Interview with Gerard Kleisterlee, Philips

“A crisis can rally people. It can awaken their fighting spirit and draw them closer together.”

Even such stalwarts of the Dutch economy as Philips are now feeling the effects of the crisis, but CEO and Chairman Gerard Kleisterlee considers himself and his company well placed to successfully deal with the challenge, not just in terms of the Philips product portfolio but also of the inner strengths of the organization. Talking with THE FOCUS, Kleisterlee describes how tough times can have a motivational impact on the workforce.

The Focus: Gerard Kleisterlee, how do you keep your people motivated in times of crisis? Is it actually possible, and if so, does it call for different methods than when the going is good?

Gerard Kleisterlee: I don’t think we have to address people differently, but probably we have to communicate with them more intensively. Particularly in difficult times, in times of uncertainty – and the external economic climate is creating a lot of uncertainty, while the essential adaptations within our own organization can add more – as a leader you have to be more visible, whether it’s by communicating via the Internet, or via direct employee meetings. That is what is different. It is the intensity more than the style.

The Focus: How do you communicate tough messages?

Kleisterlee: If management adopts “salami” tactics – announcing the bad news one slice at a time – that can create a general level of uncertainty among employees. Levels of anxiety rise as people wonder where all this is going to lead. At this point, as the CEO I have to be clear about the position of the company: Is our strategy robust? Can our balance sheet withstand a period of less healthy results? Are our products and services going to remain attractive in the future? If you can say “yes” to all of these questions and communicate that effectively throughout the company, then a crisis can rally people. It can awaken their fighting spirit and draw people closer together.

The Focus: That presumes that people have a banner around which to rally; that you have established a strong common vision in the past on which you can now build.

Kleisterlee: Yes, absolutely. And that’s exactly what we have done over recent years. In 2007 we communicated “Vision 2010,” which is a four or five-year plan. Of course with the economy now slowing down we had to adjust the financial ambitions that were part of the plan, but what does not change is our vision. And this vision excites our people now even more than it did before: building the leading company in health and well-being. We even have the feeling that as times get worse, the more the desire for health and well-being grows on all fronts. That’s why I say that if the strategy is robust you will stay the course and you can rally your people even more effectively. Sure, we will have to make some organizational adaptations, but that’s more about changing our tactics, not changing our strategy.

The Focus: How do you get people to “buy in,” especially your executives and top talent, so that they really burn for this vision?

Kleisterlee: It needs to be a vision that captures the hearts and minds of a critical mass of your organization, and then everybody will get on board. Strategy is a journey of discovery, not something that is created by masterminds in ivory towers. It starts with looking at the resources and assets that the company has and goes on to identify and explore the opportunities that you might see, before finding out which of these opportunities generate the most excitement. That requires a dialogue with the organization. You talk with your core team; you engage larger groups of people; you engage the high potentials in your organization. You get feedback on things that really catch on with people. You work on that and gradually it galvanizes into a strategy, a vision that we share. And because it needs to stay fresh, it will continue to evolve, and through that process you automatically create a lot of “buy in.”

The Focus: What arguments would you use to encourage executive talent to join your company; how would you brand your company as an employer?

Kleisterlee: The good news is that I don’t have to encourage them; they come of their own accord. So there must be something about Philips that attracts and excites them. I think it is the way Philips has positioned itself; the choices we’ve made around the theme of health and well-being, which is very much linked with some of the major developments in society wherever you go. Healthcare is a big issue and it remains the case that not everybody has equal access to good quality healthcare. Energy is another issue, and so is energy-efficient lighting, too. And we’ve developed a sense of simplicity in a complex world. Philips comes from a technology background – something that most people equate with complexity. Our solutions today may contain a lot of complex technology, but the user experiences them as something simple and easy to operate. The changes in the portfolio that we have made, the move downstream to focal applications, to add an increasingly strong marketing dimension – all of that has created a different buzz around the company. Both on the professional and the consumer side we’re doing something that people feel is relevant. If you don’t just sell cool gadgets, but introduce things that enable people to live a healthier and more fulfilled life, that in itself boosts motivation. All of this resonates with the people who work for the company. So we have absolutely no problem in attracting all the talent we need.

