Al Dunlap is an original: an outspoken, irascible executive with an incredible track record of injecting new life into t
937 147 45MB
English Pages 289 [312] Year 1996
1
1
1
3 p a k fa HDW SAVE S AND MAKE GOOD COMPANIES GREAT hf
I
r
r
A
I
I
I
I
I
A
I
U.S.A. $25.00
Canada $35.00
Dunlap (dun-lap) v 1.
To turn a
speed. is
2.
[after Albeit J.
Dunlap
company around
(1937-)]
at lightning
To focus on the best; eliminate
not the best.
3.
what
To protect and enhance
shareholder value.
Mean Business is Al Dunlap's specific battle-tested program for business success. It's all based on his incredible track record of injecting tired
new
life
into
companies, best exemplified by the dramatic
turnaround he quarterbacked
When
at Scott Paper.
Dunlap became chairman and CEO in
was
in woeful shape: a $277 on credit watch for excessive debt, a stock that had been comatose for seven years. In a mere nineteen months, Scott had record earnings, the stock had increased in value by $6.5 billion (over 200 percent), and Dunlap merged Scott with Kimberly Clark in a stock swap that valued Scott at $9 billion and created the second largest consumer-products company in
April 1994, Scott
million loss in 1993,
the United States.
Mean
Business provides the inside story behind
the strategic thinking that guided Dunlap's quest to once again •
make
Scott a world-class competitor:
The growth strategy that took
it
from a money
loser to a lean, highly profitable operation
•The vision that reshaped Scott from a commodity paper producer into a consumer-products
company
•The complete revamping of
Scott's U.S.
and
global marketing strategy
•The transformation of the board of directors into an entrepreneurial
holder interests came
team
in
which
share-
first
•The unique way the Scott story was communicated to Wall Street, investment banks, and mutual funds
Mean
Business provides invaluable lessons for
everyone struggling to meet the tough, competitive challenges of today's business world.
combines
—
It
Al Dunlap's colorful personal history
his working-class
background, employment and
friendship with people like Sir James Goldsmith, [continued on back flap)
MEAN BUSINESS
HOW SAVE BAD COMPANIES AND MAKE GOOD COMPANIES GREAT I
J.
with BOB
ANDELMAN
TIMES BUSINES
m
RANDOM HOUSE
Copyright
©
1996 by Albert
J.
Dunlap
under International and Pan-American Copyright Conventions. Random House, Inc., New York, and simultaneously in Canada by Random House of Canada Limited, Toronto. All rights reserved
Published
in the
Dunlap, Albert
United States by Times Books, a division of
J.
(Albert John), 1937-
Mean business how save bad companies and make good companies great / Albert J. Dunlap with Bob Andelman. 1st ed. :
I
—
p.
cm.
Includes index.
ISBN 0-8129-2837-7 1.
Corporate turnarounds.
States
—Case
studies.
I.
2.
Corporate turnarounds
Andelman, Bob.
II.
— United
Title.
HD58.8.D858 1996 658.4'063— dc20
Random House Website
96-21876 address: http://www.randomhouse.com/
Printed in the United States of America on acid-free paper.
20 19 18 17 16 15 14 13 12
11
10
For Judy
CONTENTS
Why Did
I
Call This
Book Mean Business?
ix
PARTI Saving a Fallen Giant
A Microcosm
1
Paper Thin:
2
Shock Therapy
of
Bad Business
3 13
PART
II
Four Simple Rules
3
Rule
1:
Get the Right Management Team
31
4
Rule
2:
Pinch Pennies
45
5
Rule
3:
Know What
69
6
Rule
4:
Get a Real Strategy
Business You're In
PART
Who
I
91
III
Am and Where
I
Come From
7
"A Nothing Kid from Hoboken"
107
8
Rambo
125
in Pinstripes
(aka "Chainsaw Al")
vii
viii
Contents
PART IV Dunlapping the Corporation 9
Look Under "M"
for
Marketing
139
1
Fire All the Consultants
1
1
Real Jobs, Real Cuts
167
12
The Best Bargain
13
Whose Company
14
Boards
15
Feed a Company, Starve a Culture
229
16
Impressing the Analysts
245
17
Fighting
Words
271
Is
CEO
an Expensive
Is It,
of Directors,
Anyhow?
God
Forgive
53
177 193
Them
207
Acknowledgments
275
Index
277
WHY
DID
I
CALL THIS
MU MEAN BUSINESP. Chainsaw Al.
Rambo
in Pinstripes.
The Shredder.
If
you want nicknames,
been called a million
I've
of them.
Some
were meant as ferocious or grudging compliments, others were well-intentioned. But
don't really explain
the people
nicknames are part
how
who work
The essence
of
or
Mean Business
do:
is
you down, waiting
and make you
Why Should
their
They
Make a company and
competitiveness
more important, how
life is
that
for
to
—how
become
to
to stay competitive.
be about because the
what works today won't even be
The predators are out
satisfactory tomorrow.
I've
I
what I'm about. That's what you need
harsh reality of business
stare
I
there the best!
competitive, and perhaps That's
of image, not strategy.
why do what
less
there, circling, trying to
any sign of weakness, ready
to
pounce
next meal.
You Listen to
been where you want
Me?
to
go and
I've
worked through
just
every kind of problem you'll face, from companies that have
about
lost their
focus to employees seeking motivation and leadership. I'm not an academic or consultant making a living just by studying
problems. Neither
who was bottom, I
am
I
an
MBA from some fancy,
anointed into the corporate
literally:
I
worked the
swam my way up
elite.
I
high-priced school,
started
my
career at the
third shift at a dirty, smelly
through a sea of look-alike,
paper
mill.
sound-alike middle
ix
Why
x
Did
Book
Call This
I
Men
Business?
managers, and stepped onto dry land as Chairman and
CEO
of Scott
Paper.
Along the way studied how and why products get made I
I
management and bad, and,
took note of laziness, good
an insidious form of ivory tower disease from the ucts
gritty
and
April 1994
it
particularly,
keeps managers aloof
world of manufacturing, marketing, and selling prod-
services.
Scott Paper
that
correctly.
As
if
anything else
was my most recent
was
in
in
business mattered!
challenge.
woeful shape, having
When
I
took over in
$277 million
lost
in 1993. Its
stock price had been comatose for seven years. Scott products had
peaked long ago, and the company had not had a proper marketing strategy for several years. However, the deepest trouble Scott's
management and employees no
came because
longer believed the company's
decline could be stopped.
That
changed within a matter
all
By December
merged with Kimberly-Clark, creating
Scott Paper
consumer products company debt-free,
of months.
its
stock's value
in the
United States, Scott was virtually
had improved by more than 200 percent, and
just as importantly, the
gained confidence
—
in their
Before landing at Scott, panies: Sterling Pulp Lily-Tulip tries
&
people working
company,
at Scott
their products,
had
and themselves.
Paper (1967-77), American Can (1977-82),
(1983-86), Diamond International, Cavenham Forest IndusIn-
(1989) and Consolidated Press Holdings (1991-93). In
learned from ing Sir
re-
had helped turn around many other com-
I
seventeen states and across three continents,
I've
worked with
—and
—some of the world's great business geniuses, includ-
James Goldsmith.
What
I
learned was that
pretty good.
You must be
must assume vigilant,
that failure
it's
no longer enough
to
be competent or
great.
But even the great can't
to
billion.
(formerly Crown-Zellerbach) (1986-89), Australian National
dustries
be
when
the second largest
shareholder value had increased from $2.5 billion to $9
Perhaps
1995,
rest.
is
just
At the start of each business day, you
beyond the next obstacle. You must
working as hard today as you did when you were trying
reach where you are today.
Why
Ten Reasons 1.
Mean Business
Business
lowed
is
my
Did
I
Call This
Mem
Book
i\
Worth Your Time
Is
simple, remarkably simple. In fact,
four simple rules
Business?
—get the
right
if
everyone
management team;
cut costs; focus on the core business; get a real strategy
Harvard Business School (and
its
fol-
imitators), as well as
—the most
consulting firms, would be out of business. 2.
When problems
start at
a company, they're often traceable to
a self-aggrandizing corporate royalty more concerned with
own
perks than with the products the
services
company makes
When you must make
offers.
it
its
or the
changes, start by
throwing corporate toys (and their defenders) overboard.
Squeeze corporate headquarters and shrink high-priced, unproductive management. 3.
The most important person
any company
in
is
the shareholder.
Not the CEO, or the chairman of the board, and not the board of directors
I'm not talking here about Wall Street
itself.
Working people and
cats.
trusted us with their 401Ks
dren's college tuition
and
men and women
retired
and pension plans
their
own
fat
have en-
for their chil-
long-term security.
If
we're
not concerned about them every step of the way, they're
screwed. Another reason for calling If
above 4.
all,
your goal
is
to
make money
Marketing strategy
is
needs a dictionary
to define
one had I
a
this
book Mean
Business:
you're going to be in business, you'd better understand that,
at Scott.
company
facturer to
I'll
a vibrant daily
tell
it,
for the reality.
owners. If
your company
you've got a problem like the
you how Scott was transformed from
commodity paper manuitself as a global consumer
that thought of itself as a
one
that believed in
products company. 5.
Everyone
in
a
company needs
tied directly to the
performance of the company. The
secret in the corporate world
a business that
is
incentives, but they should
is
how
be
last dirty
directors live off the fat of
not their employer.
I
started a revolution by
Why
xii
Did
I
Call This
Book
Mm Business!
insisting that Scott directors
came
intensely
be paid only
and personally
in stock.
They be-
how
improve
interested in
to
performance. 6.
Don't turn decision making over to an
Use them sparingly,
at all. Don't
if
against risk taking or following your 7.
army
of consultants.
use outsiders as a shield
own
vision.
Reward leadership and outstanding performance
company. Most CEOs are ridiculously overpaid, but
level in the I
every
at
deserved the $100 million
took away
I
when
Scott
merged
with Kimberly-Clark. 8.
money where your reputation is, and have the utmost your own talent. When accepted the job of Chairman
Put your faith in
I
and CEO
of Scott,
I
put a portion of
and invested $4 million doing and 9.
I
cism
—
we
—
all
tell
about
I
believed in what
results,
carefully.
When you
If
have
spread the word, even
And when
stay out front. Take responsibility
your actions.
for
was
I
—would be successful.
acting like a bull in a china shop. lags,
fortune at risk
of us
—but pick your spots
a good story to
means mance
in Scott stock.
foresaw that
Be outrageous
my personal
if it
perfor-
—and
criti-
you're doing the right things, stay the
course. 10.
You're not in business to be liked. Neither
succeed. chances;
If
you want a
I've
am
I.
We're here to
friend, get a dog. I'm not taking
any
got two dogs.
O O O Several years ago, the traits ter
needed
for
I
met Roger Bannister, a man who exemplifies
success
wasn't a businessman
Bannister was the
May
6,
1954,
achievement.
I
business climate. But Bannis-
—he was an athlete and a surgeon. runner
first
was one
I
in today's
to
break the four-minute mile.
of millions
ran track
who
and heaved
cheered and envied
On his
the shot put while in high
Why
school, so
working
was an London
for Sir
Book
Man
who was
my
wife Judy and
master of
Phil's
Business?
meet him while
James Goldsmith. One
ecutives, Phil Lader, invited
ner with Bannister,
Call This
I
especially great honor to
it
in
Did
of
me
my
xiii
I
was
former ex-
to a private din-
alma mater, Pembroke
College at Oxford.
We and
I
ate in a 300-year-old dining hall and, while
traded stories from our careers.
traordinary athletic feats and
more
we
ate,
Bannister
He spoke modestly
of his ex-
enthusiastically of his subsequent
career as a renowned neurosurgeon.
He
told
me
he had known that the four-minute mile would be bro-
ken and that two fellows besides himself could do
upcoming
they were running in an earlier race
because
break the barrier.
in his heart
And he
did
it!
it.
When
he heard
race, Bannister entered a lesser,
and mind, he had
Incredibly, the
to
be the one
to
two guys he was con-
cerned about went on to break Bannister's speed record, but they're
Everybody remembers Roger Bannister and
just historical footnotes.
nobody remembers
the other
two guys.
commitment
Bannister had total
in
everything he did.
He
stu-
become a world-class runner and, later, a worldclass physician. He wasn't just a fellow who had natural gifts and moped along, like some of today's star athletes. He had a plan, paid diously trained to
and followed through. Bannister created
the price,
his greatness
by
using everything he had.
He was
the ultimate competitor.
he would charge after of
what
I
do
it.
I
in business:
He knew what he wanted and how
saw, in the things he did, a total application
Create a strategy, follow through, take
sacrifice, recognize opportunity,
and pick up the winner's
risks,
spoils at the
end. I
want Mean Business
your
own unique game
to provide similar lessons so
plan for success in
business has ever known.
some
you can develop
of the toughest times
PART
I
Saving a Fallen Giant
Chapter
1
PAPER THIN: A MICROCOSM OF RAD BUSINESS Lesson: Today, in good times and bad, everyone must be a turnaround manager.
I
my home in Florida, when it became shockingly apparent how much
was standing
Boca Raton,
in the aisles of
Company was
trouble the Scott Paper ticular
concern
to
me.
and chief executive
I
a Publix Supermarket near
had
just
in.
was
Scott's trouble
accepted the job as
its
of par-
new chairman
officer.
After two hours of wandering the store's aisles, seeking out Scott's
famous
my
label products
and
friend Dick Nicolosi
talking to unsuspecting shoppers,
were alarmed.
Scott's
I
and
packaging was so bad
even the products were embarrassed. ScotTowels hid from customers. They
seemed ashamed
of
what had become
them
of
in re-
cent years.
We asked
talked with consumers as they went through the aisles. their opinions
about what was going on, why
and how they decided what products school students, doing a
Our shopping edge about
tour
first
was an
to buy.
it
We were
was going like
we
We
on,
eager high
public survey, preparing for a big exam. excellent
way
Scott's product categories.
of getting firsthand knowl-
We
found
it
remarkable that
people talked with us easily and gave candid answers tions
We
to the ques-
asked.
heard a bunch of things. One was that the Scott brands were
considered old-fashioned, antiquated, and not particularly innovative.
To shoppers, they were
just plain boring.
And
Scott wasn't
good 3
Saving a Fallen Giant
4
at telling
consumers how well
its
products would hold up compared
with other brands.
The way Scott merchandise was priced and packaged was confusing.
The variety
of products
and the way they were presented on
made
shelves and in advertising
it
consumers
difficult for
store
to figure
out which product represented the better value. In short, Scott wasn't
keeping up with the competition.
& Gamble
Dick, a veteran of twenty-three years at Procter
came
me
Scott's chief marketing executive), led
(he be-
through an analysis
of our findings to figure out
what could be done. For the
since being offered the job,
had serious doubts about whether any-
body could save thought,
boat take on a
pumps
company.
this
what have
I
experienced the "Oh, God!"
signed up for? The Scott people had
I
lot of
I
first
water.
to get all that
was going
It
time
factor:
I
let their
an entire marina of
to take
water out and make the flagship seaworthy
again.
Those were the quickest two hours had spent I
They went by
The
issues
like
a moment.
we
identified
were not small
and
blips; they
were not solvable
were fundamental
change them would be
to
Queen Elizabeth //when
it's
in
a long, long time.
a heartbeat. They
in
for a
consumer brand,
like trying to reverse the
at full-speed
ahead.
course of the
We needed
time and
careful plotting.
The next though
I
day,
I
called Scott's headhunter
wasn't backing out,
I
and warned him
was having second
that, al-
thoughts.
O O O Two
brothers, Irvin
and Clarence
Philadelphia in 1879. The
Scott,
company began
founded Scott Paper
as a producer of bags and
wrapping paper, but began manufacturing
toilet tissue
plumbing became more prevalent toward the turn
Some in the
115 years
later,
Scott
was
in
when indoor
of the century.
the eighth largest paper
company
United States, and had the second largest U.S. market share of
tissue paper. In the
marketplace.
world market,
it
was No.
1,
with 15 percent of the
Paper Thin: A Microcosm
By the time Gary Roubos, chairman the Scott Paper
CEO
Company board
job in 1994, he
company had come can't
job
is
of the search
5
committee
for
of directors, interviewed
had already spent close to finding
He
candidate stunned the board.
Bad Business
of
six
months
CEO
its
me
for the
in the hunt.
The
twice before. The
first
"Wake up! This company
said,
be saved. Not only don't /want the job but whoever takes a
The
this
fool."
description given by
initial
Roubos
to
Tom
Neff, president of
the executive search firm of Spencer Stuart Inc., called for
who combined
someone
a classic consumer packaged-goods background
with experience running a business
—
a CEO, or
ideally,
maybe
a
company with internapeople who grew up in com-
chief operating officer, of a fairly substantial tional operations.
panies
like
for
& Gamble.
General Foods or Procter
made
Plans were profile but
They were looking
he was
to offer the job to a
second person who
fit
that
traveling internationally for a couple of weeks, de-
laying the committee's action.
And based on what
the search
com-
mittee had learned from talking with the candidates and getting their
harsh assessments of Scott Paper, something clicked. Roubos suggested
that,
before making a final decision, the search committee
should think "out of the box."
How
companies rather than
structure
about somebody
just
package and
who sell
could
re-
consumer
goods?
when my phone rang. Roubos, whose full-time job is
That's
as chairman of the $3 billion Dover
saw
it
said, "This
is
Corporation, described the situation as he
He
didn't try to bullshit me.
He
at Scott.
acute.
It's
an overly
much money on the wrong get out of its own way."
bureaucratic organization, spending too things.
He
It's
told
running
its
so slow-moving that
me
asked him
"It
own
can't
corporation has just twenty-two people
corporate headquarters.
we shared an I
that his
it
didn't
It
was immediately apparent
inclination toward leanness.
how
Scott got into such a mess.
happen
overnight,"
Roubos
said.
"When
board seven years ago, Scott was doing pretty business
is
that
cyclical.
It
was at
well.
I
went on the
But the paper
the top of the cycle at that time
and most
Saving
6
of
Fallen Giant
a
big subsidiaries such as S.D.
its
down,
the paper cycle turned
Warren were making money. But as
became very apparent
it
that
it
was
going to be very, very bad for Scott."
Many
management people
of the top
thirty years.
It
was very
difficult for
at Scott hadn't
them
changed
in
way
of
see a different
to
doing things. The boring, old-fashioned packaging that consumers
complained about reflected the old-fashioned thinking
had
that
management that could never make the kind
nearly wrecked the company. They tried, but the
had grown up of
changes
in that
that
antiquated culture
were necessary.
Roubos believed
men and women
that the
running Scott knew
they were in trouble and were trying very hard to figure a it;
they just couldn't see what
the
company's core
lated fields
it
way
out of
And having moved away from into so many ancillary and unre-
was.
tissue business
—ranging from health care
to
energy generation
—Scott
wasn't a focused business.
just
The company, he confided, was considering a bankruptcy
filing
if
dramatic change was not made.
As negotiations moved ahead,
would be a need egy,
and
ered
me
He I
I
told
Roubos
dramatic change
accomplish
I
agreed that there
if
and
strat-
the board empow-
that.
mince words with me. He
him
I
in direction
would only seriously consider the job
to
didn't
told
for a fairly
I
would attack
said,
"What would you do?"
costs, put together a
high-powered man-
agement team, focus strategy around the core business, and get
rid
of debt.
And
that's
what
I
did,
from day one.
O O O Once signed on I
a Chicago Bears
blitz.
Paper
for exactly
resold
it.)
My
the dotted line, the next few I
what
sold I
wife, Judy,
my new house
paid for
and
I
it.
Boca Raton
like
to Scott
(The company subsequently
put our belongings back in storage
and moved, along with our two dogs, Philadelphia for seven weeks.
in
weeks rushed by
into the Four
Seasons Hotel
in
Paper Thin: A Microcosm
As my car pulled up
my
1994,
first
orphaned
to Scott
day on the
I
I
and ScotTowels back
we met
its
office
manicured lawns, elegant water fountains, geese, and
be done.
to
they'd look so
handsome
three
representing each country where Scott did business,
had
my
In
I
and opulence
Scott's buildings told the world
shareholders' money. Running
of
what management thought about the
my hand
over the marble walls in the
I
thought about the self-aggrandizing executives
them.
I
knew
days
reach the sixth
ings,
ultimatums, and
That
floor.
absolutely incredible.
who had
built
—and the buildings' —were numbered.
with Scott lasted only as long as
tor to
is in-
headquarters.
its
foyer,
their
flags
knew what else
experience, the success of a corporation
versely proportional to the size
My honeymoon
in
into shoppers' baskets.
Taking in the company's campus, with buildings,
19,
couldn't help but think of those poor
resolved that the next time
good they'd be jumping
7
World Headquarters on April
Cottonelle toilet tissue
rolls of
Florida. Quietly,
job,
Bad Business
of
firings. If
first
week went by
The things
I
Scott's shareholders
it
took the eleva-
in
a rush of meet-
saw and heard were had known what
I
dis-
covered, they would surely have burned the place down.
There were 1,600 people working
known
ings
at the three
as Scott Plaza, including 500 people with
responsibilities. At the top of the chart
management committee.
I
or
it
management
was an eleven-member
ruling
ordered them immediately into a meeting.
"Ladies and gentlemen," life,
headquarters build-
I
said, "this
could be the best day of your
could be the worst."
By reputation alone, they knew what meant. For those who hadn't I
performed
—
virtually all of
them
—
it
would be
the worst day of their
professional lives.
asked them to introduce themselves and explain
I
One
thing immediately caught
nancial officer in
by
training, said
my
attention.
their duties.
There was no chief
fi-
attendance. The chief administrator, an engineer
he handled financial details
at these
meetings.
How
absurd! In
due course, the eleven member operating committee was
banded.
Two
The others
of
its
members were given increased
either resigned,
were reassigned, or were
dis-
responsibilities.
fired.
Saving
8
a
When
a business doesn't do well, no one can stand up and say,
Vm
"Well,
Fallen Giant
not to blame."
you were part
If
accept some of the blame.
you must
of the business,
you were running the company, you
If
must accept most of the blame.
Some
critics
to discern
may think
who
status quo.
screwed up.
I
I
I
willing to
is
people too quickly. But
fire
make changes and who
want the
didn't
want them screwing me up.
problems,
I
status quo.
don't
will
maintain the
The former management
don't
When there are
pretty easy
it's
blame employees. pick I
the right
management and the board of directors. That goes over well with employees. They know that if they're not efficient or productive, targets:
the fault usually lies above, not below. At
my
general
staff
meeting,
I
when talked about Scott management's underperformance. "Why are we where we are?" said. "Lead-
practically got a standing ovation
I
I
ership!
