Sun Microsystems Inc. (www.sun.com) recently moved its headquarters a few miles down the road from a corporate campus in Palo Alto, Calif., to a building in Santa Clara that is a vision of elegant simplicity. The new headquarters is a small mission-style building, with crisp, white stucco set off against the burnt-orange tile on the roof. A clock tower rests on top of the four-story building, drawing the eye as visitors approach down a quiet drive lined with palm trees.

There’s more here than immediately meets the eye. Just to the left of the entrance is a small historical society plaque that says the building used to be known as “the great asylum for the insane.” The building, built in 1888 and then rebuilt following the earthquake of 1906, housed mental patients into the 1970s.

This shift of headquarters, then, may be the biggest statement of confidence yet by Sun Chief Executive Scott McNealy, whose brashness is well-chronicled. McNealy is so confident that he’s willing to house his executive team in a building known as an insane asylum.

That confidence shines through in the interview that Context Editor-in-Chief Paul Carroll recently conducted with McNealy. Though Sun has had its problems since its many dot-com customers hit the wall and since the recession has slowed spending even at big corporations, McNealy thinks he has things figured out. He lays out a compelling set of principles for being a leader in tough times, then provides an intriguing vision of the future of the workplace that would do away with most office buildings—and have all of us lining up to buy lots more Sun servers.
 

CONTEXT: What kind of leadership is required of a chief executive to get people through these tough times?

SCOTT MCNEALY: You need to be a great leader all day, every day. You are being watched—and people have a choice about where they work.

You have to have strength of character. This is not like being president of the U.S. Character matters.

As far as specific tactics go, the first thing is to realize that, when times are tough, you don’t need to beat on people. You have the same team you had a year ago that was growing the company at 60% a year. These people didn’t turn stupid or lazy all of a sudden. So right now, my leading consists mostly of cheerleading. I’m telling people how great they’re doing.

I get the crop out when things are going really well. Ask the folks at Sun. I was all over them about a year ago, trying to keep them from getting complacent, arrogant, or sloppy.

You need to attenuate, not amplify, the swings in people’s morale.

The second thing is to use a layoff as an absolute last resort. If the company is economically viable, then delay, delay, delay. If you have to lay people off, do it as minimally as possible. Employees understand what’s going on, and they appreciate your concern. For every one of the “What did you do that for?” notes I’ve gotten [following layoffs in October, months after its competitors made similar cuts], I’ve gotten another 50 love notes. People wrote, “I understand what you had to do, and I’m sorry I was one of those who had to go. But let me know as soon as you start hiring again. I’d come back here in a heartbeat.” You can actually build loyalty in difficult times, even though you have to make some tough decisions.

The third thing is to protect your cash. You do not want to go see a banker right now. Having said that, it is also a great time to make some smart strategic bets. You can hire really smart people and bring back the great folks who left for those pot-of-gold-at-the-end-of-the-rainbow ventures. This is also a great time to do acquisitions. The $6.5 billion we have in cash reserves is still $6.5 billion, and with the stock market down so much, prices can be good.

Finally, leaders must communicate like crazy. Don’t hunker down. Get out and meet with people. I’m doing radio shows, town halls, one-on-ones, phone calls, handwritten notes, and e-mails. I’m traveling. I have to show that I’ve got more passion and fire than ever.

CONTEXT: My theory is that it is easier for management to make fundamental changes in tough times, because crises convince people that they need to rethink their behavior.

MCNEALY: Right. People are much more willing to change now than they might have been when our business was expanding 60% a year.

At Sun, we were making more mistakes when our financial results were at their high. Right now, our customer satisfaction ratings are much better than they were about a year and a half ago.

There are other benefits. The availability of our machines is much better. Our component costs have gone way down. Our voluntary turnover is lower.

In hard times, marginal players disappear. You see Hewlett-Packard and Compaq collide—I mean agree to merge. Boom! They’re gone. Asia and Europe? Boom! The competitors there are gone. EMC? Crashed and burned. These were companies that caused real problems for us a year and a half ago. Now only Microsoft and IBM are left. I’ll take that any day.

CONTEXT: Once we make it through these tough times, what’s your vision for how technology will create new ways of working together?

