2000 Chief Executive of the Year.

You have spoken. Chief Executive readers have nominated and a peer selection committee (see "From the Editor," p. 6) has confirmed John Chambers of Cisco Systems as the 2000 Chief Executive of the Year. Why?

"He symbolizes the impact that high technology has on evolving the economy to its next generation where networking provides the backbone of human interaction," says selection committee member Aart de Geus, chairman and CEO of Synopsys.

"The Internet is shaping how we live, work, and play in ways that were previously unimaginable," adds fellow judge Bill Steere, chairman and CEO of Pfizer. "John Chambers has put Cisco on the front line of this revolution." Deloitte Touche Tohmatsu Chairman Ed Kangas sees Chambers as the "architect and engineer of a new generation company that will drive e-business into the next century."

When John Chambers became CEO in 1995, the San Jose, CA-based computer network equipment maker had 3,000 employees and $2 billion in sales. Today, it is the third most valuable company in terms of market capitalization; it has 31,000 employees and revenues of $18 billion. Cisco's total annual average return to shareholders over the last 10 years has been an eye-popping 112 percent. Its annual net income and EPS CAGR are an equally impressive 78 percent and 67 percent respectively. In short, Cisco has been a turbo-charged shareholder value engine for the new economy.

"I believe any CEO's goal is to achieve consistency of long-term operating performance and shareholder value," says selection committee member Joe Forehand, managing partner and CEO of Andersen Consulting. "Chambers has led Cisco to exceed the high-water mark in both."

But financial performance is not the full measure of leadership, according to Autodesk CEO Carol Bartz, who has observed Chambers up close and personal as a Cisco director. "Leadership is tested through difficulty and how one achieves results with others. John has never lost sight of the value of his people while maneuvering through both good times and bad."

"Having had the opportunity to work directly for John has given me the opportunity to experience his 'greatness' first hand," offers fellow judge Robert Davis, CEO of Lycos. "He is a man of extraordinary leadership who delivers for his customers, employees, and shareholders."

"The most significant strength of this unusual CEO," says Sealed Air Chairman Dermot Dunphy, "is his intense focus on developing and fostering a strong culture--in my view, the only long-term sustainable competitive advantage for any business."

Perhaps last year's Chief Executive of the Year, and this year's chairman of the selection committee, Herb Kelleher, CEO of Southwest Airlines, summed it up best. "John has never let his head forget the existence of his heart, which is why Cisco is not only a legendary story of success, but also acclaimed as one of the best places to work in America."

Chief Executive salutes John Chambers, 2000 Chief Executive of the Year.

WHY John Chambers Is The CEO of the FUTURE

Few companies have grasped the importance of Internet management better than Cisco systems, yet the company's strength isn't about technology. It's about values, culture, and an organization built around speed and change. In mastering the soft skills, Chambers, a naturally empathetic communicator, is more coach than boss-and the archetype of future business leadership.

Without Cisco Systems the Internet couldn't function. Maybe it wouldn't exist in the way we know it today. Not bad for a company that didn't exist 16 years ago. When John Thomas Chambers joined the San Jose, CA-based company as the second in command to then CEO John Morgridge, Cisco had $70 million in annual revenues, 300 employees, and a market capitalization of $600 million. Since raking the helm of the world's largest networking equipment maker in January 1995, the 50-year-old president and CEO has built an Internet powerhouse that has $18 billion in revenue, employs 31,000 people and had a recent market cap of $444 billion, ranking just behind GE'S $505 billion and Intel's $446 billion, but ahead of Micosoft's $358 billion as the world's most valuable company. Most of this increase happened on Chambers' watch.

That number will probably change many times. Only last March Cisco's market cap zoomed to $555 billion, where, in addition to the above, it briefly shoved aside GM, Ford, Standard Oil, and Microsoft to become the world's most valuable company. It took Microsoft a quarter century to hit the top. Cisco did it in 16 years.

Owing to the impact of the technology revolution in business much importance is attached to market valuation because it's a measure of investors' perception of a company's future worth. Yet, unlike most of those it has jostled aside, and despite its technological prominence, it remains one of the least known by the general public. About 80 percent of the switches and routers that direct data across the Internet bear the Cisco imprint. It also makes most of the networking gear--supercharged computers and software--that companies rely on to speed up corporate networks. Essentially, Cisco is to networks what Microsoft has been to PC software.