A
massive failure of leadership to perform!"
quite apparent to people
At the
same time go
and
was already
inside.
people
who
don't perform,
I
am
incredi-
When put people in leadership positions, of them. And once make a choice, stick with
who
do.
am very supportive My takeover of Scott effective
after
I
bly loyal to those
on the
It
change
I
I
I
it.
I
Paper was a bloodless coup, a most amazing in leadership, all
done from
within.
It
was
peaceful and quiet; no hostile outsiders took part. The result was that
no premiums or greenmail were paid from taking over, and
in the
to prevent
an unwanted
suitor
end, tremendous value was created for
the shareholders.
How did we do
it?
The remedy started with awareness. there
was an
effort to look at
Scott creating for
its
value creation.
five years.
costs, the overall results
How much
had generated and the cost
I
arrived,
value was
When
of capital
earnings were compared with
were not encouraging.
No sooner was the board aware of the widened. And it continued getting worse. the stock price.
even before
shareholders? The board of directors looked at
the earnings that the business
over the preceding
In 1993,
The work going on
gap, however, than the gap
Forget about just looking at
at Scott
was not creating
value.
Paper Thin: A Microcosm
The process by which decisions were made
of
Bad Business
to invest capital
9
was
flawed and shortsighted. There wasn't sufficient vigor, and the process stank. At
last,
the board could no longer deny that the return
on
investment was poor and the course that was supposed to produce future earnings
At the
and
same
was not being
plotted correctly.
time, shareholder groups all across the United States,
particularly in long-depressed
coming more vocal about
On
their
companies such as Scott, were be-
diminished investments.
the positive side, the prevailing
product
view was
held great potential. There
still
wrong with
the industry
itself;
that the
company's
was nothing fundamentally
the opportunity existed to improve
margins. But Scott was being horribly managed, and opportunity passing
it
by.
Everything pointed to a need for change, starting at ited to
was
—the
—but not
lim-
top.
O O O was not the cause of the average Scott employee's discomfort in was the result of the previous administration's having cre1994. ated a train wreck out of a once successful company. But people within the company had difficulty accepting that fact, particularly those in what were the company's pockets of excellence and comI
I
petence.
Everything was not bad. Scott had great business units, such as the
From-Home Worldwide commercial and
some
terrific
European Consumer and Away-
divisions; the latter
developed and marketed
industrial cleaning products.
couldn't understand
why everyone had
to
The answer was
ture of the restructuring.
people and some
Many
of those people
endure the pain and that
we had
competitive across the board, not just in one division. efficient
and unload a
ment had heaped on
Some
of Scott's
lot of
to
tor-
become
We had
to
be
the rubbish that years of poor manage-
itself.
European operations were rare gems
wise cloudy picture. The
first
time
I
met Paolo
Forlin,
in
an other-
then a senior
Saving
10
Fallen Giant
a
vice president of Scott's European operations, with thirty-five years
on the
job,
asked him, point-blank, "Why
I
is
this
corporation so
screwed up?"
He hardly paused
to think before answering.
"Philadelphia headquarters," he said. "Those people screw
up
everything."
Honest answer!
I
made
Europe who had
tives in
—one the few Scott senior execuperformed —our new head consumer of
Forlin
of
He took over what most people might have thought was a cushy position, with Scott products leading in many categories across the Continent. But his mandate from me came in products in Europe.
two words: "Do
better."
O O O my
After
and only meeting with
first
committee,
sought out the company's chief financial
I
amiable young
man named
only two executives of
"Why
management
Scott's existing
Basil L. Anderson.
whom
the
board
officer,
Anderson was one
of directors
an of
spoke highly.
weren't you at the executive committee meeting?"
I
asked
him. "I've
never been invited," he said.
"You are now."
Then
I
asked him about the corporate morale officer
executive meetings.
A
who sat
in
pleasant enough person being paid an ob-
scene amount of money, her primary job was to ensure harmony the executive suite.
been tearing each year-old
her,
I
told
told
me
getting
Anderson
its
demanding ass beat
to
know why
this
1
15-
on supermarket shelves
to get rid of her.
that she didn't
work
for
him.
Wrong answer. Get later,
I
rid of
called him. "Did
it?"
got the message. By day's end, Scott
officer,
in
with harmony. These people should have
repeated, and walked out. Half an hour
you do
He
I
hell
other's hair out,
company was
every day.
He
The
on
but
I
had found the
first
was
less
one morale
executive worth keeping. Anderson
Paper Thin: A Microcosm
recognized that out.
if
I
had made a decision,
And he cared about
expected
I
executive meeting. That was his told
him
Bad Business
be carried
to
it
11
getting things done.
Later that week, one of our in-house lawyers
and
of
last
to at least pretend to
asleep during an
fell
doze on our payroll.
be
interested.
A
I
woke him
few days
later,
he
was a memory.
O O O Company was
Scott Paper
microcosm
a classic
of what's
wrong
with the American corporation. More than $2.5 billion in debt and bloated beyond recognition, the Philadelphia paper producer was
unable to shake
implement Scott
the past.
a decadent and dying corporate culture about to
third three-year reorganization plan in four years.
its
was
off
A decade had
ing campaign. Viva. Scott,
company
the largest tissue
I
It
passed since
had some great
thought,
was a
pany masquerading as an
but
was
it
living in
had launched a proper market-
it
tissue
in the world,
paper brands, such as Scott and
consumer products com-
potentially great
managed commodity
out-of-date, poorly
paper company saddled with ancillary businesses such as health care, food service, energy generation, and coated paper.
Dun &
Brad-
had some good products and good
facili-
was onerous,
Scott's debt
resting uneasily during a
street credit watch.
On
the plus side, Scott
ties.
The way saw
ness
—
tissue
—
paper
with the debt, It
it, if
I
I
I
sell
could get
this
dinosaur back to
everything around
could rebuild
would take massive
it
its
that didn't
core busi-
fit,
and deal
it.
new management team, and an entirely new marketing depart-
restructuring, a
asset sales, severe layoffs,
ment. All of these are a lot easier said
go into a situation complished
like this,
in the first
you
than done.
is
believe that,
either get the pain
and
twelve months or you don't do
are no three-year restructuring plans in turing
I
done over three
years,
my
line of
moods and
when you
suffering ac-
it
work.
at all. If
There
a restruc-
corporate directions
Saving a Fallen Gianl
12
change. The longer
takes, the greater the opportunity for the old
it
corporate culture to corrupt hostage; the
first
What
it's
Employees and
it.
a tortuous process. The restructuring must be done in
twelve months. (See Chapter
technologies to
make
on the
11,
had lacked was a
Scott Paper
of settling
strategies are held
paper,
best,
some
"Real Jobs, Real Cuts.")
leader.
excellent,
continued applying
it
had seven
It
some all
lousy.
different
But instead
seven. That
was
crazy.
Even setting aside
all
the ancillary businesses,
different, high capital-intensive
Few companies could
it
was
still
in
paper businesses: coated and
afford to
two
tissue.
do both, and Scott wasn't one
of
them. But the biggest sin was that Scott Paper, the biggest manufacturer of tissue in the world, wasn't capitalizing
sales potential of
its
of the volcano.
perous today, don't take
it
for
Mine
is
brink.
I
If
you're successful and pros-
granted tomorrow.
been saving companies on the verge viving the long days
give
I
specialty has don't just pull
them strength and systems
for sur-
and nights ahead.
will profit
It's
a smart business ap-
any manager or executive as business expands
from regional and national
money-making ship
My
of collapse, but
not just a "turnaround" strategy.
proach that
reputation and the
faces every company, every day, not just those
on the edge
them away from the
its
assorted household brand names.
A similar situation teetering
on
today,
to global opportunities.
and you can
sail the
Run a
world tomorrow.
tight,
Chapter
2
SHOCK THERAPY Lesson: The price of leadership is criticism.
An
effective business
work out
regularly,
every year. But I
might not
live
if
I
I
management
get
just
If
fit.
work on
for
is
like
a workout.
stay with the workouts,
I
my arms this year, my
long enough to get
So many companies,
strategy
I'll
get
If
I
fitter
legs next year,
fit.
one reason or another,
totally lose their
Many were great household names at one time. Along the way, their own people forgot the entrepreneurial spirit that created them. The managers became custodians. They lost the ability to lead. They totally acquiesced to being members of the club. People want to be way.
liked; they don't
want
do what's
to
right
if it
costs
them entry
to the
clubhouse.
By the time tions
my
in
I
arrived at Scott,
career,
had turned around seven corpora-
I
including Lily-Tulip,
Diamond
International,
Crown-Zellerbach (which a 1983 Fortune magazine survey of executives
ranked as having the 195th worst reputation out of 200 corpora-
tions),
and, in Australia, Consolidated Press Holdings and Australian
National Industries. But Scott didn't
Bam! put I
that
had never before started so close
I
need a quick
can work
into place in
fix,
it
needed
my own
form of shock treatment.
any kind of business. And
management
1.
Get the
2.
Pinch pennies (see Chapter
right
to flatline.
defibrillating.
it's
(see Chapter
It's
a plan
simple:
3).
4).
13
Saving a Fallen Giant
14
Improve the balance sheet by focusing the business (see
3.
Chapter
5).
Get a real strategy
4.
for
success (see Chapter
6).
o o o I
the
took charge at Scott on April
new
reality at a
meeting
19, 1994.
for 1,600
Not long
after,
headquarters
spelled out
I
staff in the
com-
pany's largest cafeteria.
CFO
Basil
Anderson spoke
first,
laying out in real
numbers
the ugly
and
capital.
turn in Scott's performance, sales growth, profitability,
He presented change.
the problems so the staff could see the
all
We spent a lot of time
be given, and he was very
Then stepped up and I
months, dollars'
for
could have done what Basil did, but Scott's very credible
I
and well-respected CFO better communicated ation.
need
in
making sure the
worth of
would be
over,
Scott, a
right
messages would
effective.
told the
assembled
would be cutting thousands
I
the gravity of the situ-
assets. But,
I
and then we'd
added, get
staff that, in the
of jobs
and
coming
selling billions of
come December
31, the worst
on with building the company.
once inspiring corporate
giant,
was lumbering behind
its
competition, bloated beyond recognition, grossly overweight and sluggish,
I
said.
and think
fat
And
To compete
The speech
I
gave to the
staff that
day was
needed
it
company
what Scott employees wanted
my first annual
in Essington,
once again,
of itself as the entrepreneurial
that's exactly
big event,
effectively
shed
once was.
it
to hear.
just the
meeting as CEO, held
to
warm-up
at the
for the
Radisson Hotel
near the Philadelphia International Airport, on June
3,
1994.
Once off
again, Basil
Anderson delivered the bad news: 1993 sales were
by 7 percent. Income from operations had fallen by 19 percent. Net
income had declined by 30 percent on a normalized basis
(i.e.
restructuring charges). Pulping facilities in Chile, Canada,
had contributed heavily
to
million total losses. Prices
before
and Spain
another $20 million of the company's $277
and volumes had dropped
at S.D.
Warren, a
Shock Therapy
we owned
boom-or-bust company
that
15
manufactured coated paper
products.
Then
Basil brightened considerably. Since
I
had been
hired, the
stock had risen 30 percent to $49 because the market believed in what
we were
doing.
agement and I
We
had Wall
direction. That's
some
started off with
my
started
worked
I
worked
back tender, a
in the
beater
on experience gave
changed gears
I
over the floor to me.
background, describing how
I
paper and pulp mills as a machine
in the
third hand, a fourth hand, a fifth hand.
me
credibility within the industry
I
in
and with any-
was to work your way up from the bottom. my speech soon enough, making it infinitely it
had not been run well
said, "Scott's average
of late. "The last four
annual shareholder returns were down
&
Poor's 500 (over the
same
was up +10.6 percent and
the rest of the paper
and
1.9 percent,
years)
my
of
our man-
I
clear that the business years,"
when he turned
in
room and ran a converting winder. My hands-
one who knew how hard I
confidence
career in the industry at one of Scott's chief competitors,
Kimberly-Clark. tender, a
Street's vote of
while the Standard
four
forest
products industry averaged +9.6 percent. That's dismal."
my
The shareholders took the
company was
no-nonsense approach
in serious trouble
they were going to lose a
lot of
and,
if
well.
They knew
something didn't happen,
money.
Shareholders respect strength, and that's what they got from me.
announced publicly my facturing
company,
intention to sell Scott's coated paper
S.D. Warren,
and detailed my plan
one-third of the company's workforce by year's end.
on a percentage
basis,
I
I
manu-
for shearing
told
them
that,
our reorganization would probably take out
more salaried people than hourly people. There was no subtlety
in
my
fore 300 people, not at all like
known for. made some key
remarks.
what
It
was a rousing speech
be-
typical annual corporate meet-
ings are I
points about
going to be done about
it.
what had gone wrong and what was
Then presented my I
four-point turnaround
program: (1) get the right management; (2) cut back to the lowest costs; (3)
(4)
above
improve the balance sheet by selling noncore all,
have a strategy.
assets;
and
Saving a Fallen Giant
16
"A business plan plan
to build
is
is
like
a laser, not a shotgun,"
our position
to Scott's success, a living
twenty minutes,
In
it
was
"Our business
and rebuild our core business.
in tissue
I'm talking about developing a strategic plan that
map
said.
I
is
a road map, a road
document!"
and everyone
over,
room was on
in the
their feet, applauding. I
knew was I
playing to an unusual audience for an annual meet-
ing. In addition to the retirees
who
often
compose
shareholders in attendance at these get-togethers, a large
number
of curious analysts
heard something electric was to
meet me, look me
the bulk of the
we had
and business reporters who They wanted
in the air at Scott Paper.
and get an indication
in the eye,
attracted
of
what was
in store.
There was one strongly worded question after
my
speech. John
Brody, a union representative of the United Paper Workers International
Union and past-president of Local 448
vania, mill, said,
"I
haven't heard one
where you're coming from as
to workers
to the old traditional
jointness
"If
Scott's workers ness."
We
as Scott
of
means working and
the worker
in the plants.
going
in or
management
and
Do you believe do we go back-
versus worker?"
together for the mutual benefit of
Scott's future,"
I
answered, "then
I
am
for joint-
continued the jointness process and worked with the unions
was restructured back
After the meeting,
who
way
our Chester, Pennsyl-
word about
in 'jointness?' Is this the direction you're
wards
at
congratulated
I
to
its
core business.
was mobbed by shareholders and
me on what
I
said
and planned
absent from the group of well-wishers were Scott board of directors.
I
analysts
to do. Strangely
many members
was dumbfounded by
of the
their lack of visible
support.
Rather than dwell on
it,
I
made an unscheduled appearance
at
a
small luncheon that Basil Anderson and investor relations director
Michael D. Masseth had organized ers.
for analysts
and major sharehold-
Present was a representative cross-section from the major Wall
Street investment firms that followed the
Among them were
paper industry and
Scott.
Linda Lieberman of Bear, Stearns; George Adler of
Shock Therapy
Smith Barney; and Kathy McAuley of Brown Bros. Harriman outstanding analysts
whom came I
McAuley quoted my tioned
it
—three
to greatly respect.
about focusing
line
1?
a
"like
She men-
laser."
her report, and just about every business publication in
in
America picked up on
it.
O O O The bottom of
Paper Company:
line at Scott
We
cut back 70 percent
upper management and eliminated more than
1
became somebody
percent of the Scott payroll. Another 6,000 jobs else's payroll responsibility as
(for $1.6 billion),
1,200 total jobs, 35
sold off assets such as S.D. Warren
I
and a Mobile, Alabama, co-generation power plant
(for $350 million).
sold the company's corporate headquarters for
I
$39 million.
When December bloodletting
31
came around,
was
I
my
true to
word. The
ended and 20,000 people had secure jobs once
again.
Despite this kept promise, the media in Philadelphia (the City of Brotherly Love) bitterly attacked
had been tagged with
came
clear that Scott
me and
England and Australia, "Chainsaw."
in
needed a new
could gain a fresh perspective and a Scott's
nickname
started using a
management team
new start.
Boca Raton,
to
spread of 750,000 square
feet,
saved $6 million annually.
It
we
was a
which
setting in I
its
It
I
be-
managers
relocated the rest of
Florida. Instead of a lavish
leased 30,000 square feet and great
way
to
break the back of
Scott's plodding, consensus-driven corporate culture.
To me, the
real
news was
ing back. Stock prices rose
way
the
and
rose,
Scott's
market value came
from $38 the day arrived I
to
a year later (pre-split). The stock continued to rise every month there. In
December
1995,
1
my 603
days. That's
in total
more than $10
known
for taking
importantly,
I
businesses
also built Scott
down
I
value by $6.5 billion
million per day!
Almost anyone can shred a corporation down I'm
$89
was received a congratulatory commendation
from the board. The stock had increased during
roar-
to size.
And although
to their core operations,
back up. The increase
in the
more
value of
Saving
18
a
Fallen Giant
Scott's stock it
came about
had a promising
not only because
it
was leaner but because
future.
O O In
my
first
twelve months
we marketed
107
new product
across twenty-two countries. Every existing product
initiatives
was repackaged
We
and most were reconceived, reformulated, and/or relaunched. firmed up the Viva paper towel brand and, for the
first
time,
made
its
quality consistent across the United States. Cottonelle bath tissue be-
came an
upscale, advanced personal hygiene product sold with a va-
riety of
value-added enhancements ranging from baking soda to
hypoallergenic ingredients. Scott
Consumer created some "new" products by borrowing
tain heavy-duty items created
ducing them
to the
home
by Scott Away-From-Home and
cer-
intro-
bath and kitchen markets. This was done
under the direction of Dick Nicolosi, a veteran of more than twenty years with Procter
&
Gamble. He had hired fourteen new marketing
whose experience included years Colgate-Palmolive, and Coca-Cola. directors,
at
P&G, Kimberly-Clark,
Dick retained three world-class global advertising agencies to drive our brands in the future: facial tissue
J.
Walter
Thompson
worldwide; McCann-Erickson
and Bozell Worldwide
for
for
for Scott
bath and
ScotTowels and Viva;
wet wipes and Cottonelle. These three
re-
placed the fourteen disparate agencies that had previously handled
our advertising around the world. In
our Away-From-Home division, fifteen new products were
duced
in
sponded
1994 alone. (More went on the shelves in 1995.) to long-standing
also re-
customer requests that we bundle products
within our Windows, Scottfold, and WetTask lines of workstation sanitary and cleaning supplies.
"Look Under
We
intro-
'M' for Marketing," for the
ing strategy at Scott.)
o o o
washroom and
(See Chapter Nine,
complete story of our market-
Shock Therapy
We for
engineered a
example,
in India,
had operations
in
China, and Indonesia. Scott, which already
the
first
international tissue
company
in eighty
to
have a
China, thanks to our joint venture, Scott Paper (Shang-
in
hai) Limited, with the Shanghai Paper
We
and entered new markets
twenty-one countries and sold product
became
countries,
presence
total global strategy
19
also formed a joint venture
Company.
agreement with Pudumjee Agro
dustries Ltd., India's sole producer of tissue paper. Scott international tissue manufacturer with operations
was
the
In-
first
on the Indian sub-
continent.
Away-From-Home products and systems were
In Brazil, Scott's
launched via a marketing and technology agreement with DixieToga, that country's leading distributor of commercial tissue products.
The agreement served as a platform
for future
South American
expansion.
And our affiliate
in
Mexico invested additional resources
position Scott in the growing Latin
(See Chapter Six, "Rule
4:
to better
and Central American markets.
Get a Real Strategy,"
for the
complete story
of Scott's global strategy.)
O O O We built a new state-of-the-art manufacturing facility in Yucca, Arizona, and expedited another in Owensboro, Kentucky. In September 1994, Arizona Governor Fife
breaking ceremony for a plant at Yucca. in the
When
Symington joined
new $40
me
for the
ground-
million tissue paper converting
completed, the plant would serve our markets
West and Southwest.
And by November machine
at
1994,
when we cranked up
our $240 million
Owensboro,
its
capacity
state-of-the-art
—devoted
to
the
first
new paper
manufacturing
facility in
Away-From-Home products
had already been sold out and we had earmarked another $80 lion for a
second unit
Owensboro was tions. Its
there.
the prototype for future manufacturing opera-
advanced design and work concepts promoted
quality production.
mil-
low-cost,
20
Saving
a
Fallen Giant
These important investments
were part of an overall strategy
pany
development and implementation
in the
and more
from a paper com-
to transition Scott
packaged-products company. They were key
to a fast-moving
ements
marketing and manufacturing
in
el-
of a new, stronger,
effective strategy for Scott's core tissue business.
Could anyone believe we would commit $400 million
on new equipment
in
short-term-oriented?
We were
key markets around the world
if
we were
planning for the longterm right up
Paper/Kimberly-Clark merger on
until the Scott
in capital
December
12, 1995.
(See Chapter Sixteen, "Impressing the Analysts.") Besides looking out for shareholders' future return on investment, I
delivered short-term improvements to our owners
—and
set off a rev-
olution in the corporate world at large. (See Chapter Fourteen,
"Boards of Directors, God Forgive Them.") tion of Scott's
board of
changed the compensa-
I
directors. Instead of being paid in cash, they
received 1,000 shares of stock in the company. They holders, just like the teachers, police officers,
and
became
share-
moms and
pops
they served.
As
for myself,
I
bought $2 million worth of shares of Scott stock
at
$38 on the day took over the company and another $2 million worth, I
at $50, in
team
to
June 1994.
In
demonstrate confidence
the same, even though tively,
October 1994, in
some had
I
urged
our restructuring plans by doing
to
borrow money
they invested $10 million of their
shares. Every
one
of
my new management to
own money
do
it.
Collec-
Paper
in Scott
them became multimillionaires as a
result.
—and thanks my own stock Scott purchases, options, and other incentives — took my leave After twenty
months
of intense
work
to
of
I
$100 million richer than when That amount
moments when performance
is it's
I
arrived.
astronomical to the average person. Even
hard to imagine. But
at Scott.
Only
my
it
was compensation
$1 million salary
the rest, approximately $80 million
I
had
—
a five-year
berly-Clark, effective
my I
an incentive program
noncompete agreement
upon completion
for
the stock that
directly tied to improving Scott's performance. The
came from
have
was guaranteed. Of
was based on
bought out of pocket and the options
I
I
last
$20 million
signed with Kim-
of the merger.
Shock Therapy
My
contract with Scott provided for a salary of $1 million per year
for five years.
ized
I
When
the Scott merger with Kimberly-Clark
was
final-
received the balance of the $5 million guaranteed in the con-
I
tract.