The Focus: How much latitude, how much decision-making freedom do you offer your high potentials?

Kleisterlee: Entrepreneurship in a large corporation always is a challenge to channel the right way, because we need to strike a balance between maintaining control of a large global operation, and giving people the freedom they need to use their talents fully and make a difference. Entrepreneurship in a large corporation is always entrepreneurship within a framework; within boundaries. Over time we have been able to better formulate those boundaries and make them less restrictive, and to attract people who understand the framework, find sufficient freedom to operate within it, and still make a difference.

The Focus: You mentioned adding an increasingly strong marketing dimension at Philips; how did you recruit or build up the skills that you needed?

Kleisterlee: We upgraded the importance of marketing skills in the curriculum vitae of any new business leader we appointed from inside or outside the company. There was a long period of time at Philips when the people that were promoted to senior positions were people who originated from the company’s largest assets, which in those days were the factories. People with a background in industry became the business decision-makers. At a time when the portfolio of the company was focused on upstream technology, when process management was important, when capital expenditure decisions or technology decisions made the difference going forward, that was all understandable. But today, as I said, we focus our portfolio on downstream applications and on making a difference for the customer. That is where the money is being made or lost. So we have made marketing capabilities a necessary part of the qualifications and experience of the business leaders we select. On top of this, we have made it part of our reward policy – and thus clearly visible to the entire organization – that understanding your customer well and driving the organization from the perspective of customer needs is not just something we talk about, but also something we reward.

The Focus: What other factors influence executive compensation at Philips?

Kleisterlee: We used to have a system where the annual incentive was linked largely to a person’s own area of responsibility. Over time that evolved into a system with a sort of staggered accountability. Now we have moved to a system where we evaluate all our executives in two dimensions – the “what” and the “how.” Do you as an executive have outstanding, good, or unsatisfactory results in terms of outcomes? And are you a role model, a valued player, or somebody who needs to improve in terms of how you go about things? The answers to these questions produce a simple three-by-three grid, with which we do a “forced calibration” on our executive population. The outcome determines to what extent people participate in the annual bonus payout. But how much money there is available for the annual bonus payout is determined entirely by Philips results.

The Focus: One item that is frequently mentioned when it comes to the causes of the current crisis is that financial incentives such as bonus payments are not sufficiently geared to the long term. Have you made any changes to make your incentive schemes more sustainable?

Kleisterlee: We’ve been taking the long term into account for some time now. We have three remuneration components: the base salary, the annual incentive as a factor of the base, and a long-term incentive plan, which is a combination of stock options and restrictive shares. And within this long-term incentive plan there is, for example, a minimum holding period of three years for the shares, although we also offer an incentive to hold them longer. Actual management practice is that we never exercise our options, we let them expire and then we buy them. Also, we only accumulate restrictive shares; we don’t trade them, so that we build up a portfolio. That way we have a strong interest that is aligned with the long-term interests of the company and its shareholders.

The Focus: That doubtless sends out an important signal within the company. On what core values is good business behavior based at Philips and how do you cascade these values down through the organization?

Kleisterlee: In 2001/2002 we updated our values. We describe them today as the four “Ds” – we delight our customers, deliver great results, develop our people, and depend on each other. Although we have not formulated any typical values, things like business ethics, integrity, honesty, and so on are all part of our business principles. We believe that they are self-evident. But the four “Ds” are our transcendent culture, be it in Asia, the United States or Europe.

The Focus: As you use these four “Ds” to drive business behavior worldwide, don’t you find that, in fact, different things motivate people in different parts of the world – different cultural circles?

Kleisterlee: No, that is not my experience – at least not where the four “Ds” are concerned. If you look at the middle two “Ds” in particular – we deliver great results; we develop our people – these are fairly universal statements. No matter where you are, great results means we gained market share; we outperformed the competition. Everybody wants to be part of a winning team; that’s what motivates people. That’s why everywhere the company leaders and – cascading down – all the responsible executives have to be able to set goals in such a way that people take this winning spirit on board.
Developing people is, of course, a great way to motivate people who join us with ambition. It’s a very visible form of support. They can clearly see that they are being offered development opportunities both on the job and in separate training and coaching sessions. They can clearly see that we invest in our people. Making this investment visible is one area in which we’ve made a lot of progress over the past few years.

The Focus: What would you say is the most effective non-cash motivator?

Kleisterlee: Without a doubt: recognition. I don’t want to generalize about our Calvinistic Dutch tradition, but in the past we were always very moderate when it came to recognition. Today we have developed more recognition mechanisms, we have simplicity awards, we have customer awards and so on. Recognition is another factor that transcends cultural boundaries, although the implementation may be different.

The Focus: Our impression is that the younger generation in particular works to a different set of values – they want to do something meaningful; something that makes a difference. Does Philips respond to such needs?

Kleisterlee: I’m sure there are geographical and cultural differences in this respect as well. In the emerging economies, young people too take their guidance from the more conservative principles of hard work and meeting targets. It is above all in the industrialized nations that the younger generation is seeking a new work-life balance and this is something that we try to accommodate wherever possible. On the production line, things still need to be rigorously organized. For our knowledge workers, by contrast, there is much more opportunity for freedom in terms of time and place. Particularly with modern technology, work is not tied to a physical location and a particular time of day, and we are actively facilitating this flexibility. We don’t measure people by the number of hours they put in, but by their output.

The Focus: This sounds like part of the “entrepreneurship within boundaries” that you spoke about earlier.

Kleisterlee: The focus is on the entrepreneurial mindset, not on the boundaries. First of all we want people to have challenging assignments with which they can form an emotional bond, so that they will invest everything they’ve got in their work, and will do so voluntarily, not because they have a contract. If somebody has his own company, he does whatever it takes to realize his dreams, and it’s that kind of engagement that we want to create within a large company. One way to do this is by entrusting people with inspiring assignments, and right now we’re trying to get the tools in place to facilitate this. Incidentally, that’s where efficient strategy comes in: You need a shared vision of the corporate strategy, because that’s what creates the alignment, and if the alignment is there then you have a framework within which people can enjoy more freedom. If we are aligned on goal and purpose; if we are aligned on values; if we are aligned on vision and strategy, then you can rely on people doing the right thing without an extensive set of controls.

“The emotional side of the people equation has become more important over time.”

The Focus: When you look at how Philips has changed over time and with it the essential skill sets and maybe even personalities of your employees, what is the biggest difference from the way things were in the past?

Kleisterlee: I think the emotional side of the people equation has become more important over time. As a company with a tradition of technological innovation, our culture tended to be more geared towards the rational side of people. Today our product designers are working on issues like: How do we want to live tomorrow? How is society organized? How do we interact with each other as individuals? All of that concerns the emotional side of people. In the past, for example, we would develop a superb machine for a CAT scan or an MRI examination. Today we also focus on how to make what is often a nerve-racking experience more pleasant for the patient. That is thinking from the people side, and those skills have become more important. If you want to excel on the customer side of the equation, forging an emotional bond with the customer is today more important than making a rational connection.

The Focus: Philips has already come a long way during your tenure. Have you personally also changed in the course of that journey? What drove you when you joined the company and what drives you today?

Kleisterlee: I have always had a driving interest in innovation; a curiosity about anything new. I graduated as an engineer and started out in manufacturing, which was already atypical, because as a graduate I should have started in R&D. Then I wanted to move to marketing and sales. Today that is not only possible at Philips but expressly encouraged. At the time, it was impossible. If you worked in sales, you started as a junior sales person and ultimately you became a sales manager. You stayed in sales for the rest of your working life. Similarly, if you started work in a factory, you became a factory assistant and ultimately a factory manager. When I applied to switch to sales, they told me I knew nothing about sales. To which, of course, I replied “That’s why I want to go there; I want to learn,” but apparently at that time people had a different concept of learning than we have today. My curiosity about new things has helped me to put a focus on marketing. I was never in marketing, but I understand its importance. I want to learn about it and I want to bring in people who understand marketing and can take Philips to a different level of performance.

“Great team leaders are not necessarily great team players.”

The Focus: What are your personal core values?

