Growing Honeywell from $20 billion to $120 billion with David Cote

Episode 407, David Cote

David Cote

David Cote is Executive Chairman of Vertiv Holdings Co, a global data center products and services provider. Previously, as CEO of the industrial giant Honeywell, he grew the company's market capitalization from around $20 billion to nearly $120 billion, delivering returns of 800 percent and beating the S&P by nearly two and a half times.

Now as an author, in his new book WINNING NOW, WINNING LATER: How Companies Can Win in the Short Term While Investing in the Long Term (HarperCollins Leadership, June 2020), Cote rails against today’s trend of “short-termism” and debunks the notion that pursuing long term business growth must come at the expense of short term gains. Drawing from his remarkable turnaround case study at Honeywell, WINNING NOW, WINNING LATER shows how to run any organization, division, or team, whether a non-profit or for profit, with a new kind of rigor and balance. 

Below is an auto-generated script from the interview:

Jess: Today on the show, we've got David Cote. David, thanks for making time.

[00:00:04] David: fun to be here.

[00:00:06] Jess: So, I really want to talk about your new book Winning Now, Winning Later. It's just about out. But for people who don't know about your time as CEO at Honeywell and other things, can you, can you give people a little bit of a scope of, let's start with the Honeywell.

[00:00:21] We can talk about other things too, but. What was like, what was the market cap of Honeywell when you came in versus when you left? And was it 2017?

[00:00:30]David: You know, no, actually I left as Chairman in 2018 so if you go from 2002, market cap was around 20 billion and we were considered a just, we'll be gone kind of company.

[00:00:45] And I can remember, on TV them saying, we're not sure that this company can be turned around and if it can, this is probably not the guy who can do it. Because he didn't come in the first tier on the GE succession race. And he wasn't even the first choice to run a Honeywell. And as bad as the place might've looked externally, it was even worse internally.

[00:01:07] And 16 years later when I left as chairman. The company was worth about 120 billion in market cap. We had, 800% total shareholder return, which is about two and a half times the S and P 500. So not a bad ending for what was considered a inauspicious beginning.

[00:01:30] Jess: Yeah, I did. I heard about, folks that Wall Street Journal coming back sometime and saying to you, Hey, all those things we said to you were, “we’re unfair and we're sorry” but not willing to print a retraction about a test.

[00:01:43] David: Wow. How the heck did you hear that? That's true. I had a meeting with the editorial board about, I don't know, five or six years into my tenure, and I was just sitting there waiting and one of them turned to me and said, I went back and read what we wrote about you when you first got there, and.

[00:02:02] We were not kind. And I apologized. I said, Oh, would you put that in writing? And they said, no.

[00:02:12]Jess: The excitement. well, tell us about this new book. What's the premise?

[00:02:17] David: Well, I guess two things drive it. They're kind of connected. Is. One of the things that has bothered me over the last three or four years is all this discussion of short termism and how companies aren't long-term focus.

[00:02:32] They're too short term focused. Then they always make it sound like it's a choice. You're either short term focused or your long-term focus, and the way we ran Honeywell was with this concept that said. Success is about accomplishing two seemingly conflicting things at the same time. So as examples, do you want low inventory or do you want great customer delivery?

[00:03:01] You want both? You want high prices and margin rates, or do you want big volumes? Again, you want both. You want the people closest to the action, empowered to make quick decisions. Or do you want to have good controls? So nothing bad happens again. You want both comes to the same thing. When do you want good short term results or do you want good longterm results?

[00:03:26] The answer is you want both. So we did both at Honeywell and I thought it would be worth just kind of explaining how we went about and did it. So we have chapters on how do you think about your. Own intellectual approach to things. We call it vanishing intellectual laziness. How do you focus on process portfolio, culture, leadership, a recession transition, a number of areas where I think it's just worth people starting to think differently.

[00:04:02] It's too easy to just say, well, the markets won't let me do it, or my boss won't let me do it. And if you approach your. Job intellectually differently. You can come to a very different place that can pay off very well, both in the short and long term.

[00:04:21] Jess: So when you think about someone who, you know, they're listening to this and they're saying, that makes sense to me.