21
Another $13 million came from the increase
my own
had purchased from
bought
at $38,
and $2 million
in
value of the stock
funds ($2 million worth of shares
My
at $50).
contract with Scott also
in-
750,000 shares (pre-split). Given the huge improve-
cluded options
for
ment
stock (from $38 pre-split to $120 pre-split) the options
in Scott's
were worth $55 lion
million. Restricted stock options
based on 100,000 shares
were worth $5
1
received after the stock
I
split.
compete agreement with Kimberly-Clark was worth $20 average of $4 million per year for five years. Finally,
an advisory
lion for
role with Kimberly-Clark,
My
mil-
non-
million,
an
received $2 mil-
I
based on 5,000 shares of
stock per year for five years.
People love comparing
Paper workers unrelated.
who were
my
$100 million against the 11,200 Scott
on
laid off
my watch.
But the two totals are
The jobs were eliminated because the company couldn't
afford them.
The people were unproductive
—not as individuals, but
within the bloated corporate structure Scott had become. In a
managed
smartly first
operation, they
place because their jobs didn't
My chore was to make sense its
would never have been hired
make economic
of the
sense.
company, force
means, and bring payroll back into
in the
it
line with current
to live within
revenue and
future projections. If
hadn't saved the company, everyone would have been out of
I
work, not just a percentage of people.
And my compensation backs.
value
CEO.
It
— I
was earned
$6.5 billion
was paid on
—
did not
was created while
billion
than 2 percent of the wealth
earn that?
Damn
was chairman and
1
and relaunching
right
I
I
Street.
created for
My all
and rebuilding
$100 million was
less
Scott shareholders. Did
did. I'm a superstar in
in basketball
Scott's core tissue
15-year-old franchise
company's goodwill on Wall
Michael Jordan
I
the basis of getting costs in line, selling assets to
projects, thereby protecting a
I
the laid-off workers'
as a fraction of the increased shareholder
that
reduce the debt by $2.5
the
come on
my
field,
and Bruce Springsteen
in
much
rock
like
'n' roll.
U
Saving
My
a
Fallen Giant
pay should be compared
to superstars in other fields, not to the
average CEO. Only a handful of chief executives are worth the big
bucks they are paid. Many are grossly overpaid and should be
fired
and then replaced by CEOs whose pay is strictly performancebased. (For more on my views on CEO pay, read Chapter Twelve, "The Best Bargain
Is
an Expensive CEO.")
Mike Mullaney, a fund manager
at
Threadneedle Investment Man-
agement Company, once commented on my work
man
Post story: "This
make share Still,
I
get criticized a
enormous value
if
I
thinker!"
with
my
My answer to
that? Rubbish.
years,
it
if
can create
I
can get done what some-
I
company.
and more
slashed Scott Paper. But
company,
few outsiders could
because
I
I
move so
tell
fast.
If
I
did the
to critics but
did so selectively.
was
I
just
much
so
of
which was which anymore.
had pared away too much and
I
it
didn't cut into
Even the Kimberly-Clark people, during merger negotiations, pected that
he a
painful.
cut the flab. There
I
isn't
think most people agree
I
might be more palatable
less profitable
the muscle of the that
to
out of there in a
is
and build the company." Look,
results but they're put off
would also be
it
People say, "Dunlap
lot.
a year or two years and
in
deed over several
I
know how
did take five years, intellectuals would say, "My,
deep
Yes,
to
an animal, but he seems
else takes five years to do, hurrah for the
But
a Palm Beach
prices go up."
year, he doesn't stay
one
is
in
that the
sus-
company
couldn't operate over the long term. But once they got under the corporation's skin, they arrived at a different point of view. Kimberly-
Wayne Sanders told a reporter from The Wall company would adopt many of Scott's ways.
Clark Chairman
Journal that his I
all
have received the time for
my
price of success;
chine, even
I
my
share of favorable press, but
I
still
Street
get criticized
rough, indelicate handling of companies. That's the
accept
when was I
it.
I
didn't hide
reviled
behind a public relations ma-
and ridiculed over
per and magazine writers and
TV commentators
the worst S.O.B. ever. Current
and
prior
the years.
Newspa-
have painted
government
officials
me
as
such as
Clinton Labor Secretary Robert Reich and Nixon speech writer turned
Shock Therapy
presidential candidate Pat
Buchanan have
antishareholder-value bandwagon. But
my own job?"
biggest
critic.
Every day
So long as the answer
bother
yes,
is
I
also joined the anti-Dunlap,
accept the heat because
ask myself, "Did
somebody
I
am
do a good
really
I
else's criticism doesn't
me much.
The harshest
my
that
commitment
nicer
guy
to hire a nice
me
critics call
much
probably a
aware
I'll
23
a bastard and say
guy than most people
to turn
around a
I
have no heart. I'm
think, but
who's going
conglomerate? I'm well
failing
brashness draws antagonism. But don't mistake
being successful with heartlessness.
to
my
you need
If
someone at whom to shoot poison arrows, look for my predecessors at any company I've turned around. They are your villains. Scott, under the leadership of my predecessor, was in serious trouble. But he still made millions by the time engineered the merger I
with Kimberly-Clark because tions
gave value to the worthless stock op-
I
he collected while helming the company toward oblivion.
him
criticized
for
causing the problems?
The media and don't understand
which
politicians don't criticize the proper
why do what I
compensation layoffs. Plus,
I
I
do.
comes
so often criticized,
is
The amount
of
people and
money
I
get paid,
as a result of the free market.
invest
my own money.
my
of-pocket cash and
The
1,200 layoffs
1
The Al Dunlaps people did
job,
I
could have
money at
lost
their jobs.
would have looked
screams out
for
I
and
fires
people,
keep uppermost I
in
—
if
I
back
I
would not be hired
wrong
top corporate
if
I
have empathy is
not that
I
for
"Chainsaw those
let
deci-
most chief executives do, and
—
10 percent of the workforce
Al,"
who sells
go. But
what
I
cut away 35 percent, but that
think that's terribly important.
off as
make
incompetence
decisions, their
in Pinstripes" or
my mind
saved 65 percent.
action
the
their
an Al Dunlap.
When become "Rambo assets
in out-
like a blessing.
But because some executives can't
make
Scott.
and costing 20,000 other people
of the world
sions or consistently virtually
My
always tied to the profitability of a company, not to
is
The whole thing could have collapsed, costing me $4 million
jobs.
Who
that's nothing.
It's
If
I
fire
a tease.
don't take
a nominal I
could do
24
Saving
less
and avoid the
Fallen Giant
a
criticism.
again and again. That Criticism
is
and
Human
the price of leadership, in government, sports, busi-
who effect
major change will be severely
Everyone
vilified in the early stages.
nature's defense
Most do.
off."
have to go back and slash
I'll
a fraud imposed on employees.
is
ness, or the arts. People
icized
But then
I
don't.
mechanism
the
tells
When you back
will
crit-
be against them.
change agents: "Back
you lose momentum. The
off
window for change closes. Proponents of the status quo win out. AT&T Chief Executive Officer Robert E. Allen stunned the business world, in January 1996, by announcing plans for 40,000 layoffs as part
company's split
of the
into three operating units.
by mid-March, Allen had knuckled under,
icized in the media, and,
reducing the planned cuts by more than 10,000. of
AT&T's problems could be
to fix
He was severely crit-
A significant portion
laid at Allen's doorstep.
them, drew heat, and wrinkled
like
a cheap
He attempted
suit.
Many observers point to AT&T's $7.48 billion (in stock) purchase of NCR (once known as National Cash Register) in 1991 as an important cause of the recent
layoffs.
NCR, a leading manufacturer
and business machines, was an acquisition giant never five
years
edged
computers
the telecommunications
meshed with and never should have engaged. Less than
—and more than $2
that the
spin off
of
billion in losses
two companies were a lousy
fit
—
later,
AT&T acknowl-
and announced plans
to
NCR.
What was so wrong with that deal? For one thing, NCR was making money before AT&T took it over. AT&T's computer business wasn't. It lost
$200 million on computers the year
it
grabbed NCR.
Following the breakup of the old Bell Telephone System monopoly in 1984, ness.
AT&T
To reach
desperately sought a
that end,
it
way
extricably closer, which should have
ever deeper hole for billion
it
lost
itself.
meant magic
money from
According
to
job.
busi-
As the
—via modems—grew for Allen's
in-
com-
the beginning, digging an
The Economist,
on computers between 1985 and 1990, and
workers.
computer
charged Robert Allen with the
years went by, computers and telephones
puter division. Instead,
into the
AT&T
lost
$2
laid off 50,000
.
Shock Therapy
Allen, meanwhile,
and CEO
of
AT&T.
upward, miraculously becoming chairman
fell
When
he began his run on
chairman Chuck Exley saw AT&T's future and
"We simply wrote
NCR in it
bled red.
will not place in
then-NCR
He
resisted
NCR
jeopardy the important values
we
are
order to bail out AT&T's failed strategy," Exley
in
to Allen.
After the takeover, with Exley out of the way,
AT&T's computer business
in the black,
barely a year. By September 1995, offs at
1990,
company's advances.
the telecom
creating at
25
NCR
AT&T,
$720 million
loss.
itself laid off
Thanks
to
when
NCR
briefly put
but the sensation lasted
Allen announced record
7,200 employees, reflecting
AT&T's deep pockets,
it
at
AT&T from
own
had stayed
personal computers long after the market had surged past
Look
its
lay-
in
it.
a different angle, as Fortune magazine reporter
Carol Loomis did. She noted that in 1984, the year of the Bell Tele-
phone breakup, the new AT&T had $12.4 uity,
ranking
In the Its
it
just
ahead of General
dozen years
market value
in
that followed,
billion in stockholders' eq-
Electric's $11.3 billion.
GE earned
$44.6 billion in profits.
January 1996 was an incredible $117
Loomis pointed out
that
billion.
AT&T, during the same period, took "more
than $23 billion in pretax restructuring charges
—not
including an-
other $13 billion of special charges for changes in accounting rules
AT&T made
bottom-line profits of only $14.5 billion on
ers' capital,
a dismal performance."
Newsweek would soon "Allen
told a joke going fire
around AT&T
everyone but himself, and
its
.
sharehold-
in early 1996:
AT&T would
.
Allen
stand for
& Two Temps." mess Robert Allen helped create and now
That's the
legend that
is
forever his.
The tens
sustains, the
of thousands of workers he peri-
odically lays off every few years to
make up
for
lard probably sleep better at night
knowing
they're at last safe
mismanagement and from
when do a restructuring, do it once. When it's over, everyone can move on. develop a real, practical strategy that adhim. At least
I
I
I
dresses the business problem at hand, and employees never worry
about the same thing happening over and over again.
Saving
26
a
Fallen Giant
Executives must tackle the doubters and the scathing criticism
head-on and not avoid them.
If
their actions are right
and
correct,
they will also be eminently defensible. There will, of course, be great suffering. But in the cool of the night,
do what we're doing, The number
all
we must know
of people
I
have fired and the assets
have been overreported. What goes underreported took limp,
lifeless outfits
and
Forest Products
that
we
if
don't
these people will lose their jobs.
such as Scott Paper,
rebuilt
them
I
is
Lily-Tulip,
into real businesses.
have unloaded the fact that
I
and Cavenham Look
at the op-
erating earnings improvement, quarter to quarter over the years, at any of these companies. That
but the people
The self as
final,
who
is
me
what the people who write about
me depend on. criticism of me is
miss
hire
recurring
that
I
have never proved my-
a long-term manager, only as a turnaround specialist.
Our em-
phasis at Scott Paper on marketing, developing a global strategy, and
building
new manufacturing
long-term future. But there
facilities
some
is
shows we were planning polemic as
truth to this
for
a
well.
I
crave the challenge of a major restructuring. There's nothing better
than being handed a ton of clay and assigned to mold and shape
it
into a beautiful piece of art.
By
contrast,
when
that? Eventually,
I
things are going well, where's the challenge in
have gotten bored every place
Once a company becomes for
me.
cept
I
I
business-as-usual,
have been. it
loses
its
appeal
honestly feel that the infamous Al Dunlap doesn't exist ex-
when confronted
with extraordinarily difficult situations.
entranced by situations where major impact, challenge
I
I
am
can make great change, have a
my
abilities,
for
making money. earned every penny
and create enormous wealth
for shareholders.
So make no apologies I
I
of
my $100 million by increasing the overall value of Scott Paper by $6.5 billion. And wouldn't have made a penny unless the company and I
its
shareholders
On
made money. was paid
July 17, 1995,
I
I
capped
to
perform and
I
did.
the turnaround of Scott Paper by an-
nouncing a stock swap merger with Kimberly-Clark (see Chapter Sixteen, "Impressing the Analysts") that created the second largest
consumer products company
in the
United States.
— Shock Therapy
By the time the companies merged on December
12,
I
formed a sloppy, incorrigible conglomerate worth $2.5 shareholder value into a focused, highly desirable
had
27
trans-
billion in
—and profitable
$9 billion corporation. Not bad for less than two years' work.
ENDNOTE ^ee
Chapter
the difference
"The Best Bargain Is an Expensive CEO," for an explanation between stock options and restricted grants of stock.
12,
of
PART
II
Four Simple Rules
Chapter
3
RULE
1:
GET THE RIGHT
MANAGEMENT TEAM Lesson: Magnify your own abilities by surrounding yourself with great people.
The term
"to
Dunlap" has become a verb
means someone
is
is
not the best.
If
you focus on the
It
is
best,
have the best management, the best employees, the best prod-
will
ucts, the
tor
business lexicon.
focusing on what that person does best and
eliminating everything that
you
in the
best marketing, the best payroll system, even the best jani-
—the best of everything.
Being the best
the most basic goal a
is
business should have.
Management
is
the spine
around which
all
the rest takes shape.
Leaders and teammates pull together on game day to win and
Some
achieve mutual goals.
captains have
system; others are free agents
who
come up through
the farm
have signed on with the highest
bidder.
don't believe a company can fix itself solely Management has too many friends, too many
For the most part,
from the
inside.
vested interests, too the
I
much
baggage.
If
managers won't have the backbone
a correction to
do
it.
is
too painful,
They must have a
—perhaps a new executive or manager brought from the outside —someone who can say "No" and who driven do
catalyst
in
is
to
what's right for the business no matter what the hurdles, or who gets hurt, or
how
it
shakes up the company's structure. 31
Four Simple Rules
32
Criticism causes
Why do
icized.
managers
because no one wants
to fail
be
to
crit-
leaders fold their tents? They can't take the heat,
which comes from both within the company and
outside.
They don't
make change because that draws criticism. They want to go along; they want to get along. And if they rose up through the ranks, they know what the culture allows and what it doesn't. People want to be liked. And when they take difficult positions,
want
to
they're going to alienate people.
and become
selves
taken
down by
be done
They don't want
to elevate
Anyone separated from
them-
can be
the herd
predators.
In talking with
to
targets.
at his
one corporate company. He
leader,
said,
"I
I
what
laid out
do
can't
that
I
thought had
because I'm part
of the culture."
To me,
that
sounded
like the truth.
He was entrenched
in
what
was, not what could be.
Look
at Scott: three restructuring
didn't get
right until the
it
115 years!
company brought
a restructuring
Still,
plans in four years, but they
is
in
its first
not just people;
outside
it's all
still
CEO
in
the other
things that go with improving the productive output of the company.
The heart
of
my approach
to leadership,
or a simple course correction,
is
whether
in
a turnaround
a seven-point plan.
Develop an Inner Circle
1.
Unlike
some people, who have a
managers, team, I
I
put together a team one time.
how will
I
ever
build teams that
We
revolving door for executives and
know
If
I
the players' strengths
work and
fight like hell
keep changing the
and weaknesses?
—with each
other, with
we never before dreamed possible. hire mature men and women who know how far to push each other and when to say when. They come to the table as individuals and leave it united for the good of the company. know they're after what's best for shareholders because their own salaries and incenme.
drive each other to plateaus
I
I
tives are directly tied to
shareholder returns.
At Scott, there wasn't a single person on
who
left.
Many were people
I
my management team
had worked with previously
Get the Right
who
Management Team
33
tandem with me. Two were executives under the previous managements whose broader talents had been untapped or underappreciated. And one met, by luck, on the tenpeople
could work
in
I
nis court.
Whenever
possible, bring in people
men and women who
fore,
predecessor. They
ground running. They
hit the
and
If
have been with you beto
you and not your
reflection of
you and, without
be responsive
men and women. They
copies or "Yes!"
stant
will
be a general
do things the way you would
asking, will
can
will
who
—without
being carbon
are used to your style and
be blown sky-high by
will not
in-
change.
startling
you've been promoted from within, don't just bring along friends
from the lunchroom. Look
for
people
who
challenge you and
who
have ideas. They will stimulate you and the company.
You want people who have been through change before. And don't
be afraid
people
of
who speak up when you go
off the
deep
end! Have faith in their judgment. That's very important.
A
management or operating committee. I've always found that small works best. At Cavenham Forest Industries, had a committee of seven, which we called "The Magnificent Seven." They earned it, too, by whipping that company business leader needs an inner circle, a
I
into
shape through cost-cutting, re-engineering of production, and
upgrading of outmoded equipment and practices.
was sold person
Hanson
to
at the top.
Industries, the
new owners
When Cavenham
didn't
change a single
The Cavenham operating committee
I
put in place
stayed for the next decade and continued squeezing every possible profit out of that
At Scott,
Murtagh,
I
company.
put together a "Magnificent Five,"
Basil
Anderson,
couldn't possibly be style.
But
I
cific skills,
more
different
from
ests
—we
me
in
—who
temperament and
took these people, each very different and with very spe-
and melded them
Boca Raton, where
aged us
Kersh, John
Dick Nicolosi, and Newt White
into another great team.
along in no small part by being strangers Scott to
—Russ
I
had
helped
a strange town; relocating
lived before, albeit briefly, encour-
to frequently socialize together all
in
We were
and discover mutual
played either tennis or golf or both.
inter-
Four Simple Rules
34
Each member
of the operating
each major decision, even
knew wouldn't I
use them
just
committee played an equal
was outside
if it
You read about marketing director Dick Nicolosi
other.
in
Chapter One.
turned to
I
Tom
Neff, president of
York-based Spencer Stuart, the executive recruiting company
recommended me
that
I
a tennis court, but hiring him because of his serve would
have been irresponsible. Instead,
New
They
in their discipline, in their expertise;
would apply them across the board, challenging each
We met on
role in
his area of expertise.
to Scott's
board
of directors.
I
asked Neff to
independently rate Dick's qualifications and ability to do the job. Dick
came back with
The
role of a
the highest of marks.
headhunter
is
not only to find people but also to
check references and maintain contact with the oping needs.
Now
let
used Neff 's expertise
I
me
tell
you about
client
about devel-
in all of these situations.
my other four wizards.
Newton White, one of two executives kept on from the previous management, was a good hands-on guy, but in the early stages he disagreed vehemently with what was Senior Vice President
P.
I
I
doing.
Newt ran
Scott's
Away-From-Home, Worldwide, business, which
products particular to commercial washrooms and worksta-
sells tions.
He had
actually
been one
of the
people the board considered
CEO and chairman of the board. He had often was to get anything board about how difficult
as a successor to the
complained
to the
it
done because too many people stood like
in his
way. White thought a
lot
me.
Newt had been with took over the company. He rose
Joining the sales force right out of college, Scott for twenty-eight years
up through
when
the ranks in sales
the United States
and Asia
I
and marketing, and ran operations
for a
wide Away-From-Home business
in
time before taking over the worldin
1990 and joining the executive
operating committee.
On my the only
first visit
guy
1
to Scott before actually taking the job,
was introduced
to beside the
Newt was
board members. The
commercial Away-From-Home business had a history
of
good
per-
formance, growth, and earnings improvement under Newt. He had
Gel the Right
survived Scott's cockeyed culture by going his
own
Management Team
35
own way and doing
He had good people working for him and a track record of innovation in the market. That's why the board of directors had recommended so strongly that he should be one of the few ex-
his
ecutives
We
thing.
I
keep.
where the business was going,
talked for an hour or so about
and he
told
me about the things that needed
changing. Newt was blunt
about what he called the company's "pretty horrendous strategy
consumer business" and how
it
make much sense
didn't
consumer products without an organized marketing
to
him
in the
to sell
strategy.
He looked me straight in the eye near the end of the conversation and asked me why he should stick around if was going to clean I
house. "It
needs
rest of the
be done," he
to
I
"Maybe
I
should
just leave
with the
gang and get on out of here."
At that point,
panies
said.
I
decided to
fill
had turned around,
him
my
in
on
my
background, the com-
philosophy of restructuring. He
when appropriate, me in the eye again and rephrased the same question. "That's great, Al," he said. "But why should stay?" "Because," said, "I'm going to make you rich."
tened patiently, asked a few questions
lis-
then looked
I
I
I
said that
the people
I
had every intention
who
of turning Scott
participated alongside
me
in that
around and
that
process would be
well rewarded.
Newt
said he'd stick around a while
and see how
it
went. The
next six months were incredibly hard on Newt, a solid operator
in
a
company populated by incompetents, but a man who had never worked anywhere
else
and never
felt
the fury of a corporation in
turnaround.
We
butted heads often during that time.
understood that
I
was going
out him, but that that,
I
I
let
didn't
end
until
Newt
company with or withwith him. And that after did
to restructure the
preferred to
would once again
It
do
it
him and
I
the other senior executives op-
erate the business.
Chief Financial Officer Basil Anderson, the only other holdover from
previous management, joined the
company
as an internal consultant
Four Simple Rules
36
in 1975.
company would hire people to work for a year consulting group, a management science/operations
At that time, the
or two in the
research team that helped Scott's business managers with problemsolving. Consultants then
developed
in the
moved on
whatever area of expertise they
to
group.
He helped senior executives solve particular business problems and was promoted two years later to the newly created position of manager of international finance. That was significant because Scott already had operations (mostly The experience served
Basil well.
ventures) in sixteen countries at the time. But no one at Scott
joint
was overseeing themselves.
and helping those companies finance
that activity
all
Some were very sophisticated, such
gland, but others accepted terms
as our venture in En-
and conditions
that
many
paid high rates for everything. Basil restructured ations
and helped them develop long-range
In 1983,
he became Scott's
first
were lousy and of these oper-
plans.
director of investor relations. That
assignment made him an expert on both the company and the paper industry.
On
the road constantly, visiting
he gained a tremendous insight into
lysts
money managers and shareholders and how
anathey
think.