MCNEALY: My dream is to have a campus with a modest-size central building surrounded by a large parking lot. The main building would have an auditorium, a nice lunchroom, and a bunch of meeting rooms. It might have a workout facility with showers and restrooms. Around the main building, which I think of as the town hall, there would be many parking spaces. Each space would have power cables and a broadband connection to the data center.

People would pull into these parking spaces in their “sport utility offices,” equipped with a swivel chair, a computer, a phone, a printer, and a copier. I expect most people would arrive no earlier than 10 and leave by 3, to avoid rush hour. Before 10 and after 3, they could work from home. That five-hour window would still give people enough time to socialize and to schedule face-to-face meetings. Co-workers would be easy to find because there would be a directory of who is in the parking lot, which would be updated as soon as each person logs into the central data center. If I wanted to talk to you, I would know where you were, and I could just come bang on your window.

Talk about cost-cutting and efficiency. At the moment, I’m paying rent, depreciation, and utilities on all kinds of office space just so someone can have a nice place to hang a picture of his dog.

I include myself in this, by the way. The only tools I need are a browser, a wireless phone, and access to a network. When I show up in the office, I mostly read my e-mail. My secretary is the one who needs a big office with a couch and chairs because she’s duct-taped to her chair 12 hours a day.

I tell CEOs to walk down the halls in some of their buildings on Wednesday at 10 o’clock in the morning and note to themselves what the peak occupancy is. It’s usually 40%, at most. So why are they paying for all that unused space?

CONTEXT: That’s a good question. Why are they? What’s keeping us from heading to your more flexible model?

MCNEALY: The biggest problem is the personal computer. With a PC, your identity is attached to the piece of equipment that you own. Your software and your data are on that equipment, and you have to carry it with you. That limits your flexibility.

We have to get to the point where the data reside on the central server or network. Then people can access their desktops through a browser on any machine, from anywhere.

The human resources theorists and the organizational behavior theorists have also conditioned us to do the wrong thing. They always try to get us all together. They say a person’s manager and other members of the team should be right down the hall. The theorists say executives should manage by walking around. That is the dumbest thing in the world! There are 40,000 people at Sun. I can’t walk around!

I did an experiment at one of my leadership conferences about six months ago. I asked, “How many of you have your boss in the same campus?” Not on the same floor or even in the same building, but on the same campus? The number was very low.

I asked those people who didn’t have a boss at hand, “How many of you are unhappy with that?” Not one hand went up. They don’t care. They actually like the remoteness better because they can get their jobs done.

There used to be some technical reasons for having people together. In the old days, you couldn’t fax a blueprint around, so a design team had to be in one place. But nowadays, engineers don’t have to be in one place to look at the same blueprint.

At Sun, we’ve already adopted a more flexible approach to work. Because we rely on servers, we don’t have to be tied to our laptops and our desks in the office. I do not want somebody at 10 o’clock at night who can’t sleep, who wants to work because there’s nothing good on TV, to not have full capability to do everything he needs to do to get the job done.

My executive team and I designate weeks as travel weeks or meeting weeks. People are expected to be in the community building during meeting weeks. Everybody plans their meetings then.

I believe humans are moderately social critters. Very large urban areas are akin to having too many rats in a small cage. Urban areas contribute to random, deviant, and inefficient behavior. On the other hand, without enough social interaction, you end up spawning the Ted Kaczynskis of the world. Being social in moderation is right. We want to be able to go to a ballgame and be with humanity, but also to get out of that crowd. The city and the wilderness are places you go to occasionally, not places you live.

It seems so logical to me that because rivers, valleys, and climates created concentrations of economic activity, we all live near each other. But the network of the Internet allows us to spread out into a bit more of a reasonable environment. That’s a huge innovation and will make us much more efficient.

These are such big changes that people really haven’t figured them out yet.

CONTEXT: Will people have trouble splitting work from home life?

MCNEALY: There is no distinction.

When I’m working at home, I do e-mail with my kid sitting on my lap. I sort through them, deleting the dumb ones. Then we cut over and look at the Chrysler minivans on the Web site, and he’s all excited. I couldn’t be happier, and I’m working.

Maybe I am unique, but I don’t really think so.