UTC's Master Of Principle

Chief Executive George David, IndustryWeek's CEO of the Year, thrives on competition, winning and the rule of reason.

George David, Chairman and CEO of Hartford, Conn.-based United Technologies Corp. (UTC) and IW's 2002 CEO of the Year, chafes at long or complicated questions. He also deals in direct answers. "Clarity and brevity are important values around UTC in written and oral communication," David states. Perhaps that is just a part of his private personality. Or maybe it is a natural parallel to the brief commands of sailboat racing, a sport in which he excels. Nevertheless, there is much to be said about the disciplined management style of the highly competitive David, the CEO of $27.9 billion UTC since 1994 and its chairman since 1997. His operating principles range from ethics and education to social responsibility and shareholder value. And there's the remarkable breadth and depth of his business knowledge. "He's like a college professor, and you better have done your homework," quips one senior UTC executive. Indeed, a college professor who knows David well, agrees. "He has high expectations of everybody around him," says C. Ray Smith, a professor of business administration at University of Virginia's Darden School. (David received his MBA from Darden in 1967 and served on its board of trustees, including a two-year term as chairman, from 1990 to 2001.) "He asks lots and lots of questions, and some of them you can't answer. But you'll be ready the next time." In the spring of 2002, when allegations of corporate misdeeds and executive ethical lapses seemed to be occurring on a weekly basis, David told UTC shareholders meeting at the New York Public Library, "What you see is what you get." The library, he noted, is among the most truly open institutions in the world, and David said UTC aspires to be held to the same kind of standards and expectations in governance and financial management. The company has a 16-page code of ethics, including 35 standards of conduct. "We must have a spotless, perfect record. Period," he insists. Sixty-year-old David is, of course, more than UTC's chief ethics officer. A former management consultant with Boston Consulting Group and a 27-year veteran of UTC, David was once Otis Elevator Co.'s senior vice president for corporate planning and development and is now one of the more experienced and longer-serving CEOs among major U.S. companies. "I think I know this business about as well as anyone is going to know it, having studied and thought about it for a quarter of a century," he reflects. "I am an operating executive. I am curious about everything. That's in my nature. That's how I work and think," he states. "I think there is great utility in being that way because in operating reviews I'm full of questions. It's not that I want to know everything myself about everything. It's that I want to cause others to know everything." With their focus on measurement, follow-up and opportunities to make mid-course corrections, operating reviews are "the way you move a business," David contends. There is a lot to know and move at UTC, a global company that, for instance, makes more than $100 million a year in China on annual sales of $1 billion. UTC is a big company -- similar in size, in terms of 2001 revenues, to Dow Chemical Co., ConAgra Foods Inc. or Finland's Nokia Corp. It has four major business segments. UTC's Pratt & Whitney aircraft-engine business, which accounted for 27% of revenues in 2001, is partnering with long-time jet-engine rival General Electric Co. (GE) to produce powerplants for Airbus' super-jumbo A380. With 32% of 2001 revenues, Carrier's HVAC and refrigeration lines are still considered good growth businesses for UTC, although after 2001 operating income disappointed David, the division is under new leadership with orders to cut costs and improve operating margins. Otis, the world's largest elevator and escalator manufacturing, installation and service company, accounted for 22% of UTC's 2001 revenues, with 76% of those revenues coming from outside the U.S. Hamilton Sundstrand and Sikorsky helicopters constitute UTC's flight-systems business segment and accounted for 19% of total revenues in 2001. David expects UTC to report some solid financials for 2002, something that a number of other U.S. manufacturing CEOs won't be able to deliver. Despite the current downturn in the aerospace industry, which has reduced revenues and operating profit in the company's aircraft-engine business, for the first nine months of 2002 UTC's diluted earnings per share (EPS) were $3.36 on net income of $1.70 billion. That's better than $3.14 per share on net income of $1.59 billion during the first nine months of 2001. "Our earnings and cash-flow outlooks remain right on track to our prior expectations for the year," David said when the company announced its third-quarter earnings on Oct. 17. Expectations then for full year 2002 were $4.40 EPS and $2 billion in available cash flow. In addition to attending to existing operations, David always is looking to acquire businesses that would be productive strategic fits at UTC. A case in point: Honeywell International Inc. In October 2000, David was within hours of acquiring Honeywell when John F. Welch Jr., then-GE chairman and CEO, bid more for the aerospace and specialty-materials company. "It would have been a truly defining deal, and I can assure you that things like that are in my mind all the time," says David. In fact, it's part of the David dictum of looking far ahead, getting there first and working things to your advantage. "That is a role of the management of any company." Credit To Commitments UTC's relatively strong showing during the 2001 U.S. recession and the ragged and slow-paced recovery in major measure is a credit to operating principles contained in five, David-authored