The firm was founded in 1984 by Sandra Lerner and Leonard Bosack, two Stanford University graduates who tried to work out a way to get the university's disparate computers to share data. The couple (they later got married, then divorced) conceived of the idea of a multi-protocol router, a mysterious black box of twisted coaxial and souped up software which allowed otherwise incompatible systems to talk to one another.

With maxed-out credit cards and an eventual $2.5 million intervention on the part of Don Valentine, general partner of Sequoia Capital, Cisco took off. Today it supplies some 80 percent of the routers that move packets across the Internet. Cisco's strength is its ability to cobble together dissimilar systems into coherent networks--all managed through its crown jewel, the Internet Operating System (IOS), which has become something of a standard. The expression "no one gets fired for buying Cisco" is reminiscent of IBM in its glory years. Virtually all of Cisco's administration, from employment applications to expense reports, is conducted over the Internet. And today, 87 percent of its customer business is conducted over the Internet, up from 42 percent in 1997.

Success frequently appears inevitable in retrospect. Contrary to popular lore, Cisco wasn't the only company hoping to become the IBM of networking. The so-called Internet wind was also at the backs of 3Com, Bridge Communications and Bay Networks among others. Unlike Microsoft or Intel, Cisco didn't have a near monopoly early on. Also, the now famous aggressive acquisition strategy--Cisco has gobbled up 58 companies in seven years at a cost of $32.1 billion (see timeline)--actually began under John Morgridge. In addition, according to Silicon Valley mythology, one must either be a founder or an engineer to have true impact on a company; Chambers is neither. Even Cisco's famed devotion to customer satisfaction can be traced to Sandy Lerner's fanatical "customer advocacy."

John Chambers is the company's third CEO, but today's Cisco bears his indelible stamp. Born and raised in Charleston, WV, the son of two doctors, Chambers and his two sisters grew up in a tightly knit family. He sang in the church choir, enjoyed fishing with his now retired gynecologist father, Jack, and fondly remembers family vacations spent on Carolina beaches. Chambers married his high school sweetheart, Elaine Prater and dotes on his two children--son, John, Jr. and daughter, Lindsay He graduated second in his class at high school despite having mild dyslexia, a learning disability he persevered to overcome through working harder and tutoring. Even to this day he dislikes lengthy written memos, preferring to communicate verbally. His presentations are almost thoroughly memorized and dynamically delivered underscoring the preacher-like flair with which he addresses audiences. As a West Virginia University undergraduate he played basketball, still his favorite sport--notably an intensive team spirited on e, and later earned a law degree from West Virginia and an M.B.A from Indiana University.

It's easy to be lulled by Chambers' ante-bellum charm and honeysuckle accent. But make no mistake. Fast-talking and energetic, he's a relentless competitor who is fanatical about putting customers first. The oft-told tale about Chambers being late to his first board meeting because he took a call from a distressed customer and made certain the problem was resolved before joining the meeting is true. But what Chambers is really selling is the culture and its values. And, ever the salesman, he directs his pitch to everyone.

Barbara Beck, senior VP of human resources, remembers when Chambers wanted to promote her from an HR director to her present position. She told him maybe he needed someone with more experience who could scale the organization. Having three young kids that needed their mom also might be a problem, she said. "Barbara," she recalls Chambers saying, "if we can't figure out how to do it for you, we aren't worth much as a company.

As he relates in the following interview, Chambers' training at IBM and his later experience at Wang were formidable influences on him. Big Blue taught him the importance of selling at multiple levels. But as Chambers described it to the LAN Times, "they forgot what got them there, and didn't have the expertise to make the equipment run better, and then got away from their application exercise. All of a sudden they were left with this limited relationship in some of their accounts which they abused."

