Inside The Shakeup At Sony
The surprising selection of Howard Stringer as Sony's CEO was a classic boardroom tale of executive intrigue and dashed ambitions.

(FORTUNE Magazine) – Nobuyuki Idei was in a quandary. It was mid-January 2005, and the weary Sony Corp. CEO had just received confirmation from his chief financial officer, Katsumi Ihara, of what many around headquarters had dreaded.

Price wars for flat-screen TVs and sluggish holiday sales of other consumer electronics gadgets had undercut financial results for the quarter ended in December. Revenues were 7.5% lower than in the corresponding 2003 quarter, and operating profits, perhaps the truest measure of Sony's strength and agility, were off 13%. Worse, that meant Sony's projected revenues for the fiscal year ending in March were its lowest in five years--$68.6 billion--and 5% below what the company had forecast, something to which Idei would have to fess up both in public and before an increasingly restive board of directors. Clearly, Idei's "Transformation 60" restructuring plan--intended to reinvigorate the company in time for Sony's 60th anniversary in 2006--wasn't working. It was time for a bigger jolt.

True to form for the CEO of a company long known for its unconventional leaders, Idei went out like a maverick. In March he named a foreigner--Sir Howard Stringer, a relative newcomer who had spent the past seven years running the company's U.S. operations--as the next chairman and CEO of Japan's most famous company. And that wasn't all. Idei announced that he had asked six other corporate officers who were fellow "inside" directors to join him in resigning from the Sony board when he steps down officially as CEO this June, leaving the "outsiders" with a hefty eight-to-three majority.

The moves sent a shock wave through the electronics and media industries, and not just because Stringer, 63, is a Welsh-born American who doesn't speak Japanese. Stringer is not an engineer, nor much of a gadget freak, nor even a marketing whiz; his main claim to fame is overseeing the resurgence of Sony's movie and music business. But shock is clearly what Idei intended. "It's funny, 100% of the people around here agree we need to change, but 90% of them don't really want to change themselves," he says. "So I finally concluded that we needed our top management to quite literally speak another language."

Surprising as Idei's announcement was, even more remarkable is the tale of how and why Idei and the Sony board arrived at Stringer's selection. Exclusive interviews with Idei and other top Sony executives reveal a boardroom drama of strong wills, executive intrigue, and dashed ambitions. It's the story of a CEO haunted by the ghosts of his predecessors and scrambling to retain control of the vitally important succession pro- cess--his "graduation," as Idei calls it. His goal was not just to find the right people to take over. He had to make sure they would have the flexibility, authority, and backing from the board to accomplish what he hadn't been able to do consistently in his decade as the boss--namely, provoke the company and its 160,000 employees to adapt to new marketplace realities as consumer electronics, mobile communications, computers, digital entertainment, and broadband networks genuinely converge.

"I did not campaign for this job, and I never discussed doing this job before Idei-san offered it to me on the weekend of the Oscars," says Stringer, pacing around in the New York office that will remain his home base once he assumes his new titles in June. "For three years there was an atmosphere that big change was coming, which Idei himself led. He wasn't sitting there resisting the succession problem; he was wrestling with it. What changed since January was that I think he could sense a new kind of widespread frustration in the organization and felt the need to act. Now whether I can harness that frustration constructively is really the question of the hour."

Let's rewind the tape to the apogee of the Analog Age in the spring of 1995. Nobuyuki Idei, a dashing, trilingual, cerebral marketing man with a passion for Italian suits, French wine, and American personal computers, was the surprise choice to succeed Sony's previous president, Norio Ohga, the Deutschophile symphony conductor, jet pilot, and opera singer. Ohga, who was the handpicked successor of Sony's charismatic founder, Akio Morita, would retain the titles of chairman and CEO but cede most operational and executive authority to Idei, with the understanding that in a few years he would yield the other roles as well.

