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Updated 12/20/02, 4:05 p.m. MST (adds Annex Bulletin 93-29 quote)

Lou Gerstner’s Book: “Who Says Elephants Can’t Dance?”

Gerstner Spills the Beans… Unwittingly

Boasting about IBM Board’s Courtship in 1992, He Reveals How IBM Board Misled the Public

PHOENIX, Dec 13 - Perhaps the most remarkable thing about Lou Gerstner’s book (“Who Says Elephants Can’t Dance?”, HarperCollins) is that the author, a former IBM CEO and chairman, unwittingly spills the beans about the inner workings of the “old boys network” that staffs and runs America’s corporate boards. 

The second most remarkable thing is that Gerstner’s “BookText Box:  
“Sir Lou” of Big Blue
Description” cites some wrong facts about IBM.  In its first sentence! (see the chart and comment on page 5).

We say “unwittingly,” because Gerstner spilled the beans in passing, while puffing up his own ego and executive star-appeal.  And without realizing perhaps the severity of the disclosures he was making. 

For example, Gerstner wants his readers to believe that he only reluctantly accepted the helm of one of the greatest companies in the history of the world.  He recounts in great detail, the supposed courting and cajoling by James Burke (“Mr. Tylenol”) and Tom Murphy (Capital City/ABC), the two IBM directors who led the search for a new CEO after John Akers, Gerstner’s predecessor, “resigned” on Jan 26, 1993. 

Here’s an excerpt from the Gerstner book about their February 1993 meeting:

In February I met with Burke and his fellow search committee member, Tom Murphy, then CEO of Cap Cities/ABC. Jim made an emphatic, even passionate pitch that the board was not looking for a technologist, but rather a broad-based leader and change agent. 


"…What is critically important is the person must be a proven, effective leader -- one who is skilled at generating and managing change." 

Once again, I told Burke and Murphy that I really did not feel qualified for the position and that I did not want to proceed any further with the process.

So what’s wrong with Gerstner being courted by members of IBM Board’s “search committee?”  Nothing.  Except that the books reveals that first IBM-related meeting between Burke and Gerstner reportedly took place at Gerstner’s “execupad” (a luxury Manhattan apartment with concierge services) on December 14, 1992. 

The date is very significant.  Although we (Annex) had been publicly calling for both Akers and/or the IBM Board to resign for over 18 months (see “Akers: The Last Emperor?”, June 1991), Burke and other IBM Board members had been on the record as saying that they fully supported Akers as chairman and CEO. 

Here’s, for example, what Burke told the Wall Street Journal on Dec. 1, 1992, only two weeks prior to courting Gerstner about the top IBM job:

"I wouldn't know how to put somebody in who could do better, from inside or outside the company," declares Mr. Burke, who is quietly emerging as the leader of IBM 's outside directors and is thus far delivering their solid support to Mr. Akers.

In fact, Burke went out of his way to defend Akers, publicly anyway.  Here’s what he also told the Journal in the same interview:

Indeed, Mr. Burke says he has wondered whether Mr. Akers is cutting too deeply. "This company is an extraordinary national asset on the cutting edge of what is changing the world," Mr. Burke says. "Let's make sure that we don't throw the baby out with the bath water."

Yet just a few months later, Burke (still on the IBM Board back then) and other IBM directors approved the biggest-ever quarterly cuts in IBM history… implemented by Gerstner! ($8.9 billion - see Annex Bulletin 93-40, July 27, 1993).

Nor was Burke alone in publicly voicing his support for Gerstner.

Irving Shapiro, for example, a former IBM board member, was quoted in a recent (1991) interview with Business Week as saying, "I applaud what IBM is doing.  The only issue is: How productive is it?"  

Richard Lyman, an old-timer on the IBM board (since 1978) and a former president of Stanford University, said that Akers has "the full confidence of the board."

Nor was this the only time Burke and the IBM Board misled the public.  Consider the following excerpt from our Annex Bulletin 93-29 (May 12, 1993) in which we cited investigative reporting by the USA TODAY:

In an extensive investigative report on IBM published on the day of the IBM Annual Meeting in Tampa, FL (April 26), the USA TODAY asserted that Jim Burke, a long-time IBM director who eventually headed up the search for the new IBM CEO while publicly supporting the IBM chairman, John Akers, approached Jack Welch, the GE CEO, "around Christmas," and offered him the top IBM job.  "Welch said no," the USA TODAY reported.  (That's not surprising, considering the above joke).

"Are you sure it was around Christmas?" we wondered when we double-checked this week with the USA TODAY on the accuracy of the Burke statement.  "That would have been about a month before Akers actually announced his resignation!?"  

"No kidding?!" the USA TODAY reporter replied in mock surprise.  Did Burke tell you that himself?  The USA TODAY reporter wouldn't say, protecting the source.  "But it (the statement) was true!" the reporter added emphatically.  Writing about this story, the USA TODAY editors also said that their reporter "verified all key information... with at least two people, and often more."

Meanwhile, Burke and the rest of IBM directors gave an impression in public that they were backing Akers all the way.  According to a December 1, 1992 WALL STREET JOURNAL story, for example, Burke said that Akers was still his man.  "I wouldn't know how to put somebody in who could do better, from inside or outside the company," Burke declared.  He later also wrote a letter to the editor of the WSJ clarifying his role on the IBM Board (see WSJ, December 15, 1992).

Furthermore, John Akers himself asserted that, "IBM's Board supports this management; the Board supports me, and I don't plan to step aside."  Akers spoke on December 15, 1992, following IBM's announcement of the $6 billion-writeoff (see CMS BULLETIN 92-61, 12/15/92, and WSJ 12/16/92).  Yet, two days later, we learned that Paul Rizzo had already been brought in to "advise Akers."  When this information became news (see WSJ 12/21/92), an IBM director (Richard Lyman) denied that the Board had anything to do with this.  The IBM spokesperson also wanted us to believe that John Akers himself had asked his former rival for the top job to help.

So, in the midst of all this apparent outpouring of public support for Akers, and only about a month after saying that Akers is the best man for the top IBM job, Burke offers Jack Welch the same position?!  In professional (and even in amateur) sports, that would be considered unethical.  It is called tampering (with other club's properties), and is subject to significant fines, even dismissals of the parties involved.  And yet in business, such practices are acceptable? 

We hear that Jim Burke was understandably quite upset when the USA TODAY story came out.  Not that he disputed its accuracy, mind you.  He was apparently mad because he had to do a lot of explaining to some of his high-powered friends.

So Burke, “IBM’s most powerful outside director” in December 1992, according to the Journal, was speaking for the Board when he praised Akers in its Dec. 1 story.  Here’s what that article also concluded:

…other outside directors won't comment, but they're considered likely to fall in line behind Mr. Burke.

In short, Burke et. al. misled the public!  Several times.

Well, that may seem like small potatoes in the post-Enron era, after travesties worse than lying by Ken Lay (Enron) and others (WorldCom, Andersen, etc.) came to light.  But back in 1992, IBM still had a pristine image.  IBM was still lily white-kind of Big Blue, earned over the decades of high morality leadership by the two Presbyterian Watson’s (the IBM “founder” and his son).

Had the public and the Wall Street investors known that Burke and the IBM Board were talking out of both sides of their mouths, they might have fled out of the IBM stock even sooner and in greater numbers than they actually did (see the stock chart).

Text Box:

But there is more…

Double Jeopardy?

We have it on pretty good authority that Akers was actually told by the IBM directors that he would have to go at the Board meeting in Japan in October 1992.

How good an authority?  As good as it gets.  IBM’s current CEO, Sam Palmisano, told us that during a dinner conversation in November 1994.  And he should know.  Not only because he is now Big Blue’s big boss.  But because Palmisano had been also Akers’ EA (Executive Assistant), and was in Japan at the time of that October 1992 Board meeting.

Here’s an excerpt from this writer’s November 3, 1994 diary notes, now being published for the first time:

John Akers, IBM Board

Sam had been Akers' EA for two years.  That's unusual.  Typically, EA'sare kept less than a year on the job, before being dispatched somewhere back to the field.  "I guess I was a slow learner," Sam joked.


Far from it, he and Akers have become very close.  Which is why Akers kept him around for so long.  And even now, the two maintain a close personal relationship.  "I was out playing golf with John on Sunday (10/30/94)," Sam said.

I used that chance to say in front of another consultant that, "Akers was really a nice guy who had lost his compass " (this was actually the headline from our last report about Akers - see “A Nice Guy Who Lost His Compass,” Annex Bulletin 93-07, Jan 26, 1993).  And that the IBM Board directors treated him very shabbily.  I figured that this message would eventually filter back to Akers, too.


That's when Sam Palmisano opened up.  He told us what happened at the IBM October 1992 Board meeting, which took place in Tokyo.  At the time, Palmisano was also based in Tokyo, working for IBM Japan (as distinct from IBM Asia/Pacific HQ which Ned Lautenbach was heading up at the time).


"I noticed that something was wrong when I talked to Susan (Akers' wife), after the Board meeting ended," Sam said.  "She was very upset."  Akers' luck with the Board had evidently run out.


"That's incredible!" I said.  "I remember Akers holding a news conference in mid-December (i.e., two months later!) in New York (to announce big write-offs), and assuring the world that the Board had full confidence in him."  I added that some IBM Board members (e.g., Opel, Burke) were also quoted in the WALL STREET JOURNAL in late November/early December (1992) about how much they supported what Akers was doing. 


"That means that they simply lied and deliberately deceived the public!" I said.  "I can't believe it!  They are worse than even I had thought before."

Should the SEC look into it now that Gerstner has spilled the beans and independently corroborated a part of the (old) IBM Board’s deception?

Why not?  As far as we know, there is no “statute of limitations” on lying.  Or on a public Board misleading the public.  Such a case may just be the right kind of a challenge for the just-appointed SEC chairman, William H. Donaldson, if he is to establish credibility as a tough law enforcer. 

This may be all the more appropriate as our initial call for Akers’ resignation and criticism of the IBM Board’s complacency (“Akers: The Last Emperor?”, June 1991), had been sent to the then SEC chairman and to ALL IBM OUTSIDE DIRECTORS, and to the chairmen of the banks and large institutions that owned the biggest chunks of the IBM stock in 1991.

Having told Akers in October 1992 that he was basically finished, it was more than preposterous for the IBM Board and other insiders to try to make us believe that Akers suddenly voluntarily resigned on Jan 26, 1993.  “Akers Quits at IBM under Heavy Pressure,” for example, was the Wall Street Journal headline on Jan 27, 1993. 

Here’s what we said about that momentous Big Blue moment in an editorial written the same day (see “A Nice Guy Who Lost His Compass,” Jan 26, 1993):

…Only 24 hours after supposedly giving "full support" to the company's CEO, according to IBM's PR department, (the IBM Board) gave John Akers a well-deserved boot.  At least three to eight years late, the IBM Board members were among the last to admit that the "emperor had no clothes."  

…if someone were to suggest to you that John Akers voluntarily resigned a mere 24 hours after "everyone in sight" at IBM denied the rumors which we have been hearing about twice a day for the last three weeks about his resignation; we hope that you would dismiss such suggestions as -- sheer nonsense.  Akers was no more the resigning kind than was Gorbachev, or Milosevic.  People like that have to be pushed out.  He was.

Good Manager, Poor Entrepreneur, Wrong Facts

As for the new IBM CEO, the search for whom was only beginning back then (or so we thought), here’s what we said contemporaneously about that:

… A good time for IBM's shareholders, customers, or employees to rejoice?  It is not.  It is a time for careful reflection; a time to weigh the options which will shape the IBM future.  

… The new IBM CEO, therefore, needn't necessarily know which end of a 3090 mainframe is up, nor the difference between the DRAMs and the LA RAMs.  This person needn't come from within the computer industry, which would ensure that he or she would not be tempted to meddle in operational management.  This person should be a "business architect" with financial, legal and political skills to match the challenge of disposing of a tremendous amount of IBM's current assets, or acquiring some news ones down stream.

As it turned out, in Lou Gerstner, IBM got a mechanic instead of an architect; a CEO who knew how to cut but not how to grow (see “Gerstner’s Legacy: Good Manager, Poor Entrepreneur,” Jan 29, 2002).

And now, a full decade after he was first approached about the IBM job, we can see that Gerstner still doesn’t have all his Big Blue ducks in order.  The first sentence of Gerstner’s “Book Description,” which is also the first sentence of the book’s inside jacket, contains wrong facts:

“In 1990, IBM had its most profitable year ever….”

Actually, IBM had more profitable years in 1984 and 1985 - in terms of absolute net profit figures; and in five (5) other years (1984-1988), when it had higher net margins (see the chart). Text Box:

Oh well… what’s a billion here, a billion there if you’re a “Louis XIX of Armonk?”  J   Hopefully, the former Big Blue emperor has a better grasp of his own executive compensation.  As you saw in “Sir Lou OutLayed Lay” (April 2002), Gerstner outdid even the Enron chairman in insider selling.  With the help of the (new) IBM Board members - his pals whom he had appointed, the former IBM CEO took home nearly half a billion dollars in aggregate executive compensation. 

Gerstner’s nine years at the IBM helm will be remembered as the “Era of Greed.”  They are unprecedented in IBM corporate history when it comes to plutocratic self-dealing by the top Big Blue brass. 

But that’s not something about which Gerstner is boasting in his book “Who Says Elephants Can’t Dance?”  Self-enrichment while manipulating the stock through stock buybacks is another conflict-of-interest practice that the new SEC chairman may want to look into.  If he really means business, that is.

But don’t hold your breath for it to happen any time soon.  The chances of his and/or IBM Board’s apparent transgressions being investigated by the SEC or other branches of our government are pretty slim.  At least if history is the guidepost and the status quo prevails.

Oh, well… at least IBM now has at its helm a CEO with a “nice guy” image.  With Gerstner gone, we should see shortly in which direction Palmisano steers the Big Blue ship.  If he does have some real changes up his sleeve, he’d better show them soon.

Returning to IBM’s old morality may not be a bad start.

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2002: "On a Wing and a Prayer" (Oct 21), "IBM-PwC Tie the Knot" (Oct 2), "IBM to Take $500M Charge" (Sep 3), "IBM Layoffs Confirmed" (Aug 14),  "Half or Double Trouble?" (Aug 12), Wall Street/Main Street Chasm (June 25), “Wall Street Casino,” (June 21), Big Blue Salami (June 19),  Sam's Dull Scalpel (June 4), Looming IBM Write-offs (May 23), "No New News at IBM" (May 15),  "Looming IBM Layoffs" (May 14),  "Sam Is No 'Change Agent'," (May 6), Additional Stock Buybacks Authorized (Apr. 30, 2002),  "IBM 5-Yr Forecast: From Here to Eternity?" (Apr 2002),  “Tough Times, Soft Deals,” (Apr 25, 2002), "A Disastrous Quarter," (Apr. 17),  Industry Stratification Trend (Mar. 30, 1990),  “Gerstner’s Legacy: Good Manager, Poor Entrepreneur” (Jan 2002), IBM Pension Plan Vapors: Where Did $17 Billion Go? (Mar 2002), "Big Blue Starting to Unravel," (Apr. 8, 2002), SEC Launches Formal Probe of Wall Street Research (Apr 25, 2002),  “SEC to Tighten Stock Option Rules” (Apr 5, 2002), "Sir Lou OutLayed Lay!" (Apr 1, 2002), "IBM Pension Fund Vapors," (Mar 23, 2002),

A selection from prior years: Is IBM Cheating on Taxes, Annex Bulletin 99-17 (May 1999),  IBM 5-year Forecast 2001: An Unenviable Legacy (June 2001) "Break Up IBM!" (Mar. 1996), Fortune on IBM (June 15, 2000), “Smoke and Mirrors Galore,” July 2000), "Slam Dunk of Bunk" (Jan 2000), Annex Bulletin 98-14 ("Wag the Big Blue Dog"), Armonk's Fudge Factory (Apr. 9, 1999)Where Armonk Meets Wall Street, Greed Breeds Incest (November 1998)Stock Buybacks Questioned: Is IBM Mortgaging Its Future Again?, 97-18 (4/29/97),  "Some Insiders Cashed In On IBM Stock's Rise, Buybacks" 97-22, 7/27/97,  Djurdjevic’s Forbes column, "Is Big Blue Back?," 6/10/97;  “Executive Suite: How Sweet!,” (July 1997), "Gerstner: Best Years Are Behind", Aug. 10, 1999), "IBM's Best Years Are 3-4 Decades Behind Us" (July 1999), "Lou's Lair vs. Bill's Loft" (June 1999),  "Corporate Cabbage Patch Dolls," 98-39, 10/31/98; Djurdjevic’s Chronicles magazine October 1998 column, "Wall Street Boom; Main Street Doom", “Louis XIX of Armonk,” (Aug. 1996), "Mountain Shook, Mouse Was Born" (Mar. 25, 1994), “A Nice Guy Who Lost His Compass” (Jan 26, 1993), “Akers: The Last Emperor?” (June 1991) etc.]

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Volume XVIII, No. 2002-23
December 13, 2002

Editor: Bob Djurdjevic
Published by Annex Research
e-mail: annex@djurdjevic.com

P.O. Box 97100, Phoenix, Arizona 85060-7100
TEL/FAX: (602) 824-8111

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