Despite his vast the company, Basil
was
still
—and growing—
and despite being promoted
When
I
tore
up
my
He
He found got
my
arrived in 1994.
who
joined
me
at
Lily-Tulip's fragile structure in the early 1980s,
who
company's structure, a concept
grasp.
I
old Lily-Tulip gang
he was the only financial analyst the
to chief financial officer,
treated as a junior executive until
Russ Kersh was one of Scott.
familiarity with the intricacies of
himself telling them
understood his
how
own to
attention because the people
do
how
to reorganize
supervisors couldn't their jobs.
between us couldn't stop
And every time walked into the CFO's office, Russ was usually there. When we moved Lily-Tulip from Toledo, Ohio, to Augusta, Georgia, promoted him to corporate treasurer. He handled many of the financial intricacies of taking the company pub-
talking about him.
I
I
lic
and
Fort
later
Howard
was involved offered
South Carolina, with
in
him a job
me
Howard Paper Company. but he chose to come to Hilton Head,
its
sale to Fort
instead.
We
continued working side-by-side
Management Team
Get the Right
GOSL
over the next six years for Sir James Goldsmith's
37
Acquisition
Corporation.
When went
to Australia in 1991 to take over operations at
I
Con-
media conglomerate, Russ took over
solidated Press Holdings, a
Adidas America, the running shoe manufacturer. He spent about eighteen months leading their restructuring
Adidas was coming
hundreds
taling
lessons with
When
effort.
consecutive years of annual losses
off four
had learned
of millions of dollars. But Russ
me and
he arrived, to-
his
put them to use. Just for starters, he fired the
company's marketing group
and
(to start fresh)
half
finance
its
group.
Adidas made $6 million
in
And
million the previous year.
He
told
me
later that
if
year under Russ, after losing $30
its first it
was
profitable again the next year.
he hadn't worked with
me
prior to taking the
he probably would have listened to more of what the existing
job,
Adidas managers said was wrong, rather than saying, hear
it."
Everybody there
pany got where
it
tried to
tell
happened three Russ
is
hell. In
we
the
going to do tomorrow?
How are
I
I
we
I
are going to go tomorrow." is
tough
many companies where he has worked with me, Russ I
am
of the toughest decisions,
I
usually
my
com-
George
gregarious and has a good sense of humor, but he the
to
company turned around? don't care what years ago. don't care what happened last year.
If
has been
how
want
is
going to get today's
care about where
as
the history of
don't
was. But Russ told them, "History
Washington, not Adidas. What are
we
him
"I
alter ego.
about
to take action, particularly
bounce
it
off
Russ
first.
I
trust
one
him
without hesitation.
John Murtagh, about ous and quiet force
whom
when we work
later, is
a very seri-
been a mitigating
together because he provides executives with for
my own bombast and
me, he has an unbelievable capacity
hours. John
more
fellow, quite unlike myself. He's
an emotional counterbalance like
you'll learn
was our general counsel
for
rhetoric. But,
hard work and long
at Scott, yet
he played an equal
role in all the operating decisions.
Russ Kersh and steps
I
tend to be very go-go, and once
between us and
says, "Stop!"
Everybody has a
in
a while John
role to play; that
38
Four Simple Rules
was
his. In
one
like
2.
a well-conceived, well-oiled organization, there
John.
Compress Very
Difficult Objectives in
and Achievement
Time, Resources,
Once
the right
pen.
take a yellow legal pad
I
team
mittee meetings.
crammed to
be completed. I'll
If
something
start
compressing very
is
asking
On
and achievement and assuming
a l-to-10 scale, no one working for
produce
will
that
me
is
hear."
things over It's I
and
over,
a
100 percent of
if
you hear
is
One
of
to
always stay
6.
They're 10s
it
remember
it"
10 percent of
ten times, you are likely to
any
managers
tell
"get
in
the
first
what you
remember
it.
At Scott, whenever
what we were going
we decided
to do, set a
a corner. For example,
completed
I'll
because people never
the old saw: "You only
believe
it
if
like 10s.
group a certain amount of posturing takes place.
time.
sup-
my managers
One-on-one, I'm probably easier to deal with, because
some
is
difficult objectives in
meet or exceed expectations. This forces them
sharp.
things hap-
always move the dates up, always move the target up.
time, resources,
and
make
with notes to operating com-
be done by Thursday, on Tuesday
to I
my key management styles will
to really
attack each item with relish, specifying the day
I
I
done.
ready
in place, I'm
is
when expect each assignment posed
some-
is
in eight
I
make
a move, we'd announce
time frame, and paint ourselves into
announced
months, a goal
tious but impossible. But
to
that
our restructuring would be
many thought was
not only ambi-
working against the calendar brought great
discipline to the process.
We
never
left
ourselves an "out."
We
just
performed.
3.
Develop Fast Opinions about the Competency of the
Managers and Staff
When you move fast
as quickly as
I
do
in hiring
and
firing,
you develop
opinions about the competency of your managers and
staff.
I
Get the Right
don't believe
I
same question on
One
people.
test
I
39
someone was good and my managers dis-
ever thought
And always
agreed.
Management Team
my techniques
of
is
to ask the
different days in different ways, looking for convic-
"Do you
tion. I'm also, indirectly, asking:
really
know what you
are
talking about?"
Early on,
I
tested Basil
Anderson by assigning him the task
of re-
forming Scott's reporting process. His job was to eliminate reports
made no sense and nobody read anyway, as well as to cut back on the number of people compiling and receiving reports. He was that
up a paperwork nightmare.
brutally effective in cleaning
By
contrast,
sources were
my
fruitless. I'd
constantly studying
The logjam
fix.
it
—even
are not
a mistake
is
of a
all
the idea
who
made by
sudden going
They'll insist they front
if
and always got
cannot keep the people That
human
re-
hand them an assignment and they were
didn't disappear until
the core of a task I
early attempts at straightening out
was
to cut
back on
put John Nee in charge.
I
it
studies.
He
cut to
done.
created the debacle I'm expected to
timid executives. Existing managers
to
were doing the
change! They are afraid of change! right things all along, right
door of bankruptcy court. That's what got them
up
to the
in trouble to
begin with. Flush them out of the system.
Remember That Business
4.
Overintellectualize
maxim
Here's a
won't get
it:
I'll
you have In
I
During
simple.
simple.
and
It is
I
die,
and some people
still
not complicated. Like the football
tackling, there are a
my
talk,
few simple things that
at Stetson
University in DeLand,
a student stood up and said, "Mr. Dunlap,
so successful doing such simple things?"
The people trying
may seem it's
is
spoke to students
how could you be is
It
to do.
1995,
Florida.
Simple: Don't
repeat until the day
Business
basics of blocking
Is
to
make
it
seem complicated
—
complicated; therefore, obviously they don't get
unbelievably simple."
Here's what you need to do:
I
said,
"It
to
them
it.
To me,
it
Four Simple Rules
40
1.
Set major goals that
2.
Don't
let
make
a difference, goals that are attainable.
people stray from these goals. Hold them accountable
with great tenacity. 3.
Focus, focus, focus on your handful of goals.
many
goals,
you
What complicates
will
fail.
Your intentions
will
If
you
become
set too
diffuse.
business? For one thing, managers and employ-
ees do. Rather than solve problems, they put their energy into
all
the
why the company can't do something, Then they hire outside consultants who conduct studies. Then, recommendations in hand, reasons
they pass the problem on to a committee. By the end
one I
—
it's
remember reading through
ings.
company misses
so complicated that the
its
—
there
if
is
opportunity.
the minutes of past Scott board meet-
The directors were always studying something. And rather than
reach a conclusion or take a stand on something, they'd hand
another subcommittee
for further
examination.
It
it
off to
was a defense
mechanism, not a decision-making process.
5.
I
Keep Your Staff Small
believe in small executive
everyone
part of a team.
is
staffs.
They
When all
a
company has a
small
staff,
work together and are more
ac-
countable. Large staffs aren't as attentive and they're always pawning responsibility off to
contributors
somebody
and they must
stay
else.
on top
The two major business heads
I
staffs
are
much
—Consumer's Dick Nicolosi
—were
part of the small staff
consulted on most major decisions. So were general
counsel John Murtagh,
CFO
Basil Anderson,
and Russ Kersh, who
specialized in strategic objectives and overall operations.
nated the group. Everybody
enough
to
keep
fully
up on
all
knew
busy work.
coordi-
decisions. In other places, I've seen exstaff.
Discussions in those
meetings go on and on and nothing gets done. The is
I
everybody else's expertise well
ecutive staffs so large that they needed
business
greater
of projects.
at Scott
and Away-From-Home's Newt White with which
Small
nitty-gritty of their
— Gel the Right
When
a
staff is
Management Team
too large, everybody has to wear safety glasses so
they don't get poked in the eyes because everybody at
6.
each
41
is
poking fingers
other.
Never Rely on Large Meetings for
Important Decisions Don't
The
make
decisions in
result of the
rooms
meeting
is
full
of people.
It's
horribly inefficient.
usually, "Let's have another meeting."
By
company where have had a very small staff, we could always make major, tough decisions with just a couple of peocontrast, in every
I
around a
ple sitting
Put twelve or
table.
more people
think they must look smart,
a
in
room
— nothing happens. They
and therefore they play
cohesive approach. Here
is
how
the problem,
we
will
one-upping
at
their counterparts, looking clever, playing "Got ya!"
all
I
—
demand a all
of us
fix it?
When was chairman I
one
Lily-Tulip,
of the
Paper Company.
would augment
We
It
of the
board and chief executive
companies we thought would buy us was Scott
was a
Scott's
perfect
total indecision. Scott
fit,
wasted unbelievable sums of money studying
They brought more people
working
there.
make a
our headquarters than
we had
decision."
was a small group
that
deal.
They
couldn't.
concluded Scott should either acquire
Kimberly-Clark or merge with Scott's important businesses
Kersh,
to
said to myself, "These people are paralyzed. They
They ultimately did not do the It
We saw
months and months and months.
the deal.
can't
a natural product extension that
"Away-From-Home" business.
dealt with Scott for
I
officer of
it.
The decision
—wet
wipes
to sell or
—was
keep one of
made by
Nicolosi,
and me.
When
I
was
at
American Can, large
staffs
and
large meetings
were routine. This pattern no doubt helped push the company unrelated, unwise ventures in the record, fashion, industries.
canning
Most of those ventures didn't
giant.
fit
There was a group dynamic
into
and reclamation
with the plastics and
—everybody wanted
to
Four Simple Rules
42
present ideas, guessing what the boss wanted to stand out
By
when
contrast,
speed by
dumb
by opposing a six
idea.
a room have been brought up to
people
in
come
to a
their staff, they
the job
done and not waste
of their
own
—but nobody wanted ways
to get
time. They're not there to hear the
sound
meeting looking
for
voice resonate in an auditorium.
Create Opportunities to Develop Your People
7.
When
the slashing
sized
right
and burning are
over, you've got a business that
and creates enormous new
possibilities
for
is
people.
They've got more authority than they have ever had before. There's
tremendous pressure, but the rewards are people received stock options and stock of.
Thanks
to the stock's
handling of
human
damn
the way,
In
are
I
and by
would."
My
possibilities that they never
we
created
resource issues related to restructuring will tell
ever thought
before.
dramatic appreciation,
look back in three years and exciting thing,
offered stock
The people who had a hard time with
sixty-two millionaires at Scott!
my
We
management than anyone had
options far deeper into
dreamed
better.
Some
every company, and
I
their friends, "Gee, that
things
made
need a
don't care
some good people buried by
I
a
lot
pretty
more money than
I
time and distance.
little
how bad
was a
the
company
layers of corporate politics
is,
there
and bu-
reaucracy. Identify them, remove the shackles of bureaucracy and
let
The bad people are those who say everything has
them
flourish.
been
tried, or they can't
do something, or they did
it
all
before, or
they can't implement something. They spend hours arguing instead of
making something work.
things that can
I
want the people who can show me
be done.
As may be obvious by now, expect people I
I
to
do a
ran Sir James Goldsmith's U.S. holding company,
lot.
In the years
GOSL
Acquisition
Corporation, Russ Kersh, general counsel Vic Stronski, Phil Lader, three secretaries, office in Hilton
and
I,
working from a small, 3,000-square-foot
Head, South Carolina, oversaw an operation that con-
trolled 4.5 million acres of land across the country,
approaching $3
billion.
and had
assets
Get the Right
I
Management Team
43
believe in sharing secretaries. At Scott, Kersh, Murtagh, and
shared two, Marguerite Hamilton and Karen Jerome. As a
result,
I
they
became much more than secretaries. They were extensions of us, setmedia, being up-to-the-minute
ting meetings, dealing with the
business decisions, and following the ups and
downs
in
of our stock.
They knew so much about what was going on, they knew what was urgent and what could wait. They could even determine and suggest,
among
the operating team,
who
should be
in
a particular meeting.
They got a marvelous business education and could probably run a
many sitting CEOs. Business books and the "experts" who write them are always promoting some fad. Once it was conglomerates. A favorite today is con-
corporation better than
sensus management. Tomorrow
it
consensus management doesn't work; smiling,
happy
be something
will
else.
But
a disaster that pushes
it's
its
practitioners to less than the best solutions for their
companies. To placate everybody, consensus managers sacrifice what's important.
and
failure sions.
And
On
the other hand, strong
criticism will their
make very
companies get
managers willing
to risk
different decisions. Better deci-
their total
commitment
to carrying
through. If
you operate by consensus, you're not making hard decisions.
stead, you're looking for
something
easier,
something
less. Scott's
In-
old
eleven-member executive committee always worked by consensus,
and
their record
was
dismal!
However your management
is
organized, the operative
mains: manage. Take responsibility,
matter
how you carve
Anything
less
is
just
it
up, that's
seat-warming.
word
re-
make decisions, take risks! No what management is all about.
Chapter 4
RULE
2:
PINCH PENNIES Lesson: Cost
Cost
always your enemy. You must attack
is
pany
always your enemy,
is
is
in trouble or you're just
cost should be No.
itability,
you even
if
something
1
it.
searching for ways to increase prof-
on your
list
of enemies. Cost will kill
you come out with better products. is
your competitor's price
your cost
If
for selling
You must attack cost
can't stay in business.
Whether your com-
it,
you
to
make
lose.
You
every way, shape,
in
and form. Sir
James Goldsmith acquired an
industrial parts supplier as part
of his acquisition of Crown-Zellerbach. In 1985, the year before
took
it
company
over, the
Over three years,
it
down would have take a crack at
The it
first
had
I
lost
$19 million on sales of $56 million.
an astounding $50
cost another $25 million; Sir
making
thing
lost
it
run
million. Closing
James asked me
it
to
in the black.
noticed about the industrial parts division
had the infrastructure
he
of a billion-dollar
company.
It's
a
was
that
common
mistake: Instead of staffing according to levels appropriate with today's business, future.
managers overhire based on
That wastes
money and narrows
their potential in the
profit margins. At this partic-
ular company, every time sales increased, the existing infrastructure
was expanded, which constantly added more dollar, the gross cost of
cost.
Out
of every sales
buying goods was 75 cents, on top of which
they spent 60 cents on sales, marketing, and administrative costs.
Add
it
up:
The company spent $1.35
35 cents on every dollar.
It
made no
for
every $1.00 sale, a net loss of
sense.
45
46
Four Simple Rules
In the
very
first
meeting
"We
the president said,
more
sales.
Finally,
"This
at the industrial parts division,
much
don't have too
cost.
What we need
is
To keep growing! Growth, growth, growth!"
ridiculous,"
'profitable,' as in
even
said.
I
"I
if
to
hear you use the word
conjunction with the word
in
it
contained your
'profitable growth.' Until you've
you grow, what's
ing, you're not
want
don't
more unless you use
'growth' any
costs,
on
sat in
cut in on him.
I
is
I
matter? Your margins aren't improv-
it
going to produce any more
more you
profit. In fact, the
grow, the more you're losing"
The division head
left
the
company.
the way, cutting $10 million in costs the
number
ment
of distribution centers
— mainly
distribution centers fected.
and jobs
office staff
—was
We
was much
How? reduced
easier.
from twenty-two
I
Employ-
to four.
related to the closing of eighteen
cut by one-third, but sales were not
af-
Margins improved, and sales actually increased by one-third.
Then tackled I
inventory.
The company stocked
cent of which rarely sold. That frequently lete.
found that with him out of
1
1,000 items, 90 per-
made our
inventory obso-
Worse, each of our original twenty-two distribution centers
bought and sold what
it
wanted.
I
centralized purchasing, dropped
9,000 products, and wrote off $7 million in inventory.
By
1987, annual losses
we had
At Scott,
dropped from $10.6 million
a 71 percent
staff
to zero.
reduction at headquarters, a 50
percent reduction in managers, and a 20 percent reduction workforce.
We sold
our headquarters
year
in costs.
We cut out $30
lion a
million
for
in the
$39 million and saved $6 mil-
million in consultants fees
and $2.9
on compensation experts. Also eliminated were $3 million
association fees
and newspaper and magazine
subscriptions.
We
in
cut
out charitable donations entirely, saving almost $5 million.
You have
to get to
you must find a way
a good cost position and get there quickly. Then to
keep
that
good
cost position through regular
budget reviews, cost control analyses, and frequent rebidding of materials, supplies,
and
In cutting costs,
how you do
it
services.
success will sometimes be measured as
much
in
as in what you do. For example: Never cut an hourly
worker before you deal with the headquarters
staff.
you cut costs
If
at the
expense
know you mean
rebel. But they'll
and Judy Paycheck, they
will
real business
if
you
slice the real fat
and so on. That sends a clear message
agers, headquarters, airplanes,
you are
company
my
47
Get rid of nonproductive senior executives and middle man-
first:
that
of Joe
Pinch Pennies
to
serious. Deal with unions
and workers
They want the
last.
succeed as much as or more than management does.
experience,
they'll
be more supportive
of cutbacks
if it
means
In
the
company will be demonstrably improved.
general health of the
O O I'm terrific at beating
up suppliers and negotiating more favorable
contracts.
One
ing us too
much. called one
am
"I
time,
I
thought Lily-Tulip's paper suppliers were chargof
I
going to consolidate
vendors,"
I
pay
for
this big contract
I
Forget
to
one or two
and here
is
what
I
it."
The guy selected turned me down "No way," he
paper suppliers
of our
all
"You could get
said.
am willing to
our primary vendors with a challenge.
flat.
said. "I'm not shipping
product to you
at that price.
it."
The guy hung up. went
I
lem
into Russ Kersh's office
—we have no paper
At the time,
And
I
my own
was sweating
their expiration
brinkmanship.
achs churn.
go
If
I
do
I
have a prob-
a two-week supply of paper on hand.
can't just switch suppliers overnight.
facing a crisis of
you:
said, "Boy,
supplier."
we had about
company
a
and
invention. Years later,
bullets that day.
dates,
enjoyed
but
it
don't
mind
I
was
telling
With existing contracts nearing
every day would it,
I
Suddenly
mean another game
made my
of
senior executives' stom-
the suppliers told us to go stuff
it,
we had nowhere
to
for paper. I
rationalized that, in a reasonable world, the other side
would not
knowingly shut us down. And we always assumed they didn't really
want
to lose
Our
our business.
offer, in return for price
of our business.
If
the supplier
concessions,
was an increased share
wanted volume,
it
was on
the table.
Four Simple Rules
48
me
Late that afternoon, he called
back.
Til accept your offer," he said.
He from.
figured out that Lily-Tulip
A golden
was too
big a contract to walk
opportunity had been tossed in his lap.
It
away
would dou-
ble or triple his business but he'd get less than his normal margin.
was agonizing That phone
for us both,
but the right thing to do.
call literally
saved us a ton of
most crucial cost savings
money and became
we accomplished
that
at Lily-Tulip.
It
the
We
leveraged our position by throwing out a myriad of suppliers, cutting
down
to three
solidated,
vendors from about
and we gained
we decided
to continue
eight.
Production lines were con-
price concessions from the guys with
whom
doing business.
For at least a few days, a result of that incident,
my guys thought walked on I
I
believed
we could
water.
And
as
renegotiate with any-
body.
Most people everything at
just
list
of suppliers for
go through the motions
and have too many
in
purchasing. They buy
suppliers. Minimize the
any commodity and drive your organization
number
to obtain
the most advantageous prices using a competitive bidding process.
When you
have ten suppliers
full price, in
petitive.
other words
every item and you're paying
for
—you're not doing the
job.
list
Make them com-
That will make you better.
Scott's top purchasing agent
suppliers at a big meeting she
wanted
to introduce
me
to Scott's
had planned. "Who's paying
for it?"
I
asked innocently.
"We
are," she said.
"Do we purchase advantageously?" "I
think so," she said.
"Wait a minute.
We
pay
for
a meeting to bring these people here,
feed them and you think we're buying advantageously?
want I
me
to entertain
And you
them? Nonsense."
couldn't believe the person in charge of saving the
company
money was so out of touch. A smart CEO wants purchasing executives who know the company can improve profits more quickly by purchasing well than by improving production or significantly increasing sales at the
same margin.
I
brought
in
a
new head
of purchasing.
Pinch Pennies
I
have guided every one of
money you
purchasing departments through
which saved Scott $100
the following principles, easiest
my
will ever
make,
much
49
like taking
•
Leverage volume as
•
Narrow suppliers
•
Encourage multiple vendors
•
Negotiate hard contracts.
•
Practice brinkmanship. Let vendors
million. This
is
the
candy from a baby:
as possible.
to a handful.
on requirements.
to bid
know
that they don't
have
an eternal lock on your business. Significantly challenge the
•
cost out
Ask vendors
•
to help
in
doing
Everything
we
did
fit
minimum amount
reach the same
so.
reduce costs by
carton material. the company.
a
of
"common denominator" change we had to make
strategy:
in
Some
better,
to stand on. In
some
more
instances, marketing per-
needed
in
to
a
number
of
be selectively
we had
for the
able to
eleven suppliers of poly (the film that wraps
we had manufacown specs and its own
eleven different countries where
Each had else's.
we were
cost-effective products.
Each international Scott unit had
everybody
weight of
order to run lighter weight standard materials. With the
Europe,
supplier.
test
units paid lavishly for corrugated containers that
various functional areas working with purchasing,
packages)
is
We used many different weights of cardboard across
years. In others, manufacturing processes
improved
What
to everything, to
sonnel had not reviewed competitive requirements
turing.
exper-
common specifications?
were strong enough
In
own
utilizing their
Take something as seemingly benign as the board
produce
to take
and resources.
tise
the
and support them
procurement organization
its
The
its
own
justification
why
units
were competing more against each other
its
spec was better than
than against the competition. They wanted to look good
among
their
Four Simple Rules
50
in-house peers and didn't care so
such as James River or Procter
We
this? Or,
need It's
Why do
means
have that?