Idei inherited a $38 billion company suffering from a rare bout of the blues, primarily because it had run up $20 billion in debt while buying its way into Hollywood and the music business at inflated prices five years before and had slowly come to the scary realization that despite all its grandiose dreams of "synergy and convergence," it knew next to nothing about show business. So pathetic was Sony Pictures' performance that during the previous year the parent company had sheepishly had to absorb a $3.2 billion write-down to reflect reckless overspending at its Columbia and Tri-Star studios--nearly as much as it had paid for the studios in the first place. Meanwhile, calling to mind the Betamax vs. VHS debacle of 20 years before, Sony also seemed on the verge of losing out in the battle to define the lucrative technology standard for the DVD player. Idei's sole source of optimism was Sony's PlayStation, a come-from-behind gambit to take the videogame business away from Nintendo and Sega.

In this difficult climate Idei at first had a golden touch. The PlayStation stormed the videogame market, severely wounding Nintendo and all but exterminating Sega. The company's movie studios rebounded under his handpicked management team (Stringer joined in 1997) to set box-office records for the industry and came to be admired as the tightest-run ship in Hollywood. Idei worked out a deal to incorporate some of Sony's proprietary technology into the new DVD standard, avoiding another Betamax experience. Sony's digital still cameras elbowed to the top of that burgeoning market, and the company became the dominant supplier of the video-receptor chips that many other camera makers used. The VAIO line of PCs was a hit. Even Sony's mainstay television business, led by its high-end Wega cathode-ray-tube models, was able to increase market share.

All that changed after the turn of the century. Aside from the continued successes of the PlayStation and the movie business, Idei has had precious little to crow about--and platters of crow to eat. Apple stole the march in the new market for portable digital music players with its sexy iPod. Rival TV makers from Japan, Korea, Taiwan, and China moved more quickly to make flat-panel plasma and LCD models. Sony had to join forces with Ericsson to make a go of it in cellphones, and once again it faced stiff competition in devising yet another digital standard for high-definition DVDs. It was beginning to feel like déjà vu all over again.

All along, Idei found himself second-guessed by Ohga, who despite nagging health problems stepped in occasionally to thwart or even sabotage his successor's initiatives. Ohga seemed especially chary of acquisitions and divestitures, shooting down Idei's plans in the 1990s to try to buy Apple Computer and later Palm Computing. Insiders say that during Idei's early years, Ohga seemed jealous of his protégé's success in turning around movies and of his ability to strike a higher profile in world business circles. (Ohga declined to be interviewed for this story.)

And Ohga's subtle interference didn't stop after he gave up the CEO title in 1999. In 2002, Ohga was instrumental in scuttling plans to sell the Sony Life Insurance subsidiary to GE Capital for about $5 billion, even though the board and Idei had already signed off on the deal. Says one director: "There was an organized revolt by the employees and the management of the insurance company, and some key Sony senior executives opposed it too, even though the board had approved the sale. In American terms, that would have been enough. But after they won the support of Ohga, it was shot down--summarily dismissed, actually. Losing the chance to raise $5 billion was bad enough, but worse, it sent the message to the organization that 'It's okay, nobody gets penalized if you resist Idei.' "

Even after retiring from the board in 2003 and taking the ceremonial title "honorary chairman," Ohga made his presence felt. In particular, he was a big promoter of Ken Kutaragi, the founder and head of Sony Computer Entertainment, maker of the Play-Station. Kutaragi, a brilliant but obstreperous engineer, was presumed by many to be Idei's heir apparent. Ohga put him on the board of directors in 2000. And after Idei named Kunitake Ando, the amiable mastermind of Sony's VAIO PC division, to be the parent company's president and chief operating officer, Ohga agitated for Idei to find a bigger executive role for Kutaragi--who, after all, had developed Sony's most profitable product.

Finally, in late 2003, after the company posted a disastrous quarter that the Japanese press called the "Sony shock," Idei relented. Looking for someone to fire up the troops, Idei reluctantly put Kutaragi in charge of televisions, home electronics, and semiconductors, as well as the PlayStation group. Idei tersely described Kutaragi's position as a "trial run." Some thought that meant Ohga had finally persuaded Idei that Kutaragi might be able to save Sony. Others believed Idei might be setting Kutaragi up to fail.