corporate commitments to performance, pioneering innovation, personal development, social responsibility and shareowner value. "I think the words are pretty good, and in some respects they are obvious," says David. But "what is most important" about the words is that they focus on the present and future of UTC while incorporating achievements and values of the past, he says. For example, he cites the commitment to pioneering innovation. "We invented every business we are in -- and in a bunch of cases the name of the [business] is the name of the person who did the invention." On the roster: Elisha Otis, inventor of the elevator safety system in 1853; Igor Sikorsky, a Russian-born aerospace engineer and a last-century pioneer in rotary-winged aircraft; and Willis Carrier, who invented dehumidification and air-conditioning systems in the early years of the 20th Century. "Engineering innovation is fundamental to what we do, and when you spend, as we do, almost $2.5 billion a year [on R&D], you need to be good at it," emphasizes David. Indeed, innovative and marketable ideas are so basic to what UTC does and so personally important to David, an intensely curious non-engineer, that he makes a point of understanding such things as the details of the co-generation of electricity and the algorithms that help control Otis elevators. Simultaneously, David, the second son of a college professor, characterizes UTC's worldwide Employee Scholarship Program as "the best thing I ever did in business." Implemented in 1996 and the hallmark of UTC's commitment to personal development, the program pays the entire cost of an employee's college or graduate school education, allows employees to pursue almost any subject at an accredited school, provides paid study time off (three hours a week), and awards UTC stock (up to $10,000 worth in the U.S.) for completing degrees. So far, nearly 11,000 graduates have received just under $90 million worth of stock. "It's one of the obligations that an employer has -- to give employees opportunities to better themselves. And we feel it's also very good business for us because it generates a better workforce that stays with us longer." David is committed similarly to corporate social responsibility, with an intensity and bluntness that set him apart from many other CEOs in the U.S. and elsewhere. "Shareholder value is fundamental to us, but you get shareholder value when you do the right thing," he contends. "To me, a safe and healthy workplace is an absolute right for an employee. If I thought for one minute that we didn't operate a safe and healthy workplace, we'd stop the company." He believes the right to bargain collectively is fundamental, noting that it's protected by law in the U.S. though not necessarily elsewhere in the world. He's also an advocate of "responsible" environmental practices. "You have to level the playing field. I don't want a situation where we compete with somebody that has no environmental standards, and we do. And yet our world -- our planet -- wants environmental standards. And so you can't rely on people to do it individually and voluntarily," he says. "I do believe in OSHA and I do believe in the EPA," although both agencies, he believes, are "too regulatory" -- intrusive, bureaucratic, expensive and too detailed. "But that to me is an argument about implementation." Meanwhile, out in the marketplace, UTC is building a fuel-cell business. "It is the correct solution, environmentally, for the next century and beyond," David states, adding "we have great science." However, what David does not have yet are profits. The fuel-cell business has been about a $70 million-per-year net loser for the past several years. "But the way you build businesses is with investment on the front end," David stresses. "We have told investors we anticipate having a $400 million dollar fuel-cells business by 2005 . . . and I believe we will do that." On energy policy, David, whose company recorded a 24% energy reduction between 1997 and 2001, quarrels with the Bush Administration. The White House has promoted energy production and consumption. Asserts David, who advocates driving down the hydrocarbon intensity of the U.S. economy, "We need to worry about conservation first and foremost." Winning -- And Defeat David is a CEO who relishes competing and winning. But how does he handle defeat? "I had a defeat when I was younger. I was in a hurry, and we released a product before its time," he confesses. The product, introduced about 20 years ago, was a "geared" elevator designed for use in buildings of six to 15 stories. It performed better in tests than in the field. "My response then was suck it up and do it again -- and that's how you deal with adversity." In fact, there's another important dimension to how David handles management decisions of all kinds these days. "I try hard, on the one hand, to be forceful about decisions, to know what I want to do, to know what I think our company should do [and should] want to do. "[But] I also try hard to diversify those opinions. Even though I will typically have a viewpoint, I will also go very quickly and ask a lot of people about different points of view, being very alert to the fact that what I think is true just might not be true. "This is a company where the 'Yes' answer doesn't necessarily get you the next job. I like the idea that we run the company by the rule of reason."

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By The Numbers -- United Technologies Corp.
Revenues (US$ billions)
1997 21.3
1998 22.8
1999 24.1
2000 26.6
2001 27.9
EPS (US$ per common share)
1997 2.10
1998 2.53
1999 3.01
2000 3.55
2001 3.83
Return On Equity (%)
1997 25
1998 29
1999 25
2000 24
2001 24
Available Cash Flow (US$ billions)
1997 1.24
1998 1.40
1999 1.61
2000 1.83
2001 1.90
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