I
all
of
Europe
—with one spec.
religiously asking: If
then I'm going to get rid of
it,
beating competitors
& Gamble.
consolidated: one supplier for
Solving these problems
do
much about
I
don't have to
Why do
do
it,
or
I
if
have to I
don't
it!
equally important to define the best practices in your industry
and benchmark them making machines
for
your business. There were
in the Scott
fifty-two paper-
manufacturing system. Five of those
machines, the top 10 percent, clearly performed better than the next 90 percent. So
and online
we
took the best practices, in terms of chemical uses
reliability,
And one more
and applied them
every plant.
thing to think about: Don't
raw materials and supplies
may
with suppliers. They
When
at
for
let
the people
who buy
you constantly lunch and fraternize
feel like they
work
for the suppliers.
purchasing people get so close to vendors that they choose
the vendor's side in
an internal debate, something
is
wrong. Employ-
become too comfortable with suppliers. How do you know if your people are too comfortable? The surest way is to look at the supplier base. When was the last time the company made a change in its purchase of a major commodity? There may be good reasons for not making a change, but when was the ees should never
last
time an item went out for competitive bidding? With purchasing
people
who aren't aggressive, you
riding along for years with the
often find the
company has been
same vendor and nothing has
changed.
And, crossing the
street,
what have you done
to
encourage the
vendor?
What we found
was a hesitancy to maintain leverage and There were some preconceived notions that
at Scott
drive real hard bargains.
our procurement agents couldn't take erations for any period of time.
risks that
might shut down op-
The previous management never gave
these employees enough support so they would feel comfortable taking a risk. I
can remember being
at
dinner one night with Jack Dailey, our vice
president of logistics, procurement, and distribution,
and a vendor's
Pinch Pennies
We weren't getting anywhere with
reps.
to the salad table, Dailey
these people.
me
about the proposed deal. What he told
to tear
backed up
them
their reticence to
plates piled high,
apart. Dailey couldn't believe
knew now
ley told them, "This
is
expect to sweet talk
me
my
I
that
we spoke
the deal, take later.
it
with one voice.
or leave
it,"
pro-
anger. But
walk away from the bargaining table
his authority to
uncertain terms. They
they went
a few more details
about
budge upset me. When they came back, salad ceeded
me
leaned over and told
When
51
If
I
no
in
Dai-
they shouldn't
There were no end-run plays around
my execs. Procurement has supplies,
to
do with buying and negotiating
for products,
and services across the corporation as well as contract
resolution.
issue
Procurement should be a headquarters responsibility
to
assure the best price against the greatest volume.
Replenishment, on the other hand, has to do with ordering against the contracts that
take an
army
procurement has already
of corporate
making sure trucks product
arrive
procurement people and assign them
on time and
—but why bother? We sent
local plant operations.
and follow through on
If
You could
set in place.
that
to
you aren't running out of
that responsibility
back
to
our
they needed product, they could order
it
delivery.
many companies, purchasing is seen as an unimportant staff function. But you can make more money buying right than you can possibly make selling right. How much product do you have to sell, at In
what margin,
to
match a savings on the purchase
of a major item
you
buy? If
a
company
to fix. Everything that costs
ments, audit, fees,
people
much money is
generally pays too
all
who
the purchasing,
all
the
for things, that
negotiable: travel arrange-
moving people, the
volume
to consolidate suppliers.
organization together toward a
money was every
bit as
One
common
important as the
of
my
goal,
which makes
life
we looked goals
was
at leverag-
to drive the
and the way we spent
way we earned
outsourcing, cutting incidentals, consolidating, fications,
airline
run your pension.
At Scott, as at Lily-Tulip several years earlier, ing
rather easy
is
it.
That meant
and simplifying
easier for the vendors.
speci-
Four Simple Rules
52
It's
not necessarily easy for any of the functional areas of a
company, such as marketing or manufacturing,
to
change designs,
drove the entire Scott organization to support cost-cutting
but
I
this
way.
in
Within Scott, one of the major areas of consolidation was specialty
chemical suppliers. Specialty chemicals go into the manufacturing of
paper and, on a worldwide
basis, Scott
probably used $18 million
worth of these chemicals annually. They are consumed by paper mills
and pulp-making operations and were purchased by Scott
the past
on a very localized
basis.
Vendors showed up with coffee
and doughnuts, established allegiances, and in the plants
We
in
all
of a
sudden nothing
would run except with a certain vendor's product.
consolidated specialty chemical procurement on a worldwide
basis, signing
potential,
on with a
single
vendor we thought had international
even though the company was not a global entity
time. Naturally, there
the world stage, but
were others who were already performing on
we chose
the vendor
we
To reach
that
was
we could dethan if we had
thought
velop and bring along, netting ourselves a lower price
gone with one
at the
established.
we
this decision,
put together a team of manufacturing,
whose assignment was to evaluvendor products and make sure potential new or
engineering, and technical people ate the viability of
replacement products were quickly scheduled
were given a
We had
fair
as
and we used
and
opportunity to work.
many
this
for mill trials
as 200 specialty chemical suppliers worldwide,
process to narrow them
down
to just three.
Then we
gave one of them, Calgon, an 80 percent position and retained the other two in lesser roles.
Calgon was the newest supplier on the scene, and our choice prised everyone. Calgon
tude of the offer and
itself
the fact that they got
aggressive in their pricing;
cover their costs
was surprised because
it
in the deal.
will
But
the process,
of the magni-
They were very
probably take them two years to it
was worth
apulted them to worldwide significance
When we began
it.
sur-
we
it
in the
because the deal
re-
cat-
paper industry.
held out the possibility of a single
supplier consolidating 80 percent of our business. That
was
the carrot
— Pinch Pennies
in all of
we demanded,
the price
and
Some companies were
our negotiations.
service.
and none
not enthralled with
not to mention our expectation of quality
Calgon had a very strong presence Europe, but
in
53
it
wanted
to
grow
there.
know at first whether we were serious about ume, but we made it clear that Scott was not
United States
in the
The company
didn't
importing so
much
afraid to put
most of
volits
eggs in one basket.
(You don't do hold up
its
end
suppliers that
that without being comfortable that the supplier
We
of the bargain.
we would have gone
can
always had a couple of backup
to.)
The smart procurement executive looks pany needs but what the vendor needs
in
for not
a deal.
only what the com-
Any time you can
a match between vendor and customer, sparks will
fly.
Scott
find
was a
very large and visible paper-making company. Calgon wanted to
demonstrate
world and the marketplace that
to the
be a very viable
supplier. In bidding
tunity to
become
company
to
just that.
expand
its
we
trenched because least a
could and would
Now, Calgon has volume
and
technical
Of our three vendor
it
on our business,
it
had an oppor-
that allows the
sales expertise into Europe.
Hercules was the most firmly en-
finalists,
didn't have a
good
few of the chemicals they make.
alternative supplier for at
Still,
our negotiator had the
make our best deal. She also had the authority to tell any company including Hercules that it was not a player. During this whole process, one company acauthority to press as hard as she could to
—
tually
had the temerity
to
propose a price increase.
We said
no, even
though we didn't have a viable short-term alternative supplier product. Naturally,
We
we
didn't
tell
for that
that to the bidders.
we were changing processes and doing other things. We made it appear as if we could take or leave their product even though we couldn't. Negotiabluffed our
way through
the crisis by telling
them
that
—
tions are negotiations; there
is
always a certain amount of b_s_ on
the table.
Sometimes, a bluff gets called.
We had tons.
The
a separate negotiation with a major supplier of folding carfiber
market was loosening and we had gone out looking
for price concessions.
Our existing supplier did not want
to recognize
Four Simple Rules
54
the decrease in
own
its
costs as something that could
be passed
along.
The
we
reality,
learned
was
later,
that the negotiation
had an ex-
tenuating circumstance: the supplier's agreement with KimberlyClark.
We knew the company was a Kimberly-Clark supplier and suggested might be the problem, but the supplier
that this
We went to
the price.
were about find
to
a brinkmanship negotiation process and said
change
which point our
We
we
merger
was
Kimberly-Clark learned
Fortunately, the
it
we to
found one and moved our its
was a bigger purchaser of
were, and the supplier
if
finally
original supplier explained
Kimberly-Clark. Kimberly-Clark
than
Meanwhile, we were scrambling
suppliers.
an alternative supplier.
business, at
refused to lower
still
deal with
the product
afraid of repercussions after the
was paying more than
new supplier worked
Scott.
out.
O O O I
empowered
change.
If
procurement organization
Scott's
procurement could get a lower cost such as manufacturing, had
tional areas,
work, rather than to just turn I
and
it
and
it
make
let
why it
it
wouldn't
go.
to take risks but de-
held accountable. biggest differences
that of other
ran the mill
time
down, deny
help
something, the func-
to prove
encouraged and allowed procurement
manded it be One of the cess
it
for
to
trials,
between our vendor selection
companies was speed.
and
instituted
would have taken
changes
the previous
pro-
We made our decisions, in
processes in half the
management.
How? Because of the demands we put on our people.
I
drove everybody
toward making things happen as a positive action, not a negative one. The message was: tire
organization
Change
became
is
a good thing. After a while, the en-
enthusiastic about
what
it
was doing
to-
ward change. Overpriced vendors were not necessarily the only casualties process. People
who
didn't
go along with
at least trying to
in this
make
Pinch Pennies
change
things
who it,
lost their jobs.
Complacency was not
—
move ahead. Even when Scott made dramatic changes
kicked
they
if
knew why
factors, primarily
didn't
We
—
in certain cases,
to
cautious not to intentionally burn bridges.
dors
tolerated. People
have not been exposed to change often don't think they can do
so they have to be encouraged and prodded
but
55
want
to
in
vendors,
to
accept
that.
If
—because of cost they couldn't,
we
do business with them anymore, anyway.
also negotiated consignment inventories. This
owned
still
We obviously upset people,
they were losing our business
—then they had
we were
the inventories, and accountability
meant our ven-
was passed on
to
them. Not only were they responsible for supplying a product at a certain price, they
sure the product
were also responsible and accountable
was where we needed
Since the inventory in our locations they were paying for
it,
for
making
when we needed it. now belonged to them and
it,
they were not out to push any
more inventory
on us than we needed. By the same token, they made sure we didn't run out.
o o o You can outsource
As a matter
about anything today.
just
of policy,
I
directed Scott
management
to
outsource
many functions as possible. This directive covered everything from human resources to corporate security officers. Outsourcing allows you to be more focused on a few things and not consumed by things that really don't have very much to do with whether the as
business succeeds. For instance, everybody in a
company needs a paycheck with
proper payroll and other deductions accounted
for.
the
Why do you need
to do that in-house? What value does that add to your company when somebody else can do it better and for less, actually saving you money? Even if you have the best damn payroll system in the world, it
does not give you a competitive advantage
would not have sold one more do, in-house,
in the
roll of toilet
marketplace. Scott
paper. You should only
what gives you a competitive advantage.
Four Simple Rules
56
Some people might consider outsourcing and worry about the sewas Were we
curity of their corporate secrets. For us, that
dealt with
sured
still
in a sophisticated legal process.
at
and
some
as-
risk?
more or less than if we had a bad apple or spy on our own payroll. The size and scope of the vendor's operations Perhaps, but no
are such that security
is
not likely to be an issue. You must be will-
amount
ing to bypass a certain
of inherent corporate paranoia to
outsource.
An
awful
lot of Scott's traditional
human
resources work was out-
sourced under the direction of John Nee, vice president of sources worldwide. Nee replaced hundreds of contracting out benefits
all
of the administrative
management, and
human
staff positions
re-
by
and record-keeping work,
international assignee tax work.
He
also
outsourced domestic employee relocation. Personnel or
human
resources groups are a crutch between man-
agement and the workforce. Woe unto
enough
to realize that.
happy. The minute ager, a crutch
A good manager will
management
to justify his or her existence,
ever larger Scott
had a wonderful
that
his or her
people
a
must create problems, which means
staffs.
rived, but her staff
need
keep
human resources manA human resources director,
installs
erected for both sides.
is
the consultant not wise
was
many human
woman
heading that department when
overinflated by about 60 people.
Why
I
ar-
did
I
resource staffers at corporate headquarters?
There was no good answer. They existed
strictly to establish policy,
coordinate benefit issues, and set up compensation plans. Scott
needed human resource people
on-site in
its
mills
and
plants, be-
cause of the unions, but even there we only needed one or two credible
people per
installation.
We
kept five or six of them at corporate
headquarters, outsourced transaction-oriented processes, and
leased the
The
rest.
rest of the
efficiently
re-
company's human resource needs were
outsourced to companies that specialize
Scott saved $2.5 million annually by sending our
easily
and
in this field.
management
in-
formation systems (MIS) work to Computer Sciences Corporation,
Pinch Pennies
which was selected over two other companies.
It
was a
57
specialist in
and took over our operations and software maintenance. Computer Sciences also had an opportunity to bid on any new the field
development
projects. In the United States alone, the firm replaced
On We
150 MIS workers. All but two of those positions were eliminated. the other hand,
many
of our
people joined the outsourcing
firm.
contracted with companies that supplied 100 percent of our needs
on a worldwide
basis.
That was drastic by most corporate standards, but wasn't a core competency or one that
was so
decided MIS
I
well performed within
own organization that we couldn't outsource it with professionals who could do a better job. An awful lot of work that corporations do, such as pension adminour
istration,
doesn't add value in the making or the selling of a product
or service. Pension administration doesn't help you
product or improve customer relations. will
And
if
be negatively impacted. Hire an outside
and then
just
manage
nesses and what work
the contract. is
it
better
badly, morale
specialist firm to
What work
really specific to
two concepts and you can get
you do
make a
is
generic to
do
it
all busi-
your company? Take those
to the root of
work
that corporations
should not be doing. Scott also outsourced truck scheduling
and load consolidation
customer and transfer shipments. The vendors' personnel were cated
at
of lo-
our sites and interacted on a daily operating basis with our
manufacturing and warehouse personnel. They had access
to
our
customer order information so they could schedule shipments costeffectively, taking into consideration
customer requirements.
negotiated a contract that, had Scott continued independently
We
(i.e.,
merged with Kimberly-Clark), would have saved $16 million a year against the $120 million we annually spent on logistics. It was a gutsy move if the outsourcing went wrong, we'd no not
—
longer have the staff or capability to take
panies would study analysis paralysis.
it
back in-house. Most com-
this sort of thing forever, getting
We
got
caught up
in
what we thought was enough information
and made the commitment.
Four Simple Rules
58
Russ Kersh, John Murtagh, and
the cost differential I
said to Russ,
"You'll
and agreed
"What
if it
all
We
the possible implica-
assessed the risks and
were more than acceptable.
that they
goes wrong?"
have a serious problem," he said.
After listening to the pros
and cons,
Bidding wars broke out over vice providers
how
discussed
I
our various outsourcing programs.
tions of
much
saw an opportunity
to
said,
I
"Do
of our
make
it."
work because
Scott Paper an
the ser-
example
of
outsourcing could work for other corporations. This saved us
even more money.
We
good
attracted
tremely smooth.
We
and the
prices,
a single contractor. Outsourcing
sense
work was
transfer of the
ex-
never thought twice about our relationship with
was more
efficient
and made
the
all
in the world.
Best yet, several vendors hired our
manage
these
same
Outsourcing structuring haven't
—
all
isn't
these functions easy.
It's
it
—particularly
tough to understand
We made
before.
competitive one by getting to
know
tiating
it.
The learning curve was not
And an enormous amount
the quality of their work,
The second reason
it's
tough
is
how
do
to
it
insubstantial; the
usually doesn't
you
to
we
first
pos-
time a
know much
of research, discovery,
and
if
it
re-
the outsourcing process a
must go on with potential providers,
bilities,
midst of a
in the
the top players as well as
corporation thinks about this stuff
about
to
functions.
been through
sibly could.
own experienced people
and nego-
understand their capa-
their charges.
that culturally, the
company
will
be
who had been depended on to administer and provide certain services that now will be in the hands of strangers and outsiders. Confidences may have to be rebuilt, but the workforce breaking
ties
with people
must understand
Any
it
can be done.
consideration of outsourcing must deal with temps. In the
past, Scott
counts.
that
used temporary employees as a way of controlling head
They weren't counted among
illusion of job reductions.
needs doing
—which
We didn't need
My
belief
full-time staff, so is
temps gave the
that either there's a job that
necessitates a full-time staffer
—or there
isn't.
temps, and hiring them was a real expense. Their pay
Pinch Pennies
comes from
the
same place
59
as everybody else's: the shareholders'
wallets.
The employment relationship
one
is
A
tionships people have in their lives.
because
it
has a temporary need or
of the
most important
rela-
corporation shouldn't just hire
when
it
is
unsure of
its
needs.
O O O My team
followed "The Rule of 55": 50 percent of a company's
products typically produce only 5 percent of In addition,
its
revenues and
profits.
50 percent of a company's suppliers provide only 5 per-
cent of the services and products that the
almost half of the business, whether
it
company
buys. Therefore,
be products or services,
How many
sents less than 5 percent of the company's profitability.
how much
people would not be needed, and
repre-
be realized
cost could
by eliminating those items?
company
Eliminate from the
ducing
and adding value. That means brands,
profits
ventories,
the excess baggage that
working capital
—
all
is
not pro-
suppliers, in-
need
the things in business that
to
be
shed so you can focus on things that make money. Scott, for
example, reduced
fewer than
10.
more than
500.
that
were cost
We reduced the number of products in our business by We looked at all of our plant operations, found the ones
ineffective, old,
and obsolete, and got
by taking write-offs or selling them. competitive operations. bottlenecks.
If
domestic warehouses from 70 to
its
we
We
looked
rid of
them, either
We looked at our plant sites for nonat
our material flow
couldn't conquer a technology,
production
for
we unloaded
it.
o o o What never ceases
to
amaze me
is
how some
executives
away with spending shareholder money on themselves as kings and queens and the business
The
latest
recently
was
their royal
if
still
get
they were
domain.
poster child for corporate excess must be Paul Kahn,
deposed chairman
of Ideon Group, a Jacksonville, Florida-
based credit card registration company. Kahn had previously
Four Simple Rules
60
introduced AT&T's Universal credit card, for which President
George Bush presented him the Malcolm Baldrige National Quality
Award
in 1992.
New
Kahn, as
March
1996,
York Times reporter Kurt Eichenwald disclosed in
had a propensity
for indulging himself
Ideon's expense. According to Eichenwald,
and
his friends at
Kahn's behavior
in-
cluded handing out six-figure consulting contracts to friends, hiring a convicted felon as a financial adviser, and putting his inexperi-
enced brother-in-law
in
charge of a
new
division.
$13 million to sixty-eight different consultants
months
the
he would move from Jacksonville
to
nine
Cheyenne, Wyoming, where
company's corporate headquarters had
Instead,
back
in just the first
he was hired, Kahn had told the Ideon board of directors
$17.5 million.
it
also paid out
of 1995.
When that
Kahn
It
had previously been based
Kahn
insisted that the
just relocated at in Fort
company move
—
a cost of
Lauderdale. again.
He brought
to Florida.
He bought a corporate stocking
it
jet
and spent
with Waterford crystal,
sterling,
$1 million to refurbish
it,
Lenox china, and $10,000
worth of handmade place mats.
Kahn had not one but three secretaries. He hired a newspaper reporter to write a book about the company. He had a travel department of forty-three people and a dozen more devoted to winning the Malcolm Baldrige Award
Why all,
didn't his
board
for Ideon.
of directors rein in Mr.
After
they were well paid to oversee the company's business: $50,000 in
annual compensation plus options stock.
the
Kahn sooner?
And
to
purchase 15,000 shares of
three of the Jacksonville-based directors, nominated for
board by Kahn, received funding from Ideon
for their
own
pet
projects.
"This shows
how American
business really works.
And
it's
outra-
geous," John Westergaard, president of Westergaard Financial services, told the Times.
Confronted by the newspaper with evidence of his excess, Kahn
who had business
already been fired by Ideon after nearly spending
—acknowledged he was swimming
against the tide.
it
out of
Pinch Pennies
"I
don't think
I
can function
much emphasis on
said. "There's too
Too bad
Some
it
in today's
corporate environment," he
shareholder value."
took a newspaper expose for him to figure that out!
businesspeople mistakenly think of corporate indulgence
and
as just country club memberships
treasury.
flying first-class.
much deeper and more When we looked for areas to cut
at Scott,
lodge and a Paris apartment on the books. corporate
jet.
Philadelphia,
And
before
we moved
one with linen napkins, all
some more perks
Company is
But a car
can go
that
If
pect the
is
crystal drinking glasses.
except
almost any company:
at
salespeople because transportation
for
companies assign cars
to
execu-
If
you want
company If
why we pay them
salary.
a salesperson's tool. to read general
your primary responsibility
lustrated?
to
buy you an
is
fices as status
many people
magazines, you buy
finance,
why do you
ex-
office subscription to Sports
you need a trade journal and
others, fine. But
it
Il-
can be shared with
order subscriptions for their
of-
symbols. They have nothing to do with business
and they cost money. That goes nars.
sold them, along with a
have no need other than getting back and forth to
Subscriptions.
them.
a hunting
things Scott executives took for granted. Here are
cars,
who
and
work. They can buy their own; that's
•
I
we found
the corporate headquarters from
fine china,
part of their jobs. I've seen
tives
have found
closed the company's luxurious executive cafeteria,
I
Those were
•
I
insidiously into the corporate
perks that dig
the
61
Why do we
pay money
to
for all publications
send people
and semi-
to classes that
have
nothing to do with their jobs? •
Trade associations. They don't get membership money out of
my
companies. Not only
company,
it
will also
will that
be controversial within a
be controversial within an industry.
Scott spent $2.9 million
on trade associations such as the
ness Roundtable. Most of the people in
shouldered because they're back.
What does any
of this
all
do
Busi-
those groups are round-
busy patting each other on the to
improve the bottom
line?
Four Simple Rules
62
•
Charitable donations. They should also be history, as
cussed
Chapter Thirteen, "Whose Company
in
want
don't
on behalf
to
Is
It,
is
dis-
Anyhow?"
I
hear any crying about an executive's cash pledge,
company,
of the
to
some
charitable or
community
or-
ganization.
Several months after the turnaround at Scott, a
up
to ask a question at
"Now
an employee meeting.
company
that the
woman stood
is
we
improving, can
restart charita-
ble donations?" she asked.