Kleisterlee: Integrity and walking the talk. In our organization it has always been the case that people knew exactly where I stood and what I expected. There was no ambiguity about it, but a clarity of purpose and that doesn’t change. You embrace those values when you are a factory assistant, and you do so when you are CEO. What changes over time is the way you put the different aspects into practice. Over that same period, Philips values have also evolved, although not really changed. While we have always had a very people-oriented culture, what we’ve added to that during my tenure is a single common Philips mindset, while in the past it was still a little bit too much everybody for him- or herself. There is only one Philips; that’s what the customer sees, that’s the view we need to take, and when we come to work, we work for Philips. That intention has grown stronger over recent years.

The Focus: What do you consider your most rewarding experience in professional life?

Kleisterlee: That’s not an easy question, but to take a recent example, one very rewarding experience for me was the creation and the launch of “Vision 2010,” because it was the result of a genuine team effort of a quality that I believe is rare. Great team leaders are not necessarily great team players. “Vision 2010” was the result of some truly great teamwork, despite the fact that the composition of the team would change from time to time – and that was something I found intensely rewarding.

The Focus: And what would Gerard Kleisterlee the private individual call a very rewarding experience?

Kleisterlee: A whole lot of things occur to me, but maybe one of my best personal experiences was taking part in the legendary classic car race, the Mille Miglia, a few years ago in Italy. What I liked most about it was that here, at last, was a chance to break the rules: Even the police were urging us on, shouting “faster, faster!”

The Interview with Gerard Kleisterlee in Amsterdam was conducted by Karena V. Strella (left), Egon Zehnder, San Francisco, Ulrike Mertens, THE FOCUS, and David Majtlis, Egon Zehnder International, Amsterdam.

Gerard Kleisterlee

“Who is Kleisterlee?” the media worried when Gerard Kleisterlee took up the reins at Philips in 2001, although in fact he is a dyed-in-the-wool Philips company man. Born in 1946 in Ludwigsburg, Germany, Kleisterlee attended a Jesuit school before studying electrical engineering and going on to join Philips, where, like his father before him, he has spent his entire career. Gerard Kleisterlee joined Philips’ Medical Systems division in 1974, where he held a number of positions in manufacturing management. After moving into general management in various roles, in the 1990s he moved to Asia, initially to Taiwan and then to China, where he was responsible for all of the company’s activities. Kleisterlee once stated that this external vantage point made clear to him the extent of the territorial in-fighting that had plagued the company for decades, despite numerous attempts at reorganization. He returned to Europe in 1999 as CEO of Philips’ Components division and was also appointed a member of the Group Management Committee. The following year, he became Executive Vice-President of Philips and a member of the Board of Management. On April 30, 2001, he was named President & Chief Executive Officer of Philips and Chairman of the Board of Management and the Group Management Committee. After taking up these offices, Kleisterlee was finally able to shape the numerous fiefdoms into a single, unified enterprise. He tore down fossilized structures and replaced many of the top executives. Today he is the only Dutch member of a very international board.

ROYAL PHILIPS ELECTRONICS Sense and Simplicity

In 1891, Anton and Gerard Philips established Philips & Co. in Eindhoven, the Netherlands to manufacture carbon-filament lamps. By the turn of the century, the company had already become one of the largest producers in Europe. Philips was involved in the first experiments in television and became the world’s largest radio producer. Science and technology underwent tremendous development in the decades that followed, with key breakthroughs in the processing, storage, and transmission of images, sound, and data. Then, in the early 1990s, this kingpin of the Dutch economy stumbled towards financial ruin. With CEO Cor Boonstra at the helm, Philips underwent major reorganization to return it to profitability, more than halving the number of business areas. Almost 100 subsidiaries were sold and many production plants closed. Moving into the 21st century, Philips continued to change and grow. Under the aegis of Gerard Kleisterlee, in 2004 Philips unveiled its new brand promise of “sense and simplicity.” The sale of its semiconductors business in 2006 marked a milestone in the shift from cyclical activities to an applications-focused company. Structures were again simplified by forming three divisions: Healthcare, Lighting, and Consumer Lifestyle. In 2007, with a workforce of 124,000, the company posted sales of EUR 26.8 billion. More recently, Philips too has felt the impact of the global crisis; in the final quarter of 2008 the company posted its first negative earnings for six years.

PHOTOS: MARTIN LANGHORST