Meanwhile, back in the U.S.--a market that accounts for more than a quarter of Sony's business--Howard Stringer, the former television news producer and broadcast executive, was proving his mettle as a businessman. At first he didn't have much responsibility, looking after a chain of movie theaters and other real estate. In 1998, however, Idei put him in charge of Sony Electronics U.S, which was primarily a marketing group but also engaged in technology development. "I quickly learned that Howard is one of those rare people with a natural-born talent for general management, just as there is a born talent for being a creator," says Idei, drawing a comparison with Kutaragi. "One thing I've learned is that there's not that great a difference between managing actors or television reporters and managing engineers. So not being an engineer is not a disadvantage for him. To put it in a baseball metaphor, I can't think of any great major league managers who hit 60 home runs."

Idei soon added Sony's movie and music businesses to the portfolio, and Stringer, back on familiar turf, wasted no time putting his own stamp on them. Among his smartest moves was the hiring in 2000 of Robert Wiesenthal, a former Credit Suisse First Boston investment banker, as his chief strategy officer. The banker quickly started buying and selling stakes in a variety of businesses: In 2001 he sold 50% of Sony's Game Show Network to cable mogul John Malone's Liberty Digital, and Sony's stake in the Mexican television network Telemundo to NBC. He joined with Philips N.V. to buy InterTrust Technologies, the owner of patents for most digital-rights-management technologies used to prevent piracy of movies and music, a deal that should generate royalties for years. He came up with joint-venture deals to merge Sony Music with Bertelsmann and to acquire the movie libraries of Metro-Goldwyn-Mayer, which include the James Bond franchise and classics like The Wizard of Oz.

Stringer made other important and unconventional hires, bringing in former NBC head Andrew Lack to run Sony Music and Sony BMG, and Michael Lynton, a former AOL executive, to lead Sony Pictures. Even before Idei announced his "Transformation 60" strategy in late 2003, Stringer, Wiesenthal, Lack, and Lynton cobbled together "Project USA," a cost-cutting effort that slashed $700 million a year in overhead, far exceeding Idei's expectations.

Sony's board and the executives in Tokyo took notice. "Howard has a unique way of building affection, and he has demonstrated how he can get the trust and respect of people and get them to work together," says Peter G. Peterson, chairman of the Blackstone group, who sat on Sony's board for 15 years and now chairs the company's international advisory committee. "These were disparate businesses in the U.S., but Howard has all these guys talking together. And he has demonstrated he can take on many of these problems that Sony is talking about and do something about them: cost cutting, integration, getting the right people in place. It's no wonder that Idei started thinking of him as CEO material."

When Idei promoted Kutaragi in 2003, he also assigned his No. 2, president and COO Kunitake Ando, the grueling task of cutting costs to get the operating profit margins of the electronics divisions back up to 10%. It was an important but thankless job that took Ando out of the limelight as a spokesman for Sony, and the move reinforced the impression that the race to succeed Idei was now wide open.

Idei quietly started looking elsewhere in the organization for potential leaders. Two executives stood out. One was Katsumi Ihara, a rising star in corporate finance, who was dispatched to London in 2001 to build Sony's mobile-phone joint venture with Ericsson, a combination that has produced some of the hottest-selling phones in Europe and Japan. Idei rewarded him with the CFO title last year.

The other was Ryoji Chubachi, a manufacturing ace who had spent most of his 28 years at Sony making recording media--floppy disks, cassette tapes, videotape, and the like. ("I've felt like I've been in Siberia most of my career," he jokes.) Idei put him in charge of all of Sony's "core technology" components operations, which include batteries, LCD screens, and optical devices for CD and DVD players. Then he sent Chubachi to Korea to put together a joint venture with Samsung to make large LCD televisions.

Matters came to a head in January, when Ihara presented Idei with the dreary numbers for the December quarter. Sensing that something had to give, Idei floated the idea of sharing his CEO title with Chubachi, Ihara, or Stringer. He didn't include Kutaragi on the list--he had heard grumblings that the hotshot engineer had been alienating other electronics executives since taking over TVs and chips. But the outside directors, including Nissan CEO Carlos Ghosn and Fuji Xerox head Yotaro Koyabashi, didn't like the idea of splitting the top job. Meanwhile Ohga--who, remember, was no longer on the board--continued to lobby directors to promote Kutaragi to president at the very least. So in February the outside directors did some investigating, interviewing dozens of Sony executives to get their opinions on the "finalists" and in particular to check out the veiled assertions that Kutaragi was ruffling too many feathers. Idei, however, had already made up his mind. If there was to be a single CEO, it would be Stringer.