"That
is
a very personal choice,"
on your own, But
this
that
is
company
is
the board have not
My job
money. best
way
for
is
to
you
I
said.
your business and
I
"If
you want
encourage you
to give to
do
it.
make a buck. The stockholders and empowered me to give away the company's make sure you have a secure future, and the
to
here to
have a secure future
is
to
have a healthy
company. "The answer,
in
a word,
is
no."
O O Becoming more relationships
cost-efficient
you have.
even those enshrined
When
means looking
at all the
company you
they're disadvantageous to
in contracts
—you must take steps
to
change
the terms. Lily-Tulip
had two unfavorable supply contracts
former parent company, Owens-Illinois.
One
of
party deal involving them, us, and McDonald's. contract to
sell
Tulip
was spun
made
the cups.
in
place with
them was a
three-
We technically had
coffee cups to the fast-food company, but off,
its
when
a
Lily-
Owens-Illinois retained the plant that actually
Based on purchasing leverage
of
McDonald's and the contract we
had with Owens-Illinois, we didn't make anything on the a large volume of sales, but
it
didn't generate
much
The other contract between Owens-Illinois and
deal.
It
was
profit.
Lily-Tulip required
us to take the entire output of foam cups from another plant they
Pinch Peonies
were producing cups
kept. Naturally, they
didn't have to sell the stuff. Their mills
We
took
it
it
from them.
It
was a
higher price than
that
made
at 150
the
same
full
we could
percent of
of cups, shutting
product, to keep taking
product at a
terrible contract, stuffing us with sell
it.
foam cups anywhere near as them
were running
warehouses
all, filling
down our own machines
crazy because they
and Sundays, cranking out as much as
capacity, including Saturdays
they could.
like
63
And
the market
was not absorbing was churning
as Owens-Illinois
fast
out.
Making matters even worse, we had the same kind
We
tion plant.
already had too
much
of
cup produc-
inventory and capacity without
the Owens-Illinois output.
McDonald's settled the get us to lower our price
first
problem
for us
by applying pressure
—something we couldn't do because we own
didn't control cost. Fortunately, they short-circuited our
debate about honoring the contract facturer's cup,
nothing or
and we weren't sorry
money had we
lost
wouldn't cut
its
at all
to see
them
go.
We'd have made
continued, because Owens-Illinois
price.
down
should
don't
We
were already
the tubes
if
we
don't
change
I
said,
this contract.
a shot at pushing back and telling them
at least take
want any more
at Lily-Tulip
second production contract.
day, discussing the
"We're going to go
We
internal
by choosing another manu-
Meanwhile, four of us sat around a conference table
one dark
to
of their
damn
product."
in dire straits financially.
Kohlberg Kravis Roberts
&
having to buy product that
we
The debt structure
of
Co.'s leveraged
buyout was onerous, and
we
was
couldn't sell
yet another extreme
problem.
We reasoned that Owens-Illinois didn't really want Lily-Tulip to fail, nor did they want to be in the cup business. The upper-level manage-
ment
in Owens-Illinois had, after all, sold the
while,
we stopped
ufacturing
was
it
and
So, for a
taking their product, even as they continued man-
filling
the difference
cup business.
up
their
own warehouses all
between the business
a pretty gutsy decision.
failing or
over town. But
succeeding.
It
it
was
Four Simple Rules
64
In
a
move that we thought would settle the
second cup contract, only
issue,
we bought out the
to see Owens-Illinois enter the business as
a direct competitor. That's
when
my
had
I
CEO
face-to-face meeting with the
first
of
Owens-Illinois.
"This
He I
is
ridiculous,"
said.
I
"I
will
buy the business out from you."
said he wouldn't sell the business.
said, "I've got a bigger, better sales force
You want
to
compete with me?
The guys running reasoned
am now going to
I
their division
and
we ended up
the marketing expertise.
all
dealing from a position of strength.
We
orous marketing campaign
I
No sooner had
in
which
So they
us.
But
we
the best
all
really weren't
proceeded with the most
vig-
have ever been involved.
They had no choice but
equipment down. They couldn't continue
for the
with
they filled every warehouse they could than they
alized sales weren't materializing. their
bury you."
intended to compete with
that, in the sale of Lily-Tulip,
sales people
and better marketing.
to run with
re-
to shut
no place
product to go.
Two months
later,
the
same CEO
called me. Only this time
we had
the upper hand. "Let's talk about selling you the business," he said. In the end,
on the
first
he got
day
There were
I
less
made
money
for
it
then than he would have gotten
the offer.
disputes about us not taking the product, but
still
we
did agree to buy their manufacturing equipment. So what started as
a major hassle turned out very well for Lily-Tulip
cause
we
took the
initiative to
change the
in the
long run be-
status quo.
O O Most companies use people function
—lawyers,
strictly
according to their defined
example, interpret the law. They offer
for
their
input on legal proprieties and they go away.
Not when they work
As John Murtagh
for
first
me.
learned at Lily-Tulip, the general counsel
Dunlap-operated company plays a role
icymaking that
is
equal to those of the
in
in
a
operating decisions and pol-
CFO and
senior vice presidents.
Pinch Pennies
I
65
expect the same broad overview of corporate issues from the cor-
porate lawyer as
have?
How
will
do from every other
I
we
solve them?
What problems do we
player.
my
you're part of
If
team, you don't
make spot relief appearances; you're in for the whole game. When we resolved to close a million-square-foot paper cup and
just
paper plate manufacturing lions of dollars,
Once home fact, that
was Murtagh's
to 2,000
roughly 800.
tiful
it
It
facility in
was
far bigger
it.
I
we needed
than
a portion was leased out
a bundle operating
real
employees, the plant roster was by then
to
made
time It
—so
to
big, in
was a beau-
the
excess capacity at existing plants.
plant in Old Town, Maine, at about the I
at the
another company.
down
company a cent. In fact, we lost never understood why it was even built when
place, but the site never
we had
first
New Jersey, saving miltest as one of my lieutenants.
Holmdel,
We
same
closed
it
and a smaller
time.
who had been plant manager corporate, to go to New Jersey and
assigned Murtagh and Jack Dailey,
there before being
bumped up
to
sell the plant.
They spent a week unsuccessfully looking east before returning
"Did you
empty-handed
sell the plant?"
I
I
until
didn't see
you
in the North-
to Toledo.
asked when saw them. "No? I
are you doing here? Both of you go back to
come home
buyers
for
New
Well,
what
Jersey and don't
sell the plant."
them again
for
weeks. But
when
they finally
came
back, a deal had been made.
On
was simple: Sell the facility, lay off or transfer the employees, and move the equipment, some to Missouri, some to Georgia. We needed riggers to tear the equipment down and set it back up quickly so we didn't lose much production. We didn't the face of
it,
their job
need Holmdel, but we did need
its
output.
That created another layer of problems. There was room for
new equipment,
but
we needed
infrastructure
and an
building in Georgia. The existing Georgia plant had only
products until then
equipment ticated
there,
—cups and
plates. Besides
we would need new
frastructure for handling the plastics
entirely
new
made paper
adding the Holmdel
facilities for
foam cup-making machines, and
in Missouri
much more
the Georgia plant
and attendant
sophis-
had no
electronics.
in-
Four Simple Rules
66
As Murtagh and Dailey soon learned, there study to learn about the ten steps to shutting plant.
There were unions
compensation laws
to
and
to mollify,
no book you can
is
down and
state
be followed. And within
a busy industrial federal labor
eryone was pleased with the plant's shutdown. Our sales instance, said,
tomers
in the
"How
Northeast
director, for
am going to service all my big without New Jersey?" That was a bona
the hell
and
Lily-Tulip itself, not ev-
I
cusfide
problem. Our Northeast United States customers would no longer be able to call that, in less
up and
on the phone assuring them
get a familiar voice
than eight hours, product would be on their dock.
stead, customers
would hear a voice dripping honey
"Don't worry, sugah,
it
will
be there
So there was a
moving production
would
say,
Lily-Tulip's sales strength
was
real
customer confidence
who knew the
market,
knew
arguing with those Northeasterners.
warehouse dispatching In the end,
cated
We
some
risk to
that far away.
We considered leaving behind a skeleton people
that
about three days."
in
That was a real big problem because in the Northeast.
In-
customer service crew of
the customers,
and were used
We also discussed
to
establishing a
facility.
our southerners charmed the northerners, and
of our experienced people
also contracted for an
emergency
from
New
distribution
we
relo-
Jersey to Georgia.
warehouse
in
New
York to handle overnight delivery demands.
And, most important of
and
substantially
reduced
all, its
Lily-Tulip
unloaded an enormous asset
debt.
O O O All kinds of business
examined
and
legal relationships get stale
they're not
regularly.
In Australia,
I
reviewed Consolidated Press Holding's
penses and thought they were way out of father, Sir Frank,
the firm
if
and
had had the same
line.
Kerry Packer and his
legal firm for decades.
said, "We're going to put
Whoever gives us the best rates will The managing partner was aghast.
legal ex-
our legal work up
get our business."
I
went
to
for bids.
Pinch Peonies
"You can't do
that!"
ployee than a valued
"We have serviced
client.
panies for thirty-some years and "Fine,"
I
office.
we
an em-
like
Mr. Packer's
com-
are not going to bid!"
said. "You're out."
The next law firm,
me more
he blustered, treating
67
day,
I
whom
went
in to
see Packer and the very same head of the
had sacked the day before, was
I
sitting in Packer's
The man, who had been a director on our own board, was
pleading his case with Kerry.
"What I
going on?" Packer asked me.
is
told him, detailing
cost-related
what
I
considered excessive billing and other
problems with the
simply asked the
man
to bid
firm's work.
explained
I
how
I
had
on our future work.
At the end of the meeting, Packer looked at the lawyer. "Al's right," I
cut off
for years
he said. "You're out."
many
other relationships of the Packers that had gone on
—personal, business,
legal,
involved very difficult situations.
your probing
be
hurt,
you
will
go over, or
ways easier to compromise. wouldn't be reading
this
It
you are
very
is
least,
my whole
life!
and worry how
become mediocre.
easier to go slow. But
if
I
will
It is
al-
did that, you
book.
Sometimes, Packer would say to me, ship
political
of these
you worry about whose feelings
if
will fail or, at the
If
and accounting. Some
"Al,
I
have had
this relation-
For God's sake, there goes the relationship!
What
are you doing to me?" "Kerry," I'd say,
"I
came over here
to
do a job, the job you asked me
to do."
He would hem and haw, but he always hung in there and supported me because he knew it needed doing and he didn't want to do
it
I
himself.
fired entire
boards of directors,
men and women who had been
very close to Packer, very big personalities Several undoubtedly went to
do
this.
I
in Australia
him and asked
think there were times
and Europe.
why he was
when he wanted
to kill
letting
me
me
but he
never said, "Take so-and-so back."
People wondered where Packer's loyalties friends
and
family. But in business, loyalty
lay,
to
me
or to his
must be earned by merit.
Four Simple Rules
68
I
am
loyal to
loyalty to
people
people
I
believe are doing meritorious work.
I
respect.
be doing something that isn't helping
who
To get
my company
If
you are doing something
can't
be
loyal to you.
Packer was surrounded by hangers-on and sycophants there because he
was
rich
give
you must
that respect in business,
that has real value.
me, then
I
who were
and powerful. Had these people been
doing things that were meritorious, adding to the wealth and well
being of the enterprise, then Packer would have had every reason to protect them. But you can't protect enterprise without contributing to
somebody who
"I
I
am
going to cut our headquarters
organization will be me, you, "Isn't that nice,"
living off the
it.
remember another day walked more news for him and his son James. I
is
and had
into Packer's office
staff at
CPH,"
I
said.
"The
and James."
he said, "me and the kid
still
have a job."
new
Chapter
5
RULE
3:
KNOW WHAT BUSINESS YOD'RE IN Lesson: Focus like a laser.
Two questions you should always be asking yourself: "What business are we in, anyhow? What business should we be in?" When you have the answers, sell everything else
Every company
I've
been
and focus on
the core business.
we've created a "dirty laundry"
in,
list.
We list all the assets that don't help us, every single one, and then sell them. We free ourselves from having to manage them. We free ourselves from having to worry about them. We free ourselves from having to maintain them. We redeploy our funds into the things we should be doing. Try this process and you'll discover your company's "hidden" corporate bank, the
money
"bank" because of capital at Scott,
its
raised by selling non-core assets.
inherent cash value.
we went
to the best
I
When we wanted
bank we could
find:
call
it
a
to raise
our hidden
bank. The rates are great, they cost you nothing.
Most of
sounds so simple, but
this stuff
ecutives won't see until It's
about doing the
Scott's greatest
glomerate.
We
hope
pokes 'em
for
the simple stuff that ex-
in the eyes.
on a consistent
to
Business
is
simple.
basis.
success was not going to be as a con-
sold $2.4 billion worth of assets
from credit-watch status ica.
it
right things
it's
one
What did we miss by doing
and took ourselves
of the best balance sheets in this? Nothing.
We were
Amer-
an enhanced
company. 69
Four Simple Rules
70
On
was
the surface, Scott
(2) facial/toilet tissue
what we were
to say
looked within those
in
two businesses:
and paper
(1) coated
towels. At that level,
it
paper and
was very easy
when we peeled back the onion and businesses, we had some fits that were far from But
in.
perfect.
On
the tissue side,
we were
in the
timber and energy businesses,
because we were completely integrated
been
just
vertically.
working the end product, which
is
We
should have
where we eventually
fo-
cused. The tissue side also had a health care business and a food service business. There
was no
logic to that product extension.
The coated paper business supposedly focused on coated sheet, the
paper frequently used by the magazine industry. But S.D.
Warren was also papers
for
a variety of specialty paper businesses, including
in
quick printers and for corporate and institutional in-house
publications. So, although
quite frankly Scott
With
was
in
we
talked about being in two businesses,
seven or eight different ones.
those businesses and only a few doing well,
all
possibly be successful on the whole. The all
free
money
we
couldn't
required to support
those capital-intensive businesses didn't exist, so each year man-
agement negotiated
trade-offs.
the next year
ness,
To
me and my
it
supported the
tissue busi-
supported coated paper. Neither got the
it
attention or resources
One year
it
team,
needed it
to get well again.
came down
to a
simple choice: Are
we
a
coated paper company or a tissue company?
The decision history
and
in favor of tissue
heritage, the market in
presence. Tissue
and, once
was
its
was
also
more
easy. That
was
the
company's
which the company had a global
stable,
had the best performance
marketing problems were straightened out, the most
—under a variety Cottonelle, Viva, and Baby Fresh —enjoyed
names such
as
promising future. Scott tissue
of
Scott,
significant market
share around the world.
sumers from Bangor
By S.D. set,
to
contrast, coated
Our brand names were recognized by con-
Bangkok.
paper had a very
volatile history. Scott
bought
—which sold paper under brand names such as Somerthe Lustro, Warren Recovery, Warrenflo, and SPectraTech — Warren
late 1960s,
in
and
it
rarely excelled in profitability. In 1982, the previous
Know What Business You're
management
produced promising
instituted a strategy that
a six-year run but then
apart again.
fell
malleable than the timber resources
was always
It
I
handled
at
In
71
results for
cyclical, but less
Cavenham.
It
was
also an expensive business, requiring billions in capital.
Our announcement
that
Warren raised a
for S.D.
we were
considering strategic alternatives
eyebrows among investors
lot of
in the
com-
pany. S.D. Warren brought in $1 billion in annual sales and certainly
had
strong supporters.
its
ing cycle
When went so tissue
was about I
to
It
was a good company and knew I
go up. This was exactly the
right time to sell.
pressed the core business argument, Warren's supporters
me,
far as to tell
company!
States, they
We
matter-of-factly, that
lost
market share
we
weren't a very good
for four years in the
United
pointed out. Margins were down. "My God," someone
said, "we're going to concentrate
we're not very good at thing.
the pric-
that,
on that business?" And
I
said,
"If
we're not going to be very good at any-
We won't exist."
we had kept Warren, it would have had a couple of good years and many bad years. It would have kept going through cycles and If
soaking up capital
like
a sponge.
potential as the premier tissue
We would never have We had to sell
company.
reached our it.
The previous management had engaged Goldman Sachs suitor a year earlier, without success.
doned. Goldman didn't have trying to sell S.D.
Scott regime.
I
Warren
for
much
to find a
The project was then abanIt
had been
had been part
of the old
somebody
knew and
credibility with
a year, and
it
preferred to start over with
me.
I
liked.
Goldman Sachs was kept on as an agent for S.D. Warren, but the lead responsibility was transferred to Salomon Brothers' Mark Davis. Mark's job was doubly difficult: not only had Goldman Sachs been unable to sell S.D. Warren, but had announced publicly, to shareI
holders, our intention to
dump
it
before negotiations with a single
bidder had begun, potentially weakening our position. If
I
jumped
the gun,
Scott shareholders
again
was
wasn't.
if
it
was because
would begin
I
to feel
way company
believed that the best
good about
we understood what was our
the
core business and what
Four Simple Rules
72
He pursued them, until near the end, when one of the us it was withdrawing, which was kind
Mark's global search identified seven buyers.
and the process ran smoothly interested parties publicly told of a
low blow. They put pressure on us early
to cut a favorable deal,
some weeks before the final bids were due, they announced to the press, "We are not interested in this property." History repeated itself when a big European company, Arjo Wig-
and
then,
gins Appleton pic, publicly stated that
The
last
That
it
wasn't going to bid either.
two weeks before the bids were due were very left
painful.
only an investor consortium led by a South African com-
pany, Sappi, Ltd., a group
never heard
known
to
Salomon Brothers but one
had
I
of.
Despite the apparent lack of competing offers, Mark kept a very firm
hand out
to the
lower their bid.
on
had
It
his part, with
South Africans and told them that they couldn't to
be
at least $1.6 billion.
no other bidders
did the deal and shocked a
in sight,
lot of
That took iron nerve
but Sappi didn't blink.
We
people with the huge price we
received.
With that success under our
belt,
I
gave Salomon Brothers another
assignment: a co-banking position with Chase Manhattan in the
Alabama co-generation power plant. The company had committed $300 million in 1992
sell-
ing of our
and
to building
operating, in Mobile, Alabama, an energy recovery system that
would produce power from waste. That $300 million was more than Scott's
annual budget
company.
It
for capital
expenditures over the whole tissue
locked us into a given level of spending, and
it
drained
resources away from other projects.
Working together, Salomon Brother and Chase Manhattan sold the co-gen plant to a subsidiary of The Southern lion.
The best part was
we would
that
from the plant's new owners Scott
Consumer
make
$350 mil-
continue buying electricity
at preferred rates for
our remaining
the tissue side any less challenging.
moved
to divest ourselves of
venture
—ancillary businesses It
for
tissue operations at the site.
Selling assets didn't
huge market.
Company
didn't
food services and a health care in
make sense
which we were small players for
us to compete
in
We
joint in
a
those arenas.
Know What Business You're
We
didn't have the best cost positions or the best products.
73
In
They
just
drained our resources.
"Why aren't you doing more with the tissue company?" The answer was that we couldn't afford to. After committing so much cash to the energy facility, there wasn't any left over. By keeping that plant, we prevented ourselves from spending money Analysts asked,
more advantageously. If
you believe the future of your company depends on profitable
growth, you must find those areas where you can
but also grow the business tomorrow, so there
is
make money today natural unit growth
over time. Overseas, American companies can often find that kind of
growth, but in the United States, the consumer market only
1
to 2 percent annually. Unless
innovations that push you higher,
going to cut tential to
it.
grow;
assets to free
we had
At Scott,
we just weren't
some resources
is
growing
you can come up with
startling
to 2 percent growth just
1
it.
isn't
which gave us the po-
the technology,
funding
at
We shed the nonproductive
that could fund
more productive
future
growth.
Another problem was a severe
rift
between
Scott's
Consumer and
Away-From-Home businesses. Consumer products were sold venience
stores,
grocery
stores,
restaurants
con-
and mass merchandising markets.
Away-From-Home's products were distributed
virtually
in
to hotels, hospitals,
and stadiums. Unlike Consumer, Away-From-Home was
an independent business;
it
was
innovative and watched
every penny.
From what
I'd
heard, the troops were entertained every day by the
next round of the Consumer
vs.
Away boxing match.
nasty combination of pugilism and chess:
outwit
whom,
to get
not benefit from
hand when
I
It
Who would
what they wanted? And the
was an
often
outpunch or
overall business did
The clash distracted everyone and was out
it.
came on
of
the scene.
Disagreements about principles and beliefs were massive, and there
was no process
cal decision
One
of
needed
my
real
to
to
come
to closure.
be made,
it
I
brought closure.
If
a
criti-
got made.
accomplishments was getting Newt White, the
head of Away-From-Home, and
my new Consumer
marketing
Four Simple Rules
74
executive, Dick Nicolosi to lock arms and present a to the Scott troops
and
words: accountability for
The jointly
that
pair's thoughts
signed
posture
results.
became
so well-aligned that they began to issue
memos because the
key messages were the same.
helped bring along more progress
Newt came up with
common
The marquee then carried three
culture.
I
think
a shorter period of time.
in
the idea of bundling Scott's
Away-From-Home
cleaning and paper products to address the multiple needs of work-
and washrooms. Products were sold as
shops, commercial kitchens,
groups, in addition to being sold individually.
He
also argued that
we shouldn't sell
the integrated pulp mills, the
ones that were connected
to a tissue facility, but
the stand-alone pulp mills.
He
we needed
—
and probably
we should unload believes
still
a high level of integration for cost-effectiveness.
other hand, believed
and
felt
we
should
sell the
I,
—
that
on the
chemical pulp operations
invest in recycled fiber.
At issue was steel
company
how much we should
backward by owning
integrate
The next
the raw material in steel?
need
to
produce trees
integrate backward. Should a
be
to
the
mines
that
produce
was to ask, "Do we business? What competitive
logical step
in the tissue
advantage does that give us?"
Newt
actually shared
lieved that Scott
my commitment
to recycled materials.
had made a big mistake years
into recycled fiber.
The only
really profitable
earlier
Away-From-Home operation moved could squeeze the I
money
supported him
fully
from
that,
company
in the tissue
into recycled fiber as fast as
more environmentally
have long believed is
one way
to
we
diapers,
and you
friendly
do something about
when
it
aren't taking
and there
is
fiber.
down
became
itself
of
You
trees, so
no supply problem.
underutilize waste paper in the world,
Opportunity presented
Newt
it.
recycled fiber over time are significantly less than virgin
it's
Our
because the capital costs per ton
this
don't have to have timberlands
fiber.
but only Newt did. The
out of corporate coffers to do
on
be-
by not getting
business was using 100 percent, fully integrated recycled entire operation should have learned
He
and
I
this
it.
with another asset sale, Promise adult
clear to
me
that
we
didn't have a
competence
Know What Business You're
enough
or
was
trying to
both of
were
whom
just
mass
critical
compete with Procter had huge
dabbling
R&D
them.
in
being
after ten years of
It
75
In
in the business. Scott
& Gamble and
Kimberly-Clark,
investments in these technologies.
was too
late to
be a
player, so
we
We
sold
the business to Molnlycke AB, the tissue division of the Swedish con-
cern
SCA AB.