[00:04:29] I don't think I thought about it that way. And they want to start, you know, like we want to start reprogramming our brain. We want to be able to. Maybe build new ruts, new habits, that direction? What's, what's the first step on something we can focus on?

[00:04:45] David: Well, the first thing I would do, and we had this problem in Honeywell, I'm not every company has it, but I would first say, okay, have I scrubbed down my accounting and business practices so it reflects what's real?

[00:05:03] Okay. Think of it this way, is, am I having to. Bookkeeper, my way to making the quarter. Do I have to load distributors at the end of the quarter in order to make my sales number and do I do that routinely? And I'm just kind of forgotten that that's really an aberrant behavior. Am I having to cut price at the end of the quarter or gift terms in order to make it happen?

[00:05:30] Am I. Going to suppliers and saying, tell you what, I'll give you a longterm deal if you make an upfront payment so that I can record it as income. Am I doing odd things? Like if I run a plant, am I cutting the trees to sell? yeah. So for timber, in order to make a number, if you're doing any of those kinds of things, get rid of them first.

[00:05:54] That cause otherwise you're not dealing with reality. And as I like to say. The accounting system is your primary information system, and if those numbers are not right, then you're going to make mistakes, you're going to make a bad decisions. The second one is I would look at it and say, okay, what kind of seed planting should I be doing?

[00:06:18] And some of the seeds come up a year from now, some three years from now, five years from now. But what are the seeds that would make sense for me to plant today and figure out what those are and what will it cost to do that, to make it happen before you start to see a return, now comes the tough part.

[00:06:40] Now you back into, alright, I still need to make some numbers to keep my boss or investors happy. How do I do that and fund these programs. And that's when you have to really start looking at your business differently. And it's why you hear me talk a lot about holding fixed costs constant. If you look at variable margins in any business, they're in the 40 to 70% range.

[00:07:10] And if you could just hold your fixed costs constant, which are anywhere from 30 to 50% of any business. It's amazing what the follow through is and how much flexibility that gives you. But most people don't do it because the biggest cost item in, any fixed costs budget is people. And if you run something, you have a tendency to like it just the way it is.

[00:07:38] And if there's a thousand people doing stuff the way they always did, you have a tough time envisioning doing it with 900. But what you should figure out is how do I do it with 900 pocket 50 of it to give to investors or your boss and the other, the expense of the other 50 you invest in your growth programs so that you really do have a future.

[00:08:02] You do the CT . So those are the steps I would recommend taking. They can all sound pretty simple until you get to the last one. But that's where the rubber hits the road. And that's the one that everybody has to figure out.

[00:08:16] Jess: You know, I think my first question about that is when you, you know, when you hear criticisms of the largest public companies, and, and there's so much pressure on the quarterly numbers, which then rolls downhill to management and all sorts of layers, right?

[00:08:33] And there are so many folks who. You know, the ringing phone of these, this quarterlies numbers maybe gets eye off the prize for the longterm vision. W what do you think, what advice do you have for folks that are just, you know, they're feeling the mounting pressure and that the analysts and the, you know, what's getting said in the, on Bloomberg about them is giving so much pressure for now to not, you know, sacrifice, sacrifice the future on the alter of tomorrow.

[00:09:03] David: Yeah. You know, I don't have a lot of sympathy for them.

[00:09:11] I really don't, because I always kind of look at it, say, all right, we're all big boys and girls. We all get paid pretty well. it's our job to figure out how to accomplish both. And I can say even towards the end of my tenure, when we were headed industrial recession in that 15, 16, 17 timeframe. we were still making big numbers and investors would ask me, well, why is Honeywell doing so well at a time when none of your peers are?

[00:09:39] And I always said the same thing. I said, well, it's really got a lot less to do with what we're doing now than what we were doing three and five years ago. So with all this stuff, you just got to kind of suck it up and figure out that the steps that we talked about at the very beginning is figure out how to, how to do that.

[00:09:56] And if you haven't done it already, then start today is a phrase I always liked that said, the best time to plant a tree was 20 years ago. The second best time to plant a tree is today. So you gotta start somewhere and just stop whining. Yeah.

