Xerox CEO Anne Mulcahy brought the HBS community to its feet Tuesday for her poignant account of navigating the $17 billion company through a “perfect storm” of accounting scandals, shifting markets, huge losses and an “unsustainable” business model.
At the height of the scandal, Mulcahy got a phone call. “Mulcahy, do you believe everything they’re saying about you? Do you think it’s true?” It was David Kearns, Xerox CEO from 1982 to 1990.
“No,” she replied.
“Well, remember that because the good stuff’s not true either!”
A look back at her promotion appears to confirm the old adage that timing is everything. On May 11, 2000, Xerox fired CEO Richard Thoman (later charged with, but not convicted, of accounting fraud*), and promoted Mulcahy to Chief Operating Officer (COO). Acting CEO Paul Allaire (also later charged with, but not convicted, of accounting fraud*) made it clear to employees and outsiders that Mulcahy was running the show. At the time, the company was $18 billion in debt and its market capitalization had dropped to less than one third of that amount.
A less confident executive might have declined the opportunity. Perhaps it was fortunate that Mulcahy, who was running a home office business for Xerox that she had founded, did not know just how horrible things would become. (For example, Mulcahy told HBS that Xerox board member John Pepper, former CEO of Proctor & Gamble, “had never met with the enforcement division of the SEC until he went with me.” )
As an insider, Mulcahy had some advantages. “It helped that I loved the place,” she said. “I [knew] who to trust, who delivers…[and] there wasn’t a check on my head to get to a certain place.” Mulcahy vowed that her decisions would be based on a long term vision for the company.
The first test of her leadership skills was to convince Xerox employees to stay, despite the risk to their jobs. Mulcahy spoke about her belief in the long term future of the company and appealed to people’s desire to do something important by preserving the Xerox culture while overhauling everything else.
With the Xerox management team, the new COO was blunt about the challenges ahead. “If [you don’t] have an appetite for what [we] were trying to do, I would really appreciate it if you would leave,” she told her team. Some complied. The rest who stayed “had skin in the game,” said Mulcahy.
Mulcahy increased spending on research and development, which she called “the keys to the kingdom” and began a “relentless focus on productivity” that would include deploying Lean Six Sigma throughout the company. However, the problems at Xerox were far worse than anyone knew.
On June 29, the company announced that the SEC was investigating its Mexican operations. Eleven days later, Business Week ran an editorial titled “XEROX NEEDS A REAL LEADER: CARBON COPIES NEED NOT APPLY”. Fortune Magazine called Xerox “The Paper Jam from Hell.” Even Moody’s took their shot, downgrading Xerox’s debt to junk after the company had exhausted its $7 billion credit line.
Mulcahy believed in transparency and on October 3 she candidly told analysts, “Xerox’s business model is unsustainable.” She was thanked for her honesty by a stock sell-off that cut Xerox’s market capitalization by over one quarter. Rumors of bankruptcy and takeovers flourished, as did Xerox’s competitors.
Things got worse.
In January 2001 word got out that an assistant treasurer had been fired six months earlier for reporting to his superiors that accounting irregularities permeated the company, contradicting management’s previous assertions that the problems were confined to its Mexican operations. Four months later Xerox announced it was restating three years of financials.
In late July of 2001 the Xerox board offered Mulcahy the top job. “I had never been on the board,” Mulcahy remembered. “I didn’t even know the board.” She had, however, been viewed favorably by outsiders, even as her peers were being pilloried for their governance failures.
“I went about preparing myself with a vengeance,” Mulcahy said.
Looking back, one of her most important lessons learned was, “You’ve got to ask. You’ll be amazed at the results.” One executive she cold called was Warren Buffet, who didn’t invest “one dime” but spent six priceless hours with Mulcahy in Omaha discussing the situation. A call to Sandy Wiell resulted in a face to face meeting where he picked up the phone and called two banks that had been blocking a multi-billion dollar refinancing. Done.
Fast forward to 2005. Xerox’s debt has been cut in half, equity has doubled and the company’s cost savings program has returned $3 billion to the bottom line. Mulcahy’s obsession with productivity and view of customers as “the center of the universe” have spurred 12 quarters of earnings growth, helped by the company’s new focus on color technology, a commitment to being best in class, and a growing services business. New products include “solid ink” printers and “on demand” digital printers that mimic offset printing for a fraction of the cost.
A federal probe into the company finished in 2004 without criminal findings.
More recent headlines proclaim, “Anne Mulcahy is bringing Xerox back from the dead,” (Fortune) and, “Finally, Xerox Is Back on the Buy Lists” (The New York Times). Mulcahy is a highly sought-after keynote speaker and no longer feels like a “piranha,” a reference to the fact that “the room would clear” when she entered during the dark days of the SEC’s investigation.
“The thing I feel best about is the quality and depth of Xerox leadership”, says Mulcahy.
How does she find time for family? “The most important thing in my life is family,” she said. She and her husband committed long ago that one of them would always be home with their kids. As a priority, Xerox is “a distant second…not only is it OK, its acceptable to make this tradeoff,” Mulcahy said.
Incidentally, when Mulcahy called her mother to tell her about the upcoming visit to Harvard, her mother asked, “Oh, are you taking a class?”
* Former CEOs Paul Allaire and G. Richard Thoman as well as former CFO Barry Romeril were charged by the SEC of accounting improprieties. Each of these men settled with the SEC, neither admitting nor denying wrondoing. Their settlement agreements included officer and director bars. Romeril was barred for life from serving as an officer or director of any corporation; Allaire was barred for 5 years; Thoman for 3 years.
Anne Mulcahy has since ensured that Xerox’s ethics and governance practices and policies are among the best in business today. In fact, Business Ethics magazine recently named Xerox in the top 10 of its ranking of 100 Best Corporate Citizens, recognizing the company’s commitment to corporate citizenship and values-based leadership.