In the process of divesting assets,
could be sold
lines that
moistened product used
On
the surface,
it
One
off.
to
didn't
we looked
zeroed
I
for
on was wet wipes, a
in
wipe a baby's behind.
seem
was a baby-focused product
in
like
an
company
a
product
intuitive
that
was
and towel-oriented. Baby items are a completely category, often stacked in their
cided to
good ten
price.
wind
getting for
sell the line,
and an
own
away from
aisles of a
in the
might be spun
off.
Scott's cultural
for Scott.
It
primarily tissue-
different product
supermarket.
actively interested buyer
The operating people
that they
whole product
was
I
de-
offering a
wet wipes division had
got-
Frankly, they liked the idea of
chaos and were actively pushing
it.
The wet wipes crew represented yet another separationist group within Scott. They had been structured and cultured as an indepen-
who
dent worldwide entity
thought their destinies were apart from
the rest of the corporation. That
—the old Scott culture,
trol of
ward arguments
for
was
tolerated in
—or beyond the con-
and they were zealously pushing
why wet wipes didn't belong
But Dick Nicolosi and Russ Kersh talked
for-
with Scott.
me
into keeping the
product.
"We could use this to launch multiple product extensions," Dick said. "We could not only have a baby product, we could have a teenager product. cal cream.
We can
We can do
all
apply perfume.
We can
apply dermatologi-
kinds of stuff with this product; take
it
from
cradle to grave."
Wet wipes were premoistened and embedded with microcapsules that release different fluids.
and adults
that
we had
They had applications
not yet exploited. Dick believed the technol-
ogy had potential beyond babies. He said better than dry tissue
for babies, teens,
and
that
we
that
shouldn't give
wet
tissue
performed
up technologies
that
Four Simple Rules
76
we could
new
nourish into
products.
given for divesting the line were the
He concluded that the reasons very reasons we had to have it
succeed. Wet wipes had enviable brand strength and recognition within mass merchandising outlets. Nicolosi laid out
ments, and
I
looked him
we ought
"You really believe ing
I
could easily
"Yes,"
sell
Dick said.
think
"I
to
and bank
it
my head.
eyes and shook
in the
this business?"
know-
said,
I
millions.
has
it
keep
these argu-
all
more
far
potential,
even beyond
current business, both to the Away-From-Home and Consumer
its
businesses."
"OK,
let's
keep
In hindsight,
it,"
I
said.
wet wipes became one of Scott's more successful
businesses before the merger with Kimberly-Clark.
Wet wipes were important learned that I
want
you have
would
I
to sell
it,"
I
them.
listen to
to see spirit.
If
they had just said, "Yeah,
would have
said,
"Why
There's no possible answer for that, so hell I
do
I
My team members
another reason:
for
my
didn't
we
should
you do
next question
before?"
it
"Why
is,
want people who
will challenge
me. There
no forbidding
is
My people know they can say,
"I
disagree,"
which you had
you do
that, you'll
to hide the
destroy the company!" To which
The worst thing you can do "Boss, that's a
good
idea."
You
is
who
sit
I
The chief executive
dumb
idea."
challenge you. Sometimes
And sometimes,
guess what?
It
tablets.
He
pontificates
great idea." Bullshit! They're not
The best thing you can do
is
toughest people you can find.
all
to
have
they'll say, "Al, that's is
a
most of the corporate world, the chairman comes from the stone
say,
— indeed,
—must have strong views, but you've also got
will
I'll
always
back and
every manager
who
and
dead?"
that's already
hire people
will die.
hier-
sharp objects. People said to
answered, "How can you destroy something
people
the
we had
consider their objections. In the early days of the Scott deal, sessions in "If
it,
need you?"
archy around me.
me,
sell
dumb
a
idea. But in
in like he's
and everybody
reading
says, "Oh,
great ideas.
surround yourself with the smartest,
When
a decision
is
made,
all
chal-
lenges are over and they must recognize they're over. But up until the
Know What Business You're
should challenge you. Then
final decision, they
100 percent and get the job done.
I
77
In
expect them
go
to
they can't do that, they're out.
If
O O O When
Kerry Packer,
bought a 47 percent
whom many call
the richest
man
pany, ANI, for $380 million in April 1989, he asked
Under and take the company
ANI was a cheap buy
up
for
com-
for
me
to
go
Down
over.
Packer because
it
Spedley merchant banking group's collapse. eration facing
in Australia,
interest in Australia's largest engineering
more than $200
had been rocked by the It
was a once-strong
op-
million in losses, so Packer picked
it
a pittance.
did a quick study of ANI and immediately reported back to
I
Packer. "Kerry,"
I
stark contrast to
said, "this
what
his
is
just
Which was
a terrible mess."
own people were
saying.
I
in
said the com-
pany lacked focus, costs were too high, and management was running wild with perks. ANI's managers were out of touch and had no vision of the future.
Its
cost system
was bloated beyond
Packer chose to believe me. As he led ecutives, "This bloke
is
me
around, he told his top ex-
in charge. Listen to
Over the next three months,
I
largest engineering
companies,
ests were, literally
and
recognition.
him, do what he says."
went through ANI, one like Godzilla
of Australia's
through Tokyo.
figuratively, all over the
Its inter-
map. Besides
steel
manufacturing and processing, the company had a heavy equipment leasing division
We
proposed
and two
manufacturing railroad car wheels.
outfits
selling everything except five core businesses, closing
the least efficient plants,
and dramatically reducing overhead.
Total
recommended
firing
employment would be reduced by 47 percent. virtually all of ANI's senior
disparate headquarters staff
from 200
to 23,
management, shuttering and
and
six
selling nine
warehouses, cutting headquarters
and relocating operations
that weren't being used. All told, debt to
I
to offices in
Newcastle
was reduced from $570
million
$240 million.
The question the plan?
He
for
Packer was:
How
long would
it
take to complete
called a meeting attended by the two of us, plus Evan
Four Simple Rules
78
Rees, one of just a few directors
who stayed on from
the previous
ANI
board. "Is
the plan doable?" Packer asked us.
Rees
"Yes," "It is
eminently doable,"
"Right then
mind
unions,
I
agreed.
we
that
think
months
heading into
said,
will
territory
where we disagreed, "bear-
go from 14,000 employees
to 6,000, with the
will take twelve months."
it
"What do you "Six
I
—how long?"
Rees
"Well,"
ing in
said.
think, Al?"
at the
absolute most!"
me
Packer stared at Rees and
for
a long moment.
"You have twelve months."
same meeting, Rees
In that
the
most daring business plan
We were
would probably be
told Packer that this
had ever been
that
set forth in Australia.
both concerned that some of the ANI directors might get ner-
vous and fiddle with the plan. Packer looked to this plan.
If
stantly sacked."
didn't
me
any of
He
eye and said,
in the
my
"It
has to be done precisely
directors try to interfere, they will
would vote
said he
his stock against
them
be if
in-
they
go along with me.
remember flying out to one of ANI's plants and being met by a company executive driving a fire-engine-red Ferrari. "Either this guy thought, "or this company is nuts." is independently wealthy," When asked, he nonchalantly informed me it was a company car. You could have knocked me over with a feather. told him wanted to visit the ANI steel mills. I
I
I
I
I
"Fine,"
he said, "but
I
don't
As we drove, he went on things that he didn't do, so collect
do
tours."
to tell I
me,
in great detail, all the other
added one more
paychecks here anymore,"
I
pacity. For
some
"You don't
of miles apart, both
and both operating
reason, the two operations
different ways; the
list.
said.
And we sold the Ferrari. The company had two plants, hundreds ing wheels for railroad cars
to the
same company was
at
made
mak-
50 percent of catheir
wheels two
not making interchangeable
Know What Business You're
79
In
Why? No one had any better answer than "That's the way we've always done it," so we saved millions by shutting down one plant. The other one became a great success. found one more high-caliber guy at ANI, Paul Besides Rees, worked with them on the restructuring: we combined Redding. parts!
I
I
their familiarity with the
engineering industry with
Focusing on ANI's steel business,
we
my
techniques.
visited all the mills
and
facili-
met with managers and employees, and assessed ongoing
ties,
projects.
One
night,
when
the three of us
were
we have gone
Sydney, Rees and Redding said, "Al, can't work;
We
it
will destroy the
sitting in the
was a very tough meeting, and went I
was
better to
is
it
how
the only strategy
dire ANI's situation
mad
as
hell.
It
I
day, they thought better of
said, "but
This thing
bed thinking would proba-
to
possibly engineer a change as dramatic as
ing." That's
far.
of us
all
bly have to get two other people because Rees
Rees
too
in
company."
argued, and the meeting broke up with
The next
Regent Hotel
and Redding couldn't
envisioned.
I
"It's
it.
a high-risk strategy,"
we can see with
a chance of work-
had become. But they believed
go down kicking and screaming than
to just give up.
it
And
they were well compensated for their unease with the plan: $1 million
each was
their incentive for succeeding.
think they pulled this job off just for a
fat
I
know
these
payday, but
it
men
too well to
was
certainly a
And they did, beyond anybecome ANI's managing direc-
powerful inducement to do right by Packer. one's wildest dreams. Rees went on to tor,
and Redding became
its
chief financial officer.
Rees and Redding were not the only ones with incentive
On my recommendation, tivize
everybody
$6 million in
in the system.
Some
all
of the
was
to deliver.
set aside to incen-
main players eventually
picked up $200,000 bonuses based on reaching our goals of job cuts, zero debt, asset
As a
sell-offs,
and $100 million a year
result of all this cutting
core business, engineering. in
and
And
dealing,
ongoing savings.
ANI was refocused on
the restructuring
eleven months, not twelve, with only one day
to industrial trouble.
in
was accomplished
lost in
one plant due
Packer eventually sold out his ANI interest
1991 for a $180 million profit.
its
in
Four Simple Rules
80
In a
few months, the ANI mess was cleaned up and
London. But Packer soon invited
me back to
I
returned to
Australia to improve his
main business, Consolidated Press Holdings (CPH).
CPH was a huge conglomerate,
the biggest octopus of Packer's 413
different businesses.
My
assignment was to pare Consolidated down
business, primarily television
media
to a core
and magazines; make Packer as
as possible; and, along the way, train Kerry's son, James.
liquid
CPH was
hemorrhaging red ink because Packer had spread himself too thin buying businesses that were losing money and kept requiring addi-
months alone, unloaded more than
tional capital. In the first six
companies
that
I
were not contributing
fifty
to his core business, thereby
reducing debt and strengthening the overall company.
CPH was a world-class media empire in and reputation. A top-rated national TV network,
Fortunately for Packer,
terms of content
Channel Nine; good magazines such as Geo, Australian Business
Woman s
Monthly, Australian Women's Weekly,
and Australian tan I
editions of
and People were
at
its
Day, and Picture;
American magazines such as Cosmopolicenter.
money at CPH. home mortgages
steered clear of editorial content and followed the
Executives were directed to repay low-interest
granted by the company.
Company
club memberships paid by
CPH were
cars were taken away. Country
canceled. Packer's people were
spending his money without regard.
As
I
plowed through
his assets in the next eighteen months, the
only time Packer told me, "Hands nine-million-acre ranch.
eighteen years he had "I
am
were plenty billionaire I
I
told
am entitled to a ranch. You
who was
can't sell
why
sold off 300
two out of the
I
am
a
the ranch!" There
quibble? Packer was a
entitled to his choice of indulgences.
arrived in Australia, Packer's empire
me
in
to sell his
me. "Australians have ranches.
of other assets, of course, so
to take
loss to a
I
it.
$2.2 billion in debt, a figure Packer
posed
was when wanted
had only made money
owned
an Australian," he
wealthy man;
When
It
off!"
five years,
but
was carrying about was supthan two, had
wanted reversed.
when
I
left in less
It
I
companies and showed a turnaround from a $25
$623 million
profit.
The Australian press referred
million
to
me
as
— Know What Business You're
"Chainsaw" because of the way great sculpture lars in the
cut through
I
and
the fat
all
—and Consolidated Press Holdings had a
Id
81
left
a
billion dol-
bank.
O O O noncore assets
Selling
Some people and
think bigger
it
is
I
If
your company
grave.
When you
is
losing value
circling, bigger
are in too
many
only
businesses,
People don't focus.
distracting.
As
better.
is
and the vultures are
losing shareholders,
means digging a bigger
improve any balance sheet.
will
told Scott shareholders at
run best with a
my
first
annual meeting, businesses
not a shotgun.
laser,
There was a theory
1960s that you had to conglomerize be-
in the
cause as one business would go down, another business would go up
and like
offset the cycles.
communism.
The flaw sify
on
in that
their
That
is
In theory,
thinking
is
a failed philosophy. Totally failed.
it's
great. But in practice,
it
It's
doesn't work.
that shareholders are quite able to diver-
own, thank you. Management doesn't have
to
do
that for
them.
Conglomerates
—with rare exception, such as General
do not work. Most spread too
many businesses. They
result,
their capital
don't focus
I
talk
about conglomerates,
The Disney-ABC merger was a union
programming feeds Disney's
own
into the
ABC
cable channel, so
I
skills
over
single business, and, as a
they don't do any of them terribly well. There
When
trast,
and management
on a
Electric
mean
is
no synergy.
dissimilar businesses.
of core businesses: Disney's
broadcast television network and
works as one business. By con-
it
the Westinghouse-CBS merger does not
fit.
Westinghouse has
radio stations, but Westinghouse manufactures industrial
and com-
mercial products such as transformers, refrigeration equipment,
makes no sense to combine that kind of operation with the prestigious CBS television broadcast network. In my view, Westinghouse should have cleaned up its ancillight bulbs,
and radar equipment.
lary businesses
first.
Why
didn't
it
business and then merge? Now, a
may be needed.
It
get
down
fire
sale of
to just its
its
broadcasting
industrial products
Four Simple Rules
82
But executives and boards don't want to hear about becoming a smaller company. They think bigger successful
is
better.
More earnings
is
better,
which
is
better.
Higher stock value
isn't true.
More is
better.
Why don't
people pare down? Because anyone
who
going to be criticized. "We used to be a $5 billion we're a $4 billion corporation."
Who wants to
Consider W.R. Grace and Company. businesses that
make no
hear that?
a loose conglomeration of
sense, from manufacturing specialty chemi-
cals to running dialysis service centers. it
It's
down is corporation, now pares
Its
true value will only
come
if
unrelated businesses and gets back to a core chemical busi-
sells off
ness. But corporations don't
circumstances.
do
that,
except under the most extreme
only done by the very strong and only under the
It's
when
the shareholders finally say, "Enough!
not in
human
highest duress, as
We
want our money!" Getting small
People
things.
is
like to
nature.
It
is
to acquire stuff.
$4 billion
company than
company. That person
They
these businesses; look at
all
So what? You're doing a mediocre job with them
takes a whole different person
billion or
nature
acquire stuff so they can have more
take great pride in saying, "We're in this stuffT
Human
who would
all
all.
rather have a great $3
a mediocre $6 billion or $7 billion
will take the risk for selling
and
will
be
criti-
cized for selling.
Why
did Scott Paper get into so
There panies.
is
many
a cyclical process that takes place in industrial com-
They
start
out small, under focused entrepreneurs, and build
up a healthy business. But lurking strategic planner with
menacingly
ancillary positions?
say,
an
MBA
in the
degree
who
shadows
steps out long
of revenue or income."
When
that line, they should turn in the other direction
cessful
always some
enough
some managers
still
and
executives hear run!
think they need to diversify. They're suc-
and the business generates cash. What should they do with
They could give
to
"You need to be diversified because you can't solely
depend on one source But
is
it
to shareholders, either
it?
through higher dividends or a
stock buyback. They could expand an existing line of business. They
could expand geographically or get into other related businesses.
Know What Business You're
83
In
Instead, they often decide to get into a completely unrelated
business.
Bigger can only be better
Conglomerates
under
fall
if
their
you are
own
same
in the
line of business.
do well
weight. They
for
a while
but they're not ideal in the long-term.
BAT
which
Industries,
Sir
James Goldsmith pursued
takeover for more than a year, started out as a tobacco fore
it
went
off into retail, insurance,
And
manufacturing.
and sales
of
it
in
a hostile
company
be-
and facsimile machine paper
did everything significantly below the quality
competitors in each area.
its
As a tobacco company, BAT's market value wasn't
great,
perhaps
among its divisions were individual assets that should have been valued at much higher multiples. Those were being depressed because of the tobacco business. Some of the six to eight times earnings. But
companies should have been valued more. Their value was forced
at fifteen
times earnings
down because BAT
—or
as a whole
was
thought of as a tobacco company, which the market sets as having a
BAT tobacco company made $1 milmarket would multiply that times six and come up with a $6 million. But if its Saks Fifth Avenue retail chain made $1
lower value. For example, lion,
the
value of million,
its
a
multiple might be fifteen, setting
So BAT was forced uity.
if
Conversely,
if
its
value at $15 million.
to acquire high-priced assets using low-valued eq-
you can individually get everything valued
higher number, then you
make
great buys. That's
at the
why conglomerate
bust-ups are so profitable; individual pieces have higher total sales
values than a
company
Another flaw
who ing
in
as a whole.
conglomeration behavior
is
those businesspeople
are not doing well in their chosen business and rather than
it,
say, "Let's find
diversify
when
that
something else
is
to
depend
on."
fix-
Weak companies
exactly what they shouldn't do.
O O O An example Zellerbach,
ners
mismanagement was Crownwhich Sir James (who put up $100 million) and his part-
—including
of
conglomerate
Jacob Rothschild's Rothschild Investment
Trust,
84
Four Simple Rules
Elie
de Rothschild, Marshall Field heir Ted
Aspinall, Albert Freres,
Bruxelles
—acquired
for
was a conglomeration
Field,
and Gerald Eskenazi $600 million
of businesses
rugated paper products,
oil
and
in
Kerry Packer, John
Banque Lambert
of
a 1985 hostile takeover.
—timberlands, coated and and supplies— industrial
gas,
an outsider might have thought bore some relationship
They
other.
nesses in
Its
that
didn't.
its
mission.
Once among
San Francisco
had, over the years,
museums
cor-
one an-
to
Crown-Zellerbach was bloated and top-heavy, and focus as to
It
—the
endowed an
—the corporate
entity
the biggest
philanthropic
and oldest
Zellerbach
orchestra, a symphony,
had
lacked
it
busi-
family
and three
lost its zip.
eighteen-story San Francisco corporate headquarters at
Bush Street was a good example. Big headquarters are there
ego of the
thing, to stroke the
enough egos. Something tower, top-heavy as
it
like
CEO and most CEOs 700 people were on
for
One one
already have big
staff in that office
was with executives doing who knows what.
Everything ran smoothly only because nothing was happening.
There were meetings about meetings; decisions and ferred
and deferred. Talk about meetings: the
attorney walked in on
was
first
were de-
risks
one a Goldsmith
actually a fifty-player strong Trivial Pursuit
championship!
On
another occasion, Ian Duncan,
Sir
James's CFO, and
couldn't
I
we went
get any answers in the eighteenth floor executive suites so
down
four levels until
we found
the
men who had
the answers, assis-
tant treasurer Bill
Spencer and timber comptroller Dave
We promoted them
immediately to positions of greater authority and
Harris.
responsibility.
How and
could the corporate custodians get away with recklessness
pissing
away the shareholders' money?
In part,
because Crown-
Zellerbach had seven incompatible computer systems, so the didn't Sir
know what
the right foot
was
James wanted Crown-Zellerbach's timberland an area the
size of Massachusetts
sources but not the
rest of the
foot
doing. assets
gave him control over 3 million acres nationwide by the 1986,
left
—as well as
its oil
—which
summer
of
and gas
re-
company, the pulp and paper
divisions,
— Know What Business You're
we went through
so
bought the land under the San Francisco tower sold
it
and the building
to Equitable for
porate headquarters for
named
the
operations. olina,
company, I
company
the process of splitting the
Cavenham
for
up.
We
$15 million then
We relocated cor-
$57 million.
Forest Industries, as Sir
Oregon, where
to Portland,
85
In
we
James
re-
already had
operated everything else from Hilton Head, South Car-
under the name General Oriental Securities Limited Acquisi-
tion Corporation.
Crown-Zellerbach was shift in the
a state of turmoil following a strategic
in
company was in the process of moving wrong locations to new mills. Overall per-
mid-1980s. The
away from old
mills in the
formance had been very poor.
The timberlands company ing in
was
—which had a northern division operat-
Oregon and Washington, and a southern division orphaned
treated like an
child.
had
It
approvals and attracting priority status.
I
in
Louisiana
difficulty getting capital
found that a
lot of
the guys at
the top of Crown-Zellerbach didn't understand the business, didn't un-
derstand the numbers. But below them, guys such as Russ Carson, Lee Alford, Harris,
When ations, in
and Spencer
did.
took over, Carson was the vice president of Northwest oper-
I
Oregon and Washington. He reported
When
Zellerbach group presidents. a
fat
to
his boss took a
one of four Crowngolden parachute,
executive separation payment triggered by the purchase of the
company, Carson stepped erations in Louisiana
and
such an excellent job that
and
in
filled the void,
overseeing timber op-
Mississippi as well as the Northwest. I
He
did
gave him the assignment for good.
The timber and wood products division had made progress toward being more competitive. But the industry was
down-cycle when
I
arrived.
I
percent of the administrative
made staff
it
low end of a
at the
more competitive by
cutting 30
—people mostly responsible
for an-
swering to San Francisco, a function no longer needed. I
also shifted 40 percent of
roll to
Cavenham's hourly employees from pay-
independent contracts, tying
production. While this
and other
benefits,
money than
they
it
made them also gave
their
income
to their individual
own medical to make more
responsible for their
them the opportunity
would as hourly employees. Our wages up
until that
Four Simple Rules
86
point had
been noncompetitive, thanks
were completely out of
we
told the unions that they
to take a strike.
as far as If
was
It
to
poor labor contracts
with other companies
line
had
either
to lower their
make
the
that
in the industry.
wages
or we'd
So
be happy
change or lose the jobs
entirely,
we were concerned.
we were
going to pour capital into the sawmills,
we were going
made sense for us. We let the unions know that, unlike Crown-Zellerbach, Cavenham was not going to throw good money away on capital equipment if we couldn't operate it economically. If we couldn't get a labor structure that could comto
do
it
with a cost structure that
pete, then the other factors wouldn't bear
fruit.