[00:10:13] Jess: Well, I think we should get t-shirts of that. Just stop whining.

[00:10:16] I think this is going to go well, but

[00:10:19] David: certainly what we tell our kids isn't it?

[00:10:20] Jess: So, Well, and I think we should back up for one second. You know, Honeywell's such a well known household name, but I think there's a lot of folks that probably would be unfamiliar with what is the revenue mix look like? I mean, Honeywell has done a number of different things over the years for people to get a scope of kind of, where does the money come from?

[00:10:38] What are the, what are the top products? What does that mix look like?

[00:10:43] David: Yeah. It is quite a mixture to your point. And I always liked it that way. I want it to have that. Diversification that allowed us to always be able to perform and obviously work out very well for us. Aerospace is a big piece. It probably about a third.

[00:11:01]the focus on homes and buildings is probably for, so think of it as like a building management systems, commercial security, commercial, fire detection. A lot of work going into software and for industrial applications and specific domains that we're familiar with. We're the world leader in both process controls and, the process technologies that get used in petrochemical plants and, refining.

[00:11:30] And I'd say those would be the big ones at this point. Oh, I'm sorry. We're also, Barcode scanning, automated warehouses. That'd be another big area for us. Oh, and I'm sorry. And personal protection equipment.

[00:11:45] Jess: It is a broad range.

[00:11:46] David: So yeah, we do a lot of stuff.

[00:11:48] Jess: So I think one of the things that I was so interested to have you on the show on is your, just commitment to the truth, is, is interesting in the way that you're willing to.

[00:11:58] Just go straight head to head with things that get made into cliches without always having a ton of thinking behind them. For instance, we're all constantly being told, you can only do one thing. Well, you need to do the one thing. And, and I get that multitasking and me going like, squirrel chasing shiny objects is not productive.

[00:12:18] But yet I look at the Warren buffets that own these, all these companies and the Richard Bransons and, and you look at your time there. You know, growing a market cap by a hundred billion dollars and you weren't just making airplane engines or just doing one thing. Can, can you talk about that idea?

[00:12:36] David: Yeah. I guess I've never been a believer in that. Just one thing. Yeah. I think it's one of those things, it's easy to say, and people that focus on that, you can be right for a period of time, but I think eventually you fail because that one thing ends up having to be something different over time. So I always thought you had to have a, a broader approach to the world and how you think about things while at the same time focusing.

[00:13:01] Because while it's not just one thing, it's not 10 things either. So I always tried to, whether it's what we're trying to do in the portfolio, the process initiatives that we had, balancing objectives, like we talked about upfront to try to accomplish two seemingly conflicting things at the same time. I always tried to say, you know, the world is not that black and white.

[00:13:24] There's more that you have to think about.

[00:13:30] Jess: Well, I mean, as a guy with ADHD, I love hearing that other people have been successful doing more than just one thing in life. But, you know, I think, I think we're going to go with this. last week, we were interviewing the chairman of jet blue. he used to be the CEO of Trammell Crow. Joel Peterson teaches at Stanford. Great guy. And. Well, I was asking him for advice for entrepreneurs and specifically folks who have really made it in as far as becoming multi-millionaires, but it's maybe not quite as clear about going to the next level. what kind of advice would you have given your experience and what you've seen, you know, in the fortune 100 kind of level that might apply to more of the family business that's in the tens of millions but not the hundreds of millions or something.

[00:14:18] David: Yeah. I would say, talk to a lot of people. Kind of get a broad perspective on how to think about your business or what you might run into. And I was really struck by a conversation I had with Jeff Bezos, gosh, 20 years ago now, I guess. So he was just beginning and he was telling me about how things were going very well for him at the time.

[00:14:45] And he went around and said, okay, you know what I'm going to do is I'm going to talk to a bunch of other people who have been successful entrepreneurs, got to my point and ask them what do they think I ought to be doing? And the comment he got back from all of them was, even though you don't need it, take debt now so that you have cash because something will happen and you'll wish you had the money and then you won't be able to get it.