Once Idei had informed the directors of his choice, they quickly agreed to name Chubachi as president and to invite him to join the board. Ihara's titles didn't change, but he too was given a board seat, indicating his role as part of Sony's new executive triumvirate. The board also agreed that all the other insiders, including Ando and Idei and Kutaragi, should leave the board, and that Stringer should be given the authority to nominate two more insiders after he takes over the helm on June 22. In the end, then, Idei got his way.

Idei had many goals during his tenure. He wanted to shepherd the company into the Digital Age, in which its electronic products and entertainment content would take advantage of innovations in computing and networking. He probably deserves an A for vision and at best a B-minus for execution, given that Sony's electronics business hasn't grown much and it was beaten by Apple and others in key new digital categories.

He also sought to help Sony, as a financial entity, deploy its capital and assets in more sophisticated ways--to build up shareholder value and use joint ventures and partnerships to develop expensive new digital technologies. Judging from the success of Sony Ericsson and the proliferation of other joint ventures, he deserves high marks for this--at least an A-minus.

And finally, as an organization man, he wanted to reconfigure Sony--a company that was a collection of independent, often warring operating units aimed at particular consumer markets--into four larger organizations that could coordinate better. Last year he also managed to pump new blood into the management ranks by offering universal buyouts to anyone over 55, a novel ploy in the land of lifetime employment. After serving on the board of General Motors for three years, Idei got religion about modern corporate governance and overhauled his own board of directors, transforming an entity that in 1995 comprised more than 40 members and only a handful of outsiders into a body that looks and operates much like an American board. The reorganization still hasn't really paid off, but the streamlined board made it much easier for Idei to pick his successors and will give them some room to run. He deserves a solid B in this area.

As bad as 2004 turned out to be from a financial standpoint, 2005 looks a lot more promising, if only because Sony is globally rolling out its first genre-busting product in years--Kutaragi's pride and joy, the PSP portable game machine and media player. The sexy $250 handheld device was launched in Japan last fall and immediately got rave reviews, not only for its look and feel but for its ability to play movies and digital music. Even Steve Jobs concedes it is "pretty cool." (For more on the PSP, see Peter Lewis's Gadgets column in this issue). Beyond that, Sony this year plans to ship a new line of jumbo LCD TVs using screens made by its joint venture with Samsung; Sony Ericsson is readying a family of mobile videophones; Sony Pictures plans to release a film version of The Da Vinci Code; and the electronics company has high hopes for its next generation of digital music players, HD camcorders for consumers, and a fresh batch of digital still cameras. Stringer & Co. will have lots of good stuff to sell.

What does Idei expect from Stringer? "Howard is not coming in just to do dirty work or to keep the CEO seat warm for somebody else," says Idei. "His job is to communicate better and to symbolize that convergence is for real at Sony."

Stringer knows how difficult the job will be, especially having observed how hard it was for Idei to maneuver the company. "I'll be the Darth Vader if I have to," says Stringer. "But the way I see it, there are many, many people who have grown up in Sony who need to be liberated somehow, not yelled at.... I hope to convey to them that they should develop a sense of urgency from being angry at being beaten and from recognizing that complacency and denial are the enemies of innovation."

Which leaves us with a couple of loose ends. What will Ken Kutaragi do, after losing out on the top job and being sent back to his old fiefdom? (He wasn't granting interviews, so we couldn't ask him, but he told one Japanese magazine, "I will stay with Sony. I am young, and it is my style to keep on going.") Idei concedes that "it was very difficult for him to digest what happened, but I think he's made peace with himself over it. Remember, Ken has great ambition to try to make the PSP a bigger sensation than the iPod, and he has great ambition to make the PlayStation 3 a success next year. So he has many, many opportunities for positive revenge, so to speak."

And what about honorary chairman Ohga? He isn't talking either. But at age 75, he still comes to the office nearly every day. Some things never change.