In his recent book, Making the Cisco Connection, David Bunnell, CEO and editor of Upside Media, reports that the rigid command system is what really frustrated Chambers. "The pivotal moment came when he achieved nine out of ten self-determined objectives, and as a result, was told that he failed to meet his goal. Shortly thereafter, he began interviewing elsewhere." Similarly his experience of having to explain to frustrated employees why they were being laid off, traumatized him. "These were good people whose lives were needlessly thrown into turmoil," he says with an uncustomarily dark expression.

Even before he became CEO, Chambers set about building teams by instilling open communications. Compensation is tied to team success, as is recognition. Among the score of three story buildings that dot South Tasman Drive, the executives have the interior offices--or cubes--while everyone else has windowed spaces. In most companies it's the other way around. (Chambers' own office is also an interior space no bigger than any other executive's.) In pursuing acquisitions, the well-oiled Cisco merger and integration engine is mindful that the value lies with the talent, nor the physical assets. Interestingly, the defection rate of employees at acquired firms is lower than the annual voluntary turnover rate of 5.1 percent of all Cisco employees. (Total annual turnover is 7.1 percent.)

In its Cerent acquisition of August 1999 for example, Cisco lost only four employees our of 300. At $6.9 billion, the most expensive deal thus far, Cisco paid a whopping $23.3 million per retained employee. To be fair, the range Cisco pays per person is somewhere between $500,000 and $2 million, but it shows where the priorities lie. Cisco seeks companies developing a new technology a year or two before its launch. It incorporates the new technology as its own and with all the benefits of the Cisco brand, sales force, and market leadership behind it. It's a strategy that has thus far moved flawlessly across 15 market segments it serves. Besides, the deals consume little cash since they are done using "Cisco dollars," i.e., stock.

Chambers and his team long ago became technology agnostics. Although 70 percent of its products are developed internally, they care less about whether something is developed under its roof than whether they have the right stuff to take the marker to the next level. What happens when Cisco makes a mistake and the acquisition doesn't give it the edge it needs? Cisco is content to "eat its young," according to Bunnell who cites the case of LightStream (1994), whose ATM product line progressed too slowly and had to be pared back to allow for expansion of StrataCom's (1996) superior WAN switching technology. Given that all new employees own options, and the Cisco rule of not laying off employees of acquired companies without the express consent of the firm's former CEO, the company has turned acquisitions, a notoriously high-risk activity, into a normal 30-day business process.

It has also created an odd workplace of shiny, happy people, which has triggered the incredulity of more than one cynical observer. "Why are these people always smiling?" groused Joe Flowers writing in Wired several years ago, wondering whether the company didn't attach something Borg-like to the cerebral cortex of every Cisco employee. Then he did the math. "Suppose you are a senior systems engineer who signed on with Cisco in early 1992 with an option for 5,000 shares. If you exercised the options and kept the stock that signing bonus would be worth more than $2.4 million, enough to buy several houses--cash--even in Silicon Valley." Then there are the stock options. Microsoft may have its billionaires, but Cisco has battalions of centimillionaires.

This is not to say that everything gleams in the Emerald City. Observers grumble that Cisco makes a habit of buying out possible competitors before they become serious threats, although the company denies it uses its market power to feed on rivals. Its high market share in Internet routers precipitated the DoJ to look into whether the company had violated any laws when it approached Lucent and Nortel about splitting the market for telecom gear. Yet no charges were filed nor accusations made. Cisco has clearly learned from Microsoft's experience not to bully the regulators.

Since Cisco has moved in the direction of Internet telephony networks it is buying up software and modem start-ups. But even here observers wonder whether the company can continue to overpay as bids drive up the price of telecom equipment higher and higher. Then there is the question of what happens if the regulators restrict pooling-of-interest accounting, which critics say dilutes shareholders' interest and distorts earnings. A 177 P/E can be both a blessing and a curse. And speaking of dilution, the company is a heavy user of stock options, which under present accounting rules, are not counted against earnings. Last year Cisco employees held some 439 million outstanding options. The company reported $2.1 billion in net income in 1999, but, according to a footnote in the annual report, accounting for options would have wiped out $500 million of that.

A greater challenge to Cisco may come in the form of start-ups making equipment for the next generation Internet. Many use an optical technology, which analysts say is way ahead of Cisco's. Sycamore Networks, for example, makes equipment that allows carriers to easily switch wavelengths of light, each carrying huge amounts of data. Juniper Networks has already established leadership in an area Cisco wants to dominate--ultrahigh capacity Internet switches. Corvis has created a system that shoots photons long distances without any electronic regeneration. The next round of competition in these sectors will be tricky since there aren't all that many other players that Cisco can acquire and integrate as its own. Also, both Nortel and Lucent have popped the clutch on their own acquisition strategies in an effort to win the gigabyte race in optical data transmission.

For his part, Chambers believes that Cisco, which led the first wave of networks, will lead the next generation of network convergence, be it wired or wireless. Interestingly, he doesn't see himself as the best CEO in the world, all media attention and stratospheric growth notwithstanding. The competitive edge lies not with the company's technology, acquisition skills, or business process, he will tell you, but with Cisco people. When he talks about the "soft" stuff, Chambers' manner rakes on a hard, deliberate edge, as if to say, this is serious. While borrowing a little of Andy Grove's sense of paranoia about competitors, Chambers, whose ambition is to build the most "influential" company since Jack Welch's GE, thinks it can only be attained if Cisco's people continue to believe in themselves and in its vision.

And he may be right.

With your accelerating success, one senses that you're eager to have the company seen not just as the networking plumber, but as a spur to the entire Internet revolution. So what's the next generation of this--and what's next after what's next?

First, we were very proud to be the plumber of the Internet, and it was a unique position to be in, to be synonymous with the Internet was a tremendous accomplishment as well as very good for our marketing position. It was only once the customer changed from talking about plumbing to talking about business solutions that we changed our company.

In January of 1996 something happened that shocked me. Two customers in New York City said, John, I want to use you end-to-end. And I had no idea what end-to-end meant. And what they were saying is they wanted our products to tie together. And I said, don't you want best in class in each category? And they said, well, you've already got us in probably eight or nine out of our top 10 or 11 categories. If you'd either build or buy one of the others, then we would like to go with you and it isn't so much that the product's what we're after. We're after rime-to-marker, cost of ownership, and the applications.

After we did that, they began to talk about a single fabric for data/voice/video, so we made all of our products capable with that, and now we're often talking about how you transition a company over. How do you develop a culture that thrives on change at this Internet pace? And how do you get the company comfortable with empowerment and both the advantages and challenges that go with it?

So what is the next wave of the Internet revolution as you see it?

The next wave will be data/voice/video combined with the business applications. Today there are pretty much separate applications, often running over separate networks. It's combining those together and really getting the payback of those applications that has become key.

Most of us are pretty poor typists, and I'm no exception. I type 15 words a minute with a lot of mistakes, and I can talk 200 words a minute. And so it's much more effective for me to communicate to our employees, customers, and anyone else in a combination of data/voice/video that is most appropriate and how they want to receive. So we'll have some of the features of e-mail as far as being able to view who we are going to talk to and what sequence and priority, but we will have the capability of selecting whether to read an e-mail or listen to the voice or video and voice combination.

What are some of the applications that we're going to see?

The one that has all the sizzle at the present time is e-commerce. It was a 60 percent increase in productivity for me because my customer support over the Internet, where I support the vast majority of my customer information including trouble requests--I got the 200 percent increase in productivity and saved probably $600 million in that application alone.

The virtual financial close is another application. It allows me to know where we are at any point in time and to manage business better at the top. But the real value of a virtual close is that you can empower throughout your entire company. And it allows individual contributors or first-line managers to make decisions that used to have to come all the way to the CEO three months later. So I can see profitability by product line, changes in margins, which may be due to component pricing, which may be due to competition, which may be due to one geography discounting too much--or maybe it's a temporary blip, that I might have normally seen after the quarter is over. Now the first-line manager can see it on the day it occurs and, by the way, so can I.

How is your job different as a result?

Ninety percent of my communication with the employees, customers, and others, is over the network--everything from e-mail and voice mail to data, voice, and video combined capability. And we allow employees to pull it when they want to listen to it as opposed to saying you must listen to it first thing tomorrow morning. I could send messages blanketly if I wanted, hut that's a tremendous waste of time and it forces everybody in the company to read it first thing the next morning. That's not productive. There may be an occasion when I want that, but I'd rather them say we just made an acquisition, here's the update on it. It will move from a prescriptive of, here's what you need to know, to a subscriptive type of environment where you will say, here's what I want to know. That's how companies will be run.