[00:15:14] So he did it, and by God he ended up needing it. And I always thought that was a really nice indication of how to think as a real entrepreneur who can grow into something bigger. And he picked that up by just talking to a bunch of different people, just trying to get their perspective. And I think that's a helpful thing to do.

[00:15:33] I tried to do it at Honeywell. I wouldn't say I was an entrepreneur, but I was always talking to other people and asking them, Hey, what do you think I ought to be doing? And it's really surprising what you get is perspective. So you have to decide whether you want to take the advice or not, but still you're getting the advice and you're getting a different perspective.

[00:15:54] Well,

[00:15:55] Jess: I'm interested, you know, for those of us who hear that, and are thinking about applying it, do you have any tools for the rest of us who we, you know, maybe we are the entrepreneur and we're, we're a little brash, a little like. You know, attracted to shiny objects. And then at the same time we have seen some things that other people haven't seen and maybe got some outside success.

[00:16:18] And so now we're up against this problem. We had some failures, we've had some successes, and you go ask people questions and you get a bunch of conflicting advice and you get a bunch of people that think you're crazy. Any ideas on the tools to navigate the difference between. You know, I'm being bullheaded and I'm not seeing the obvious here versus maybe they don't have the vision and I actually should trust my gut on this one.

[00:16:42] David: Yeah, that is an interesting question because, we all run, we all run into that, whether we're an entrepreneur or a, a big business leader. I can't say that I always had consensus, for anything I was trying to do, whether it was. Investors, employees, my staff. I mean, there's always some mixture and you have to decide whether it makes sense or not.

[00:17:06] I would say though that one of the things that's really important to do, it's maybe an overused word, but it really is to listen. And there are too many leaders who want to spend a lot of time talking and they don't spend their time listening. And when they do listen, they listen with confirmation bias as opposed to falsification bias and everything they hear confirms their hypothesis as opposed to the other way around.

[00:17:38] And I think training yourself to be able to listen for that false vacation bias to say, wait a minute, maybe I am wrong about this. Not in a way of creating so much self doubt that you'd never do anything but. Is that used to say is that people will say things about you or your idea, and it'll hurt because it's negative, but sometimes it's true and you, you just gotta be able to develop that ability to separate your emotion from what is, what's objective about the situation you're dealing with?

[00:18:15] Jess: You know, I think about that. I get excited about things and. I talked to people, and in hindsight, I recognize I was mostly looking for confirmation. any, any tips or tricks, any tools to reprogram ourselves because, you know, it's so scientific to intentionally look for the opportunity to disprove our hypothesis, right?

[00:18:38] If we're going back to eighth grade here, and yet I noticed so many times when I failed that when I've. You know, I've been interested, I've been listening until I came with my idea, and then all of a sudden it's like my ears got permanently closed. And from there on out, I was interested in no new information.

[00:18:53] Any, any advice on maybe tamping that down on ourselves?

[00:18:58] David: Ooh, yeah. I guess the, the only thing I could ever point to is it's something you really have to train yourself to do. I can't remember ever seeing a course or. A mind trick anybody ever gave me other than to, other than to say, really just pay attention and listen, there was one little trick that I do use, and I don't know if this could be helpful, but it's to wait five seconds after somebody has finished talking to you to respond.

[00:19:35] Hm. And one of the things that happens in once you're aware of it, you see it happen all the time, is you're talking to somebody and you can tell they're not really listening. They're really formulating their response already. They're not really paying attention to what you're saying. They've already assumed.

[00:19:51] They know what you're going to say, and they don't truly listen. They're formulating their response. Well, if you can train yourself to just wait until someone else has done talking until they get, until they're done and. Sourced yourself to wait three seconds before you respond, or five seconds. You do find yourself becoming a better listener all the time.

[00:20:17] Jess: I love it. Well, thinking about, thinking about these lessons, you know, I know we're winding down for part one of the interview and we're going to keep talking about the book on part two. But, what was maybe one of the most fun chapters, or what's one of the, what's one of the principles that you're maybe most passionate about out of the book?

[00:20:36] David: Oh boy. Well, I liked all of them. I'm not going to, cause we picked all the chapters based upon, stuff that I thought was important for people to know. So I liked it all. but I'd say probably the stuff on leadership is the stuff that gets me. most jazz, cause a lot of people think about leadership is just give a great speech.

[00:21:00] Everybody loves you cause they're all motivated. And I always tried to make a point that, nah, that's not what leadership is. That's being a good art. Or being a good leader requires a couple of other things. And the second one being, can you pick the right direction? And third, once you've picked that right direction, can you get everybody moving in that direction?

[00:21:24] And I always said those last two are 95% of the job, but have zero visibility except over a long period of time, and nobody measures you on that. They all look at that first one. Can you mobilize everybody? And that's really a small part of the job. So I'd probably all the stuff on leadership, how to run meetings, all that stuff.

[00:21:46] Jess: Yeah, I'm thinking about that. Thinking about that first one there. I'm picking the right direction. Any, any thoughts about when it feels like there's multiple directions that might be just as good or when the future seems very murky? Any, any

[00:22:05] Jess: just things that you did or any, mental, I don't know, filter to put on that when it seems like maybe there's equally good options or equally bad options.

[00:22:17] David: Yeah. Well, I often said about when it came to making decisions, you need to believe in your decision. You need to be very confident with the rest of the organization that your decision is absolutely right and you have absolute confidence in it, but at the same time, you need to always be looking over your shoulder to make sure your decision was right.

[00:22:43] Looking for that falsification bias. Because it might not be. And it's interesting cause, you've gotta be very, you gotta be very careful. It's too easy. Once a decision is made to just kinda, you know, clap your hands, say, okay, we're all done. That decision's made and then forget that, well, what are you going to do if it's not the right one?

[00:23:06] So you gotta keep your eyes open when it comes to making a decision. I always also tried to distinguish between. those that were, that had easily reversible consequences, don't spend a lot of time on the decision, make, want to move on, and those that, would have irreversible consequences, in which case I had a, I would absolutely wallow in it, agonize over it, and I had to control myself because I tend to be a more decisive personality.

[00:23:38] And most people would say, well, that's what you want in a leader. You would say, well, yes and no. it's possible to be too decisive and decisive. People just liked making decisions and then moving on to the next one. And if the decision is not right, it can really burn you. So that's how I found myself thinking about it.

[00:23:59] I hope that helps.

[00:23:59] Jess: No, I love it. Well, everybody should be going to Amazon and pre-ordering books. I can't wait for this one to come out on audible. I, I think June 30th is the date here. Folks, before I ask my last question for this part of the interview, I just want to call out that, it's pretty awesome who you've got for your endorsements on the book.

[00:24:17] Bob Eicher, former CEO of Disney, Hank Paulson, former US secretary of treasury, Mark Benioff, CEO at Salesforce. I mean, chairman of Pepsi co. That's gotta be fun to have names like that on your book.

[00:24:33] David: Well, they're all a good friends and great performers themselves, and Jim Cramer's is on there also.

[00:24:39] He's a, he's a buddy also, and I always, I think the world of him too.

[00:24:44] Jess: That's all right.

[00:24:45] David: Well maybe it's a good bunch and they're all performers themselves, so it's, it was nice to get half a endorsers like that.

[00:24:53] Jess: I just finished Bob's book and it was, it was really fun. That one, if, as well. Well, maybe, maybe to end off here.

[00:25:01]a question that's kind of been fun to ask guests lately is, what's one of the best pieces of advice you ever received?

[00:25:10] David: Well, it was from my mom and dad, and they both had different ways of saying the same thing, but my dad always said, be a leader, not a follower. And my mom was constantly saying, think for yourself. And both of them had eighth grade educations. I was the first one to graduate in my family from high school.

[00:25:35] But those values I thought were pretty important. Cause I'm fond of saying independent thinking is a lot more rare than being smart. And them kind of talking to us kids like that all the time, I thought was an important value. An important leadership value.

[00:25:54] Jess: I love it. Well, everybody, please tune in to part two of the interview. And thanks for listening so far.