After our saving-jobs-versus-losing-them message
was understood,
renegotiations with the union yielded $4.1 million a year. Between that
and
million
staff reductions,
was gained through
With downsizing and build
up
again.
the timberlands das,
we
We
realized an $8 million savings. In
all,
$15
cost-cutting alone.
layoffs
behind
it,
the division
was ready
to
rethought the business, focusing our priority on
and not on ancillary operations,
and promoted operators who met our
set grueling agen-
goals.
was perfect; with fine-tuning, it became a cash machine. In 1987, Cavenham Forest Industries produced $71 million worth of pre-tax income. That comSir
James's timing
in
acquiring the timberlands
pared quite favorably to the division's best performance under Crown-Zellerbach: $20 million. Incredibly,
with virtually the
same
we
did so
much
better
revenues. In 1983, under Crown-Zellerbach,
the timberlands generated $270 million in revenues; four years later,
under
us, the
revenues were only slightly higher, $278 million,
but income had increased by $51 million.
Crown-Zellerbach's mistakes had been financial and strategic:
They paid too much
for the
sawmills and timberlands.
And
the mills
they bought were poor quality. Costs were inflated because the
was being micromanaged and overadministrated in San Francisco instead of in the Northwest and South, where the facilities
business
were. Too
When
many
prices
activities weren't generating revenue. fell,
Crown-Zellerbach was afraid to cut production
because the unions might picket
their
pulp
mills.
Their solution to
Know What Business You're
poor performance was
more prod-
to overcut the timberlands, selling
mask sinking
uct at lower prices to
87
In
profit margins.
My style was a tremendous shock for Crown-Zellerbach employees who weren't performing and a real blessing to the Cavenham people,
whom
such as Carson,
I
put in charge.
and they
authority to succeed,
me a presentation on some new
when
The chipping saw converts
eye and said, "OK, but
in the
they wanted a
and more production
get better utilization
Louisiana.
and we invested $20 million
it
in
equipment
yields.
I
me with it
asked Carson a bunch of
how
fluff.
I
new
new
logs into lumber.
They
I
Holden,
in
looked them
me down,
rarely let
capital equipment.
We were maximum
asked a detailed question.
I
long
chipping saw to
our stud mill
to position the logs it
would take
and get
to set up.
He answered
said, "That's a lot of nonsense!
months and we can
in four
at
better work."
During one quarterly review, installing laser
gave them more latitude and
did.
Carson and his people would give capital expenditure, like
I
You can do
much
enjoying the advantages
start
sooner." They were just giving themselves a lot of latitude. That
caught Carson by surprise. He looked
at
me with
disbelief written all
over his face. "You're a helluva
lot
smarter than
I
thought," he blurted out with-
out thinking. His associates turned ashen, thinking Carson had just insulted the boss.
thing past
We
me
laughed
I
it
off,
but they never tried blowing any-
again.
stayed very close to the market and looked at what
tating.
Then we
best return on
identified the species of
and invested
very opportunistic;
if
was
we could
get the
We
wanted two-by-fours instead
dic-
were
of four-
and we could make more money giving the market what
by-eights,
wanted, two-by-fours were what
When
that
equipment we'd need.
in the
the market
wood
it
we
export prices were high,
in the first three
it
cut.
we shipped
months and sold
all
our export
into the teeth of that
wood
demand.
we did the opposite of whatever Crown-Zellerbach had we cut more when prices were high and less when prices
Overall,
done:
were
low.
A
facility is
ployed to run
it.
no better or no worse than the strategy em-
Four Simple Rules
88
The biggest surprise
Carson and his team was
for
how
quickly
I
reached decisions. They had done research on silviculture improve-
ments
to increase timberland yields, but
proval to
try.
I
could never get the ap-
gave them the go-ahead in minutes, and
an extension of
farming
this
style,
worked. As
it
they also began fertilizing trees
by helicopter. Speaking of helicopters, son.
must share the story of the day
I
Cavenham executives
met Car-
I
Louisiana often took visiting VIPs on a
in
tour that began on the ground
and
finished in the
where you
air,
could get an overview of the company's 700,000 acres of timberland.
The day went I
to Louisiana, the
up
"I'm not going
weather was god-awful.
damn
in that
helicopter,"
Carson
said. "But I'm
sure you re not too chicken to go."
So went. Once
in the air, the helicopter
I
shook and
rattled,
to vicious lightning, thunder,
and a horrendous downpour.
Carson was trying
It
to kill
me.
was
the kind of thing that
cost other executives their careers, but
I
appreciated his
made him CEO
gence, and sense of humor, and later
I
thanks
thought
would have
spirit, intelli-
of the
company.
O O O Conglomerates are or service
is,
less
an
and more one
issue of
how good
the finished product
ego and numbers.
of
The previous Scott management had the same debt load stead of paying it.
it
off,
They were mired
be
sold,
on, as
how
it
opposed
they must have spent
in
should be sold, what should be done, when, and so to just
balance sheet and
doing
it.
say, "There's too
oats should be able to look at a
much
debt!"
look at a financial situation like a surgeon examining a patient's
most deteriorating indication was
symptoms.
Scott's
steeped
$2 billion of red ink
in
—arguably $3
within a year. That's a leading reason
We
time talking about
endless meetings, bickering about what should
Any businessperson worth some
I
all their
but, in-
why we moved
sold the ones that were least strategic
the most money.
billion.
and
for
its It
balance sheet,
had
to
be fixed
fast to sell assets.
which we could get
Know What Business You're
Hacking away
at
89
In
debt does wonders for your standing with the
in-
vestment community. The analysts following Scott applauded our
and decisive approach
swift
that to understand? Bigger
companies
How
to getting out of the red. is
that cut debt with higher ratings.
afterward because
if
they're
infinitely bet-
an out-of-favor corporate stepchild,
they're not getting the proper funding or attention anyway. S.D.
got off to a wonderful start under the
new ownership
Sappi, Ltd., a South African paper company. Sappi
business on a global basis; they're running
We
it,
and
When you
sell
should grow and be If
it
was a
perfect
fit.
group led by
was already
in that
They're funding
an asset
to
somebody
in the
it
same
was a
it,
great
business,
it
fruitful.
a conglomerate has six businesses but only enough
across the board instead of focusing
everywhere.
Warren
they're doing great.
support three, the others must go. In business, ital
of a
sold Scott's energy plant to a utility company;
match.
is
quite a distraction. Analysts reward
Most divisions that get spun out of a conglomerate do ter
hard
it,
if
money
to
you're spending cap-
the result
is
mediocrity
Chapter
6
RULE
4:
GET A REAL STRATEGY Lesson: Envision the future and plan a route to it.
If
you don't have a vision of the
first
three of
my
future,
four simple rules
pinch pennies, and
know what
—get the
Scott's
first
for the first
The central focus
as
I
arrived, Scott
much paper
product
for
of
a strategy that imparts to
my vision was Scott as a
as
it
saw
Procter
itself
could, but
global
consumer prod-
& Gamble and
Kimberly-Clark.
as a paper producer that manufactured it
was as focused on providing generic
grocery store private labels as
names. The higher margins were
it
was on
Scott's
in Scott labels, not store
that required a marketing strategy,
pany
is
—are the building
time in years.
company on a par with
Until
management team,
company your vision of the future and how to reach it. step on this path was the implementation of a global
growth strategy
ucts
right
business you're in
blocks of an overall strategy. Rule four the rest of the
you are going nowhere. The
something unheard of
own brand brands, but in the
com-
for years.
Explaining the difference between being a commodity paper pro-
ducer and a consumer products company
is
the players. International Paper, Mead, Fort
are
commodity producers known
try.
Household names such as Procter
as simple as pointing out
Howard, and James River
primarily within the paper indus-
& Gamble and
Kimberly-Clark
who ever member of
are consumer products companies recognized by anyone set foot in a supermarket.
the
I
set out to reinvent Scott as a
second group by emphasizing brand name products over generics. 91
Four Simple Rules
92
Making
happen required what we called a 20/20/20
it
strategy: 20
percent earnings growth, 20 percent return on sales, and 20 percent
we met
sales growth. Inside of a year,
or exceeded expectations in
every category.
Our
strategy
markets
to
become
a global household
name
in existing
United States, the United Kingdom, and Europe, but
in the
also in the
was
new markets opening
in Asia, India,
and South America.
O O O Achieving that vision on an international basis required building
more
state-of-the-art
manufacturing plants around the world
to in-
crease our total output of tissue products. In the past, Scott execu-
knew they weren't States, so someone had a
gaining on the competition in the United
tives
brilliant idea: We'll
grow
the
company
over-
seas, instead.
Did
I
say brilliant?
I
mean
ridiculous.
The idea was good and the company made some money, but
that
seemed accidental to me. Overseas operations, particularly on Scott Consumer side, were slipshod and inconsistent. But
is
that really surprising?
and understand
the language
If
the
you can't succeed where you speak
and
culture,
by what height of arro-
gance can you succeed where you don't speak the language? That's crazy.
Europe
own
not one country.
is
distinctive personality
the people
assume
is
that
different,
It
is
several countries, each with
and point
of view.
And
the mentality of
whether they speak English or
not.
Europeans nod
Procter
Americans
because they can communicate with most Europeans
their
& Gamble
of culture that
in
many
cases,
heads and say "Yes" because they are
polite.
English, they are being understood. Not necessarily. In
the
its
successfully
moved overseas by
creating a
was 90 percent European and roughly
mix
10 percent
American.
We the
learned from their winning example.
number of
expatriates
ploy) and replaced
(who were
them with
We
reduced by tenfold
three times as expensive to em-
nationals. Paolo Forlin,
an
Italian
with
Get a Real Strategy
more than three decades head
Under
became our
of experience at Scott Paper,
consumer products
of
in
93
Europe.
we improved communication between
Forlin's direction,
countries and regions, and sped up growth through innovation. Forlin,
who was well-known
most European countries,
after all these years in
convinced his managers that something successfully done country could be done
We
one
in another.
transformed overseas operations further by eliminating individ-
ual fiefdoms
and
competing administrative
their
European Economic Community
rules, there are
we were tremendously successful
in
most
With the new
staffs.
no boundaries, and
applying our existing resources to
increase sales and introduce Scott products in In
in
of Scott's overseas operations,
new
we had
markets.
joint
venture agree-
ments, which guided us through the local culture, language, and
otherwise hostile distribution networks.
consumer products sia.
When
ture. For
tissue
company
example,
we owned
pany such as Scott Paper in China.
in
the
first
to enter China, India,
I'm long forgotten, that will last
Western
and Indone-
and be a legacy
for the fu-
56 percent of the best paper producer in
China, Shanghai Paper Company.
machine
We became
Asia?
Ours was a
How great is the potential for a comWe installed a state-of-the-art tissue
gigantic, fast-moving piece of equip-
ment compared with what our new partners had experienced. Their machines were so slow
that Russ Kersh said,
going so slow you could read
were interfolding
we had
that
was newsprint,
They had a room where 200
it."
tissue, putting
"If
one sheet inside the
same
a machine that did the
other.
thing, finishing
it's
women
By contrast,
thousands of
cases a minute. That's potential.
But while our technology
gone
to
The previous heads
managed operations each of
light-years
is
China on our own, we would have
their
of
ahead of
theirs,
if
we had
failed miserably.
our European and Asian consumer divisions
as a series of businesses instead of as one.
managers wanted
to
And
be king of the assigned country.
These businesses had different branding and different package designs, different sourcing of product, different sourcing of
and packaging egy
materials,
and the
for building the business,
like.
And each had
with vastly different
raw materials
a different results. In
strat-
some
94
Four Simple Rules
countries, Scott lost
age of the
money;
in others,
it
made an
inordinate percent-
profits in the region.
much work to be
There was obviously
done.
running change the mindset of the person accountiefdoms had to change into being Scott in Europe; running f rare exceptions, totality. Second, and with able for the business in its country A was also good for we decided that what was good for advantages were to be Enormous economies of scale and
Our
first
country
step
was
to
B.
creatidea everywhere, rather than gained from executing one great
ing eleven
Next
good
ideas.
we decided that the various country
operate in a
spirit of
managers would have
interdependence. close collaboration and
to
We
on another country manager wanted one country manager counting business in approach to building the wet wipes for creating the best focus on paper towels or t,sanother country manager would Europe; sues;
and so on.
We consolidated our European
finance, administrate,
human
re-
also
location, Paris^We and back-office functions at one Pacific shipped the equipment to the closed unproductive mills and more production Rim countries, where we needed reaUy run independent mills, nobody had Until then, they were all wha company. Each mill manager did them as part of an integrated ways of were ten mills, there were ten was thought best. So if there
sources,
^iStal and
was almost imdomestic operations alike, it because the way for different businesses possible to compare results they The definitions and language each was organized was different. umt alThe head of an international used were equally incompatible. environment one else understands this ways had the excuse that "No so things have to be done
We the
realigned
same
my way."
management
staffing,
human
at the mills so that
resources,
and
each operated with
financial controls. Th.s
headway of reporting to corporate streamlined the mills and their all
for be one business strategy ^Fintlly we decided there would States. across the United just as there was one of Europe and Asia,
Get a Real Strategy
Marketing Scott brands above it
all
was our domestic
else
became the strategy overseas. At some point in time, a company
medium where we could
tion
—getting
ing
design,
time,
We
tried to strike
of scale; reducing staff; improv-
and
manufacturing, sales,
For the
delivery.
first
each of our country operations followed roughly the same
ganizational chart for
its
is
take the low-hanging fruit of centraliza-
economies
the
all
and
focus,
as big and broad as Scott
either overly centralized or overly decentralized.
a
95
or-
manufacturing and marketing processes.
They were linked as one company, multiple spokes driving a single hub.
What we
didn't
want
to lose
tition
because competition
ways
local.
to
It's all
about
in
was a
local understanding of
our business
turf battles
brand loyalty often turn out
to
—
compe-
—
just like politics
between brands.
is al-
Issues relating
be about power and
control; peo-
ple feel, "I've got to have something just this way." Scott's
problems were primarily
internal, not external, so the only
change the public saw was the evolution of our branding from gional
names
to "Scott the
World Over." Paolo
re-
Forlin put consistent
business operating systems in place across Europe, but allowed
country managers enough leeway and local decision-making authority to
keep
markets and customers
their
The old Scott was always making
satisfied.
more complex as opposed to simpler. Business is simple, black and white. These are the choices that we have, and the worst decision is not making a choice. It
is
issues
worse than making the wrong choice. With
that in
mind,
we
quickly resolved issues that had been hanging over Scott/Europe for years.
As a
result of this
new
strategy, Scott
moved way ahead
of
most
other American consumer product companies operating in Europe.
We became
the
industry's low-cost producer.
In
the eighteen
months preceding our merger with Kimberly-Clark, Scott was the most successful tion
—a
fact that
tissue
company
in
Europe, outselling the competi-
played no small part
in attracting Kimberly-Clark.
O O O
Four Simple Rules
96
A second step
in
my strategy
for Scott
and extension
innovation, marketing,
was acceleration
of product
both consumer and com-
in
mercial businesses.
Most good solutions
company. adding
didn't invent Softkins
I
Arm & Hammer
pushed those products
We
any company already reside within
for
wet
baking soda
that
or conceive of
toilet tissue
to Cottonelle toilet tissue, but
I
to market.
created individual strategies by business, by category, and by
product. Every business and project leader three-year development plans.
Mind the
was required
to
submit
difference; these weren't
turnaround plans, they were growth plans that sought better products
and increased
profit margins,
which would create growth and
company before had no strategy, now each operation and each product was required to have a plan. Scott became committed to at least two marketing or product initiatives in
volume streams. Where
key categories
Make
every market worldwide, every year.
sure you are focused on areas where you have competitive
advantage.
you don't have a competitive advantage, know how
If
You need a plan
get one.
can
in
the
differentiate yourself
that capitalizes
to
on your strengths so you
from competition
in the
marketplace.
Strategy has to be clearly plotted for growth over time, innovation,
technology, and capital expenditures itability.
It
should focus on
—
all
with an eye toward prof-
when and how products
or services are
being brought to market, what cash flows or sales will
and how
that,
tion
capital investments will
come from
keep production and innova-
moving ahead.
way to grow the business. What creates value? Growth does. From growth comes a cash flow over time. What will cause that cash Find a
A one-time cost reduction
flow to grow?
market quickly recognizes
it,
fected. But to reach the next
growth.
And
that
comes from
gives you a certain bang.
The
and your stock
price
quantum
you must experience
the top line
price increases forever. There has to
leap,
—
sales.
is
You
positively af-
can't count
on
be a combination of volume and
mix changes. As
you'll
read
in
Chapter Nine, "Look Under
aggressively redesigned, relaunched,
'M' for Marketing,"
and remarketed
we
the entire line
Get a Real Strategy
Consumer and
of Scott
97
Away-From-Home products. Where
Scott
there were quality inconsistencies from region to region, such as in
we brought
Viva paper towels,
We
board.
up
the product
to snuff across the
upgraded Cottonelle from a small regional brand
to
an
in-
ternational star with multiple line extensions as part of a "personal
hygiene system." Equally important,
we reduced
the
volume
of products offered.
We
kept those that were actually profitable or had growth potential.
O O Research and development In
is
key
for
every manufacturing company.
consumer products, where something
or "Better
Than
Ever!" product
But Scott had too
is
always "New!" "Improved!"
development plays a
many R&D fiefdoms
that
vital role.
were only tangentially
concerned with product development. Centralizing development and technology resulted At Scott,
power the
technologies
We eliminated
all
outside the United States.
into centralized
R&D
major cost savings and quickened innovation.
we decided which
focused on them. facilities
in
we had confidence
independent development
We
put
all
and
in
at
of our resources
our
and
development and made the technologists and
people accountable
for
producing
results. Previously,
R&D
reported to the chairman; under me, they reported directly to the business heads for
The
R&D
ing. Like
whom
they were developing product.
group became more productive despite the restructur-
many
big
companies
today, Scott's
wouldn't bring some things to fruition for
was fun
for
R&D
five or
people
in the past
even ten years.
them because they were experimenting
all
the time
It
and
didn't have to demonstrate concrete results.
"Oh, I
it's
coming," they'd say.
told them,
"If
"It'll
be here
you have something
in five years."
to show,
show
it
now, not
in five
years."
much time working on process as opposed to what needed new products, different products so we down-
Scott spent too it
really
—
sized the process part of the labs. to product.
—
They were not paying any attention
Four Simole Rules
98
I
my
told
executives
some new technology
I
believe in awarding gold stars for finding
outside of our four walls,
wasting years trying to invent
if it
keeps us from
ourselves. Find a small entrepreneur-
it
company and buy its nascent technology if we must. It's faster to market, and a small company often has better technologies than the big boys. You can't have a good business if you are not investing in product differentiation and innovation. At the same time, the scale of ial
R&D must be manageable and productive. We did that, and we shed a lot of unproductive guys sitting in R&D. Newt White saw some
said to me, "I've
of these guys
been here
we
till
fired
for
twenty years and
I
never
them because they had hidden
out over there."
As best could I
see, they
had no purpose
at Scott
Paper other than
drawing a paycheck.
O O O Before
I
arrived at Scott,
management and
the board
had
laid
some
general groundwork, sounded the alarms, and hoped the organization
could change. What the company lacked was an implementer with a
doable plan.
Work done
in
1993 educated
staff to better
understand their busi-
ness in terms of what the shareholders, retailers, and customers were
seeing and what they weren't seeing.
was
acute:
And
their vision of the
company
The shareholders were not making money and they were
not happy. The customers were seeing a retail shift that altered their expectations, thanks to companies such as Wal-Mart, which had a
computerized,
satellite
inventory system that allowed
it
to
demand
twenty-four-hour product availability, delivery, and replenishment. Scott could not deliver that way,
and subsequently missed out on
sev-
eral marketing windfalls.
We
educated employees
operate
mand
in
a vacuum.
team calculated
understand that the company didn't
must be responsive and market-driven.
If
de-
in that
process was working with the cost side.
My
to the
penny where we
or the markets
The next step
to
It
shift,
companies must move accordingly. stood compared with the
Get a Real Strategy
competition, in every aspect of paper making
Our next
fiber.
tage.
We
looked
step
was
at the
at
a disadvan-
competition and found out which of our man-
good and which were bad, so we could
ufacturing practices were
"Here are the things that
say,
labor, chemicals,
why we were
understand
to
—
we need
to
do
We were par-
to improve."
ticularly interested in things that increased productivity.
work was
them I
to
getting people to understand the
begin planning
insisted that
need
for
change, getting
change.
for
side.
The
fundamental
partial
plans to reduce the cost of manufacturing were sitting on a
wanted strike
a
risk;
management was so scared
do
to
it
in three years.
and production I
The prep
change be made quickly because substantial savings
would come from the manufacturing the previous
99
didn't see
levels
shelf,
but
of implementation that they
They were afraid the unions would
would
how we could
fall.
They weren't prepared
to take
afford not to take the risk.
o o o If
there
was one
overall
theme
consumer products company, lier
it
that drove
was
selling non-strategic assets priorities straight in
for Scott as a
creating shareholder value. Ear-
we
chapters have covered the steps
my vision
took
in
wiping out debt and
such as S.D. Warren. Once we had our
terms of what business
established a vision for the future,
we were
we prepared
in
and had
a growth-oriented
allocation of capital.
My team
didn't approve
any substantial capital outlays
until
we
sessed needs across the entire Scott universe. That's strategy. spent
money on our core
business, investing millions to
sue manufacturing capacity and upgrade existing
The ways our team found
to sustain
value never ceased to amaze me.
proaches was with our Mexican
One
expand
as-
We tis-
facilities.
and increase shareholder of the
more unusual ap-
affiliate. In late 1995,
fered a major devaluation. While other U.S.-based
the peso suf-
companies doing
business south of the border used the devaluation as an excuse for
poor
results at
home, or
took a different tack.
for getting
out of the market entirely,
we
Four Simple Rules
100
Immediately following the devaluation, tive
—
No
excuses,
kept
we
our in-country managers. "We must maintain the
told
what we promised our shareholders." How? For starters,
expenses
all
before, the price
meant
put together an objec-
maintain the value our products had before the devaluation.
to
dollar value of
we
we
was
in pesos.
looked
ing
and did our best
at the
customers were paying 10,000 pