Don't you think we ought to change? I mean, it's pretty obvious what we're doing ain't working." In his first three months on the job Gerstner made decisions that would forever change IBM. Instead of breaking the company into disparate pieces, a strategy that had been presented before he took over, Gerstner kept it together, repositioning IBM as the company that would help corporations build and run their technology systems using as much IBM hardware and software as possible. Gerstner cut long-term debt from $14.6 billion to $9.9 billion and boosted IBM's share price from less than $140 to $168.

By 1995 IBM had stabilized and by 1996 had proved that it could grow. In 1997 the IBM board validated Gerstner's strategy by extending his contract five years. By 1999 Gerstner was leading one of the most respected companies in corporate America. By then Gerstner had reorganized the sales force along industry lines, the better to provide customers with specialized services. He cut unprofitable businesses such as IBM's online service, Prodigy, and bought Lotus Development Corporation. Gerstner conceded that his two biggest mistakes were misjudging the networking market that was ultimately dominated by Cisco Systems and missing the trend of selling personal computers directly to customers, a practice pioneered and mastered by Dell. Lamented Gerstner to Kevin Maney of USA Today, "And here, my marketing background should have helped" (November 11, 2002).

The key to IBM's overall turnaround was Gerstner's decision to take the company away from its roots as a hardware manufacturer and lead it into services, which included everything from consulting on the design of corporate systems to running a company's e-commerce operation. The company's global services unit, which Gerstner started, was an industry paragon. In 2002 services accounted for 40 percent of IBM's revenue but for only 20 percent of the revenue of Compaq Computer Corporation. Michael Capellas, the chief executive officer of Compaq at the time, told Spencer E. Ante of BusinessWeek, "I'm jealous. Have you noticed that they've skirted through the downturn?"

Gerstner's tough management style was a shock to IBM's employees. Before Gerstner's arrival employees never quite knew where they stood with their managers, most of whom had a congenial leadership style. Gerstner's style was the opposite. Before he met with employees, Gerstner required a document establishing the facts and defining the agenda. Gerstner encouraged customers to interrogate his new executive team. And he called employees with queries, never with compliments. As Gerstner described himself to Morris, "I'm intense, competitive, focused, blunt, and tough, yes. That's fair. I'm guilty. Quite frankly, I am not very comfortable in chitchat. When I go to board meetings, I arrive two minutes before and leave when it's over. I don't stay for lunch or go early and have coffee." Although he was not one to lavish his executives with praise, Gerstner showed his approval where it counted: in his employees' compensation plans. Gerstner was an extremely visible executive who maintained an active schedule that kept him in front of clients and employees. A sign in his office bore a quotation from a novel by John le Carré, a favorite author: "A desk is a dangerous place from which to view the world."

LIFE AFTER BIG BLUE

Gerstner resigned as chief executive officer of IBM in March 2002 and as chairman in December 2002. In the e-mail announcing his retirement as chief executive, Gerstner told employees: "Along the way, something happened—something that, quite frankly, surprised me. I fell in love with IBM." He left behind a corporation that had regained its standing as a powerful player in the information technology market. In the nine years since Gerstner had arrived, the value of a share of IBM's stock catapulted from $13 to $80, adjusted for splits.

While few would argue that Gerstner saved the company, his legacy continued to be debated. Critics said the turnaround was simply the product of financial engineering. Considering he ruled the firm during an unprecedented boom in the information technology market, some analysts wondered whether IBM could have posted even better results. Gerstner said IBM was better off than industry peers who were swept away by "tech mania." IBM responded to the e-business and network revolution, but Gerstner said his company resisted the temptation to totally revamp its corporation. Gerstner told Hall, "It takes years to create a great company. You don't create a great company in the media. You create a great company at home, working hard over many years" (December 15, 2002).

A lifetime advocate of the importance of quality education, Gerstner created a commission on teaching to develop specific policy recommendations to deal with the teaching crisis in the United States. From 1996 to 2002 Gerstner cochaired Achieve, an organization created by U.S. governors and business leaders to drive high academic standards for public schools in the United States. At IBM Gerstner established Reinventing Education, a strategic partnership with 21 states and school districts whereby IBM technology and technical assistance were used to eliminate key barriers to school reform and improve student performance. Gerstner coauthored the book Reinventing Education: Entrepreneurship in America's Public Schools. In recognition of his efforts on behalf of public education and for his business accomplishments, Gerstner was designated honorary Knight of the British Empire by Queen Elizabeth II in June 2001.

In January 2003 Gerstner assumed the position of chairman of the Carlyle Group, a global private equity firm located in Washington, D.C. He also announced plans to contribute further to education reform and cancer research. Gerstner took classes in archeology and Chinese history at Cambridge University. He told Hall he went back to school not to get a degree but "to read and enjoy the process of learning" (December 15, 2002).

See also entries on American Express Company and International Business Machines Corporation in International Directory of Company Histories.