What about messages to you? One fear CEOs have is that they'll be flooded with e-mail and won't be able to cope with the communication overload.

The answer is, all of us are on overload in terms of how we get the information. But it's a lot easier for me to get an e-mail or a voice mail and answer in 30 seconds than it is for those people to poke their heads in the office and take 10 minutes. So it's a much more effective way to communicate. Secondly, I can prioritize either by message topic or by sender. Third, I let people know that I'm not going to be able to communicate on every email. But to customers, I will.

How many e-mails do you get?

Probably between 100 and 400 e-mails a day and voice mails run between 50 and 120. But I have a process that, through technology , automatically prioritizes issues and gets the issues that need to be addressed to the right people. And over time that process will get better and better.

Do you sit down and type these e-mails yourself? And if so, why?

Just to show the people that I do do it. What I need is the voice interface, and so I communicate on the voice mails much more effectively. Universal messaging is where it can come in by data or by voice and I can communicate back to you in whichever fashion I want. Now, if I'm communicating with an engineer, I'd better send an e-mail; if I'm communicating with a sales force, I probably should send it by voice mail. And what the future will allow you to do is use whichever combination you want. So if you're driving, you probably don't want to be typing an e-mail. And I'd much rather communicate verbally, where I can go at 10 or 20 times the speed, and secondly I can hear the emotion. So for me that's an important issue. Having said that, there are segments of my population that would never even find a voice mail, engineers, for example, so I'd better communicate in the way that they're receptive to.

Recently, Cisco briefly edged out Microsoft as the most valuable company on the planet in market capitalization. A number of people interpreted this as the beginning of the end of the PC's death grip on the technology industry. What's your view?

I think that you're going to have intelligent edge devices that access the Internet, the majority of which will not be PCs. PCs will continue to grow well, but you're going to have a lot of devices from phones to TVs to hand-held terminals of all different types to microwaves, to refrigerators, to your piano accessing the Internet.

Does this change your plans in terms of what Cisco does or does not do?

I learned the hard way at IBM and Wang that you don't fall in love with the technology. So whatever the customers say they want to do, we build. Take transport, for example. Whether it's optical, it's fixed line, wireless, or old twisted wire pair going into the home, we'll transport the information whichever way the customers want it and the way it will get the most efficient transport at the right price--so it means not just falling in love with the technology. I've learned the hard way what is needed there. I laid off 5,000 people at my last job. I'm not gonna do that again.

So if routing and switching were no longer really what customers wanted, you'd change all of that tomorrow?

Yes. Hopefully I would have changed it yesterday. We were a router company. You can imagine the trauma when we became a switch company.

So what's your core competence?

IP is our core competency. Our understanding of networks, how to make them work effectively and what applications go with them, is our core competency. Our core competitive advantage is our people. When you acquire a company and you pay between $500,000 and $20 million per retained employee, make no mistake about what you're acquiring: future technology. It's the people. And we share the stock appropriately. If somebody would have told me I was going to give 42 percent of our stock options to non-managers, individual contributors, I would have said that's socialism. But in fact it's the ultimate form of capitalism. It really aligns the goals of the whole employee base cowards a common purpose.

Respecting that options are a useful incentive, is there a danger about pushing the envelope?

If shareholders are going to approve the giving out of slightly under 5 percent of the stock per year to employees, then they expect dramatically better returns than the market plus the 5 percent, and that's clearly understood by the employees.

In terms of the growth in the marketplace, this last quarter, earnings-per-share was at 58 percent. Now, we aren't going to be able to grow at that, but if we grow at 30-to-50 percent EPS growth, then I think our shareholders are going to be extremely happy over the next decade. Time will tell if we can execute on that, but the market won't be our problem.

So you think you can sustain this pace?

It's important to be realistic about what is your available market. That's one of the many things I've learned from GE and Jack Welch. The question isn't how well did you grow; it's how well did you grow versus the market availability. We're in a market that, with or without Cisco, will be $250 billion by 2004. So the question is, what percentage of that do we have? And are we able to get our traditional 25 to 70 percent market share? If we do it becomes pretty exciting.

