The CEO Rule: Customers, Employees, Owners

Many years ago, after the closing of the first round of financing for my first venture-backed company, the investors and founders went out for dinner in a very nice restaurant to celebrate.

At dinner, one of the investors asked me a question. "Hey John, do you know what CEO stands for?"

Now I have to admit, I was a little surprised by the question, and a little miffed at the idea that he thought that I, the incoming CEO, might not know the answer.

"Yes," I replied. "CEO stands for Chief Executive Officer."

"You're wrong," he said, smiling. "It stands for Customers, Employees, Owners - in that order!"

As the punchline was delivered, everyone around the table laughed, perhaps understanding at a gut level the simplicity and wisdom of this advice - or, more likely, they were just bemused at the perplexed look on my face.  But I didn't laugh. Something about the advice resonated with me. I asked him to explain his thinking.

"It's very simple," my friend said. "Exit-driven companies rarely succeed, and companies that coddle their employees and allow the business to be run regardless of how people perform don't grow fast."

"Companies must focus primarily on satisfying consumers needs and desires. Customer-focused companies succeed."

Now, fans of Clay Christensen and The Innovator's Dilemma might raise a hand at this point, but let me clarify something - in talking here about Customers, we're discussing consumers as a total group, meaning all possible users of a product, not just the subgroup of legacy customers that Christensen believes want to box in your aspirations and stifle your innovations.

Let's explore the CEO Rule (Customers, Employees, Owners - in that order), using Google as an example. With Google, you have a situation where two guys focused obsessively on the Customer - the Internet consumer - as a lead priority for the entire five year initial development cycle as they attempted to develop the world's most relevant search engine.

Then, at a time when the business needed revenue to monetize that incredibly popular utility, along came Eric Schmidt, who displayed his genius by focusing on a different kind of Customer - the advertiser, and a marriage of the two models.

These three executives couldn't have and didn't achieve these objectives alone. Employees clearly needed to be Google's secondary focus, and with the singular exception of the daycare spat a couple of months back, Google has understood this and provided employees with an exceptional place to work.

So where did this focus on customers and employees leave the Owners?  Do I need to ask? The Owners of Google - its founders and shareholders - have had an unbelievable ride, and it's not about to end anytime soon. Everyone who bet on this company while risk was still a factor in the equation has profited handsomely.

By not focusing on the Owners - by focusing instead on the Customer, then the Employee, in that order - Google has produced fabulous returns for its Owners.  And because Google remains focused on innovation on behalf of its customer, the consumer (you just have to hear Page and Brin speak to know that they remain passionate about solving these complex problems), I predict that Google's Owners will benefit for years to come.

Think Steve Jobs has his owners in mind when he is approving iPod designs? No. He's solving a problem (availability of coolness) - a problem that will create value for his shareholders. But shareholder value isn't what drives this CEO -value is created by Jobs' understanding of the customer, and his ability to attract great talent to Apple.

Owners are last in the chain - but benefit mightily from this position, when the CEO obeys the CEO Rule.

So here's some advice. If you're an entrepreneur and you're in the business to make millions of dollars as a first priority, you might want to rethink your life choices. Start-ups focused on making millions as a first priority rarely achieve that aim.  I suggest you focus instead on the CEO Rule: Customers, Employees, Owners - in that order. 

Innovative people focused on solving problems for Customers, and creating a great workplace for like-minded, mission-driven Employees, are far more likely to see success - and provide their Owners with a return on their investment.

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John Sharp

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