Few CEOs navigated the Great Recession as skillfully as David Cote. Now he’s offering hard-won advice for corporate leaders caught in the tumult of the coronavirus crisis.
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Cote, former chairman and CEO of Honeywell, spent 23 years at General Electric, where he rose through a series of finance, manufacturing, and marketing roles to head the appliance division. In early 2002, Cote became chief of Honeywell, an aerospace and specialty chemicals conglomerate that was reeling in the aftermath of a botched merger with GE. In the 15 years through his retirement as CEO in March 2017, Cote lifted Honeywell’s share price from $22 to $128 and created $60 billion in market value.
Cote, now 67, set Honeywell on a trajectory for robust growth by skillfully navigating the Great Recession that struck in the middle of his tenure. He now serves as executive chairman of Vertiv Holdings, producer of infrastructure and power products for data centers.
In an interview with Fortune this week, Cote, author of the forthcoming book Winning Now, Winning Later, talked about the strategies he deployed to ensure that Honeywell would avoid the mistakes of its competitors, including his alma mater, and emerge from the crisis stronger than ever.
Cote also served on the so-called Simpson-Bowles commission, a panel convened in 2010 that made daring recommendations on curbing the mountainous growth in U.S. government debts and deficits—recommendations that Congress ignored. In this interview, Cote shared strong views about how America’s fragile finances may hamper our ability to fight the next deep downturn.
The following are excerpts from Cote’s interview, edited for length and clarity.
Focus on leadership, not consensus
DAVID COTE: In general CEOs don’t think through the recession playbook well.
It’s surprising how often a leader will panic. A CEO who panics will just sit there, not knowing what to do, and try to build consensus. Independent thinking is a lot more rare than being smart. It’s amazing how many smart people you run into who don’t think for themselves; they just have a really good understanding of what other people are thinking.
In a crisis, I always recall the lines from Rudyard Kipling’s famous poem “If,” which begins, “If you can keep your head when all about you are losing theirs.” Many leaders just seek consensus in tough times. Their view is, if everybody thinks the same thing, it reduces the risk they’re doing the wrong thing. It’s a big mistake to keep making concessions to win acceptance, to get everyone onboard. What matters is getting feedback from all of your people, and then making the right decision. Instead of wasting time trying to find a solution everyone agrees with, use your powers of persuasion to motivate them to implement the decision.
Get input from everyone, not just the loudest voices
Making good decisions doesn’t mean relying on your gut and ignoring the views of your team. The difference between a manager and a leader is that a manager implements, while the leader get facts and opinions and makes a decision. Some leaders are very decisive based on what they feel, but relying on your instincts isn’t the best way to go. You need to spend time with the people to build a mosaic that’s not as pretty as a painting nor as sketchy as a sketch, but tells you what’s going on here.
Not everyone on your staff will openly talk. You’ll have introverts and extroverts, and the extroverts will wave their hands as if to shout, “Call on me!”
What I learned is that you have to call on the quiet folks. When you call on them, it gives them authority. I make sure every single person in the room is pinpointed by me to speak up, “George, what do you think?” “Joyce, what’s your point of view?” Suddenly, the people who’d stay silent felt freer to speak. One very introverted, brilliant guy would show no facial expressions when others were talking. You had no idea what he was thinking. Then I’d ask for his viewpoint, and he’d have all these facts and thought processes that were very useful to us. People participate differently. If you don’t realize that, you’ll make bad decisions only listening to the people who speak out.
Hope for the best, plan for the worst
In looking forward, especially in recession, too many leaders tend to rely on what I call the “Hopecast.” That’s looking at the panoply of what could occur and picking the outlook that’s most positive. My credo is to hope for the best but plan for the worst. Pick a plan and start executing it as if you expect the worst to happen. If you rely on the Hopecast, and six months from now, the worst happens, you’ll tell yourself, “I wish I’d picked a worst-case strategy back then. The company would be in a lot better shape today.” Setting a blueprint for success in the most difficult scenario doesn’t just apply to a crisis, but to any kind of trouble a company faces. Leaders don’t want to believe it will be as bad as some people are saying—until it’s too late.
The first priority in a recession is the same as in a strong economy: Take care of your customers. Customers remember how they got treated in a downturn. If you don’t deliver as you promised or introduce the new products or services you promised, you’ll hurt the entire company and the workers. The impact on employees and investors comes after customers are taken care of. Although customers come first financially, nothing is more important than safeguarding the health and safety of employees, absolutely the top priority in crises such as the coronavirus outbreak.
It’s also critical in turbulent times to keep investing for the future. Among the first things to get cut in a recession is usually investment in new products. But it’s those products that create a growing and vibrant company, and they need to be protected. Honeywell roared out of the Great Recession because we kept investing.
During a recession, think about the recovery
Deep in a recession, most people don’t want to think about the future. They’re so beaten-down that they’re just trying to get through this week. They keep a short-term focus as opposed to thinking about what happens further out. They should be asking, “How can I handle recovery and what will it look like, and how do I capitalize on the recovery?”
In the Great Recession, a lot of finance guys and economists were saying we’d have an L-shaped recovery. We’ll have slow growth or no growth forever. My view was, that may happen, but likely not. I was struck by what an economist said. His view was, the way you go into a downturn is the way you’ll come out. To me, that made a huge amount of sense.
If sales in a business unit fell 2% to 3% going into the recession, it’s likely that the business will come out growing at 2% to 3% as it recaptures lost sales. That size bounce-back isn’t difficult to handle. The big problem in planning for the future happens when, say, a division’s revenues drop 25%. That economist’s rule applies there too. You can forecast that business will snap back in a sharp “V.” A 25% decline is tough to manage. But the 33% jump in sales in the recovery that simply recoups what you’ve lost is also hard to manage.
At Honeywell, we had situations with 30% to 40% declines. So during the financial crisis, we thought differently from the crowd. We assumed we’d have V’s out there, and planned on what to do to accommodate those V’s. Our assumption was that if it’s a V in, it’s a V out. In our aerospace spare-parts business, we suffered an immediate 25% drop in sales at the start of the Great Recession in 2008. In commercial construction, we saw a much smaller drop, so as we planned for recovery, we didn’t see a 10% increase there.
Hence, we had to make two sets of plans. First, to reduce costs as much as possible to weather the recession. Second, to ensure that we placed the cuts strategically to maximize our strength entering the recovery.
Keep workers employed for the rebound
Let’s look at how we handled the two categories of expenses, labor and materials, in different ways. And we handled them in different ways depending on whether the business declined gradually, or steeply, meaning a V was coming in the recovery. On the worker side, we did very few layoffs and no cuts in salaries. Instead, we relied on furloughs. In the businesses suffering huge declines such as aerospace parts, we told workers to stay home for a week or two a quarter, or even more. In less-stricken areas, it might be less. That amounted to a reduction in pay, but they could get unemployment insurance for the weeks they missed.
Why did we use furloughs instead of layoffs? The method was flexible. We didn’t need to predict how bad the recession would get. We could adjust our costs week by week. Layoffs require a lot of costs that offset most of the savings, and limit flexibility. With the WARN Act and severance (generally one week per year of service) you incur costs with no benefits for six months. It takes you six months of savings to recoup those costs. Your return is the three to six months when you then try hard to hire for all the open positions and have to train new people.
Now the recovery starts. You’ve laid off 10% of your people, and now you’re scrambling to find workers to replace them. Everyone else is also hiring, too. I’m a believer in the industrial knowledge base. Your people provide that knowledge, and many of them are gone. You need to train the new people. Very few companies used our approach. Instead, they relied on big layoffs to curb costs in a recession. That was the policy at GE, and it never made sense to me. The savings were minimal, and you had to hire people back in a tighter labor market.
The key was that our people never stopped being Honeywell employees. These weren’t layoffs; their jobs were waiting for them. They were waiting to return, skills intact, when the recovery began. Instead of concentrating pain on 10% of our people, we spread lesser pain to everyone.
I used furloughs to avoid another tactic many companies adopt, cutting pay across the workforce, say by 10%. It denies human nature. People don’t like being paid less for working the same amount. They view pay cuts much more negatively than furloughs. Showing up to work and getting 10% less they view as an abomination to human nature.
On the other hand, we did use reductions in benefits to everyone, [including reducing] bonuses to all management, to lower costs in the Great Recession. We reduced the 401(k) match by 50%, specifically to avoid reducing take-home pay. But we were able to restore almost 90% of those cuts in the years following the recovery.
I also made mistakes on the personnel side. A couple of times when a business was hit hard, I’d impose a blanket furlough for every part of that business. The idea was that it’s a matter of solidarity, that everyone is being treated equally. But in one case, the division’s unit in India was doing fine. They rightfully resented being penalized. I learned from that error and imposed different furloughs, that depended on how each part of a business was faring.
Thanks to the furlough policy, our employees were ready to spring into action at full force when the recovery began. That gave us a big edge over rivals that struggled to rebuild their workforces, because we raised output much more quickly and smoothly, meeting the surge in orders from customers.
Don’t patronize employees with sunny predictions
As a CEO, make sure you talk to employees about what’s happening. But don’t feel the need to give them all the answers. Never say things like, “We fully expect no more than 5% decline in sales.” People don’t handle ambiguity well, so they push you for a definite answer. They’re thinking, what kind of leader are you if you can’t tell me how long this will last? But being forthright includes telling what they don’t want to hear, such as saying you simply don’t know how many weeks of furlough are coming.
The right approach is pledging to do all you can to minimize the impact on employees while we meet the goal that comes first, taking care of customers. Saying employees should come before customers ignores reality. If you want a future for employees and investors, take care of customers first. The next issue is, How do I allocate pain between investors and employees in a downturn?
The CEO needs to strike a balance. Employees will say, this sucks, but I’ll have a job here in the future. It’s better to be direct and not sugarcoat anything. When everyone is working harder for less, you don’t call it a party, you call it a recession.
Make deals to support suppliers
Starting in early 2008, Honeywell suffered a tremendous decline in sales of spare parts for commercial, military, and freight aircraft. For the airlines, flight hours fell 6%, but the orders for Honeywell’s spares dropped 25%, as the carriers used spares in inventory to preserve cash. The fall in business cascaded to suppliers, who faced gigantic reductions in output. Seeing that 25% decline in orders, we reduced our orders to suppliers by 40%. The further down the production chain, the worse the problem became.
Suppliers were seeing 50% of their businesses disappear. We believed that orders would surge back as the recovery gained traction, so that we’d be selling just as many parts as before the downturn. But to make that happen, we’d have to ramp up at warp speed.
That couldn’t happen if we simply turned to suppliers who’d lowered their production by 50% and now asked them overnight to double production. Half of their factory floors could have shut down. If we let their production crater in the recession, they couldn’t possibly scale fast enough for us to meet the new demand when the customers began refilling our order books. We thought hard about how to solve that problem in the middle of the recession.
We went to our aerospace spares suppliers and asked, What do we need to pay you today to get first dibs on your production when the recovery comes? We tried to figure out what mattered the most to them and provide the carrot so that they’d commit future production to us. We cut deals when everyone else was running away. In some cases, we made payments in advance for future deliveries. In others, we bought more than we needed at the time, but in exchange we secured long-term contracts on good terms. In meetings, I’d say, the only organization that should be happy is the sourcing organization. I pushed the purchasing people like you can’t believe, I said now is the time to get great buys, to really show your stuff. And they did.
When the recovery came, we did much better than our competitors in shipping spares and grew sales a lot faster than they did.
You’d think every company would pursue that supplier strategy in a recession. But they seldom do. We came up with it on our own. It was the same on the labor side. For other manufacturers, the idea of layoffs was so ingrained, it was a knee-jerk reaction that we shunned.
The biggest sources of savings
All costs consist of money paid to suppliers and money paid to workers. But one of the biggest, most overlooked costs is what’s called “indirect materials.” That category consists of a crazy quilt of products and services that aren’t used to make aerospace components or chemicals. It’s things like paper, printers, mops, and fliers, and such services as cleaning, legal, and pest control. That sounds like piddling stuff, but it equaled 13% of sales before the Great Recession. During the downturn, we cut that burden to 7%. When you get everyone to batten down the hatches on indirect supplies and services, it’s amazing how fast the costs evaporate.
In a crisis, don’t take a bonus
Here’s another big mistake. It’s a case where I did the right thing, but my failure to communicate foiled the goodwill I wanted to share with employees. In the early spring of 2009, I saw that things were really getting ugly. I decided to take a zero bonus for the year. I was worried that if I told our workers, I’d be accused of circumventing our governance rules, since my bonus was technically the board’s decision, and the board could be accused of being just a rubber stamp. When workers asked me if I intended to take a bonus for 2009, I’d say that it was up to the board. That was not the answer the audience of worried workers facing furloughs wanted to hear. Employees don’t like bonuses for managers when they’re suffering. I should have told them that it’s my intent to take no bonus for the year. But I just stayed silent. And that was a big mistake.
I would advise today’s CEOs in light of the coronavirus crisis to do the same, and take no bonus. Employees want to hear that from their leaders. I wish I had sent that message earlier in 2009.
The perils of growing deficits
Sometimes in life you’re presented with two bad options. Your job is to pick the least bad. In the case of the $2 trillion rescue bill, I’d love a third option that stimulates the economy but doesn’t require a huge increase in debt. That option doesn’t exist. When President Obama proposed his stimulus act, I was front and center supporting it, saying, spend the money.
Still, our gigantic deficits and debt, and the added burden of the new package, will sap the strength needed to conquer future crises. If the U.S. had done what was needed to curb the growth of entitlements 10 years ago, we’d be in a much better position now. The size of our national debt will make it tougher and tougher to fully recover from future downturns. This time, we’re adding $2 trillion to the tab when we’re already $21 trillion in debt.
In 10 years, debt to GDP, at this rate, will explode to 130% as the baby boomers retire. What are the chances we can borrow trillions the next time, and that the world and the Federal Reserve will still support it by purchasing our debt with no ramifications? We can probably count on the rest of the world to buy our Treasuries, but we keep reducing the odds that we can make a big rescue happen. We need a much better balance sheet as insurance that we can escape catastrophes.
We will someday tackle the problem. But the two parties won’t budge until a seismic fiscal shock forces their hand. Neither wants to tell seniors we need to revamp the system. The Republicans and Democrats will wait for a crisis that galvanizes the nation. But who knows when that fiscal pandemic will arrive? We can hope for the best, but it’s better to prepare for the worst.
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