Options aside, how do you as a CEO motivate and retain managerial talent?

As people become financially independent, they actually are better leaders. They're more difficult to lead, but they will make the decisions for what they believe is right as opposed to because they've got to get this paycheck and they're going to keep their mouth shut even though they think there's a better way of doing it. So financial independence helps the company.

The key is how do you identify the next motivating point. How do you get your team to rally around changing the world, the way it works, lives, plays, and learns. How do you get your leaders rooted to their teams--because the number one reason a person leaves is, they see their leaders leave. One of the hardest things you do as a leader is to make changes in management; yet we all know that if you don't, you'll get your company into real serious trouble and your customers and employees will suffer if you don't.

My real issue is retirement. We operate at an Internet pace at Cisco, so what I have to watch with the employees isn't so much their going to our competitors as just saying, I'm gonna retire at 40 or 45.

What was formative in your own outlook on life and business and how people work in business?

Both my parents were doctors and early on they taught me and my sisters that the equalizer in life is education. So I got my undergraduate degree, my law degree, and my M.B.A. degree with the full intent of working for a company and then eventually running my own. I just thought it would be a much smaller company.

As you go through life you learn from your successes, but probably more from your mistakes or your challenges. Early on I had a mild form of dyslexia which I did not talk about because I thought it was a weakness and you want people to know you've got weaknesses--at least I didn't think you did. And once you overcome a problem like that, you realize you can overcome almost any hurdle and then, over time, you do. You build the confidence and develop your leadership style. Then as you go through companies, you learn from what they did well and from their mistakes, and as a leader, you learn from your own mistakes. This might surprise you but at Cisco, almost every mistake I've made has been because I moved slower than I thought I should have.

You've acquired some 58 companies in seven years--a breathtaking rate of acquisition. Can you keep this going? And how are you able to get past the problems that derail most mergers?

First, we go in with our eyes wide open, realizing that almost every acquisition we studied failed. Secondly, as basic as it sounds, understand what you're getting in an acquisition and protect it at all costs, and then come up with a set of rules--like you don't combine companies that have a different vision of how the industry's going to evolve because they'll hit heads forever. Don't put cultures together that are dramatically different.

With everything going so well, isn't this the point where you have to be worried about overreach?

There's always an intergalactical battle star about to destroy Cisco. And so, as unusual as this sounds, I actually jump back and forth from one side of the scale to the other. If our confidence starts to get a little too strong, I jump over to the paranoid side and say, here are all the things that can go wrong. If our confidence starts to shake a little, I jump over to the positive--here are all the things that can go right. I balance back and forth.

And the time to change is when things are going well. So if you ever see us thinking we're invincible, that's the time to sell the stock, because we have lots of things that could trip us up and we know it. But it's that healthy paranoia and a willingness to address it that allows us to be successful.

What would you like to have accomplished? And what's next after Cisco?

The most important thing to me is my family. And that doesn't change. My wife of 25 years is a perfect balance for me. When I get down, which I occasionally do, she brings me up. And on rate occasions if I get a little bit too confident she brings me back down to earth, too (laughs)--very quickly and abruptly. I've got two kids I'm tremendously proud of and they are my life; so my family is first, second, and third in terms of my priorities. And when I'm at home, as my wife reminds me when I walk in the door, I'm not the CEO anymore. So at home, I'm like anybody else. Carry out the garbage, change the lightbulbs, and so on.

John Chambers changing lightbulbs?

Absolutely. And what will I do after this? I will teach when I retire. I think giving back to the community is the right thing to do. It'd be terrible to be perhaps the most successful company in history and not give back. So I'm not going to go work for another company after Cisco. When I retire from Cisco, I'm done with the business world and I will probably go teach. Young people are so much fun to interface with. And often they don't care what you've done in the past. They want to see what can you bring, and the ability to influence young minds, not only in terms of opportunities, which the Internet offers, almost unlimited, but how do you teach culture and how do you teach ethics and how do you teach integrity earlier on. To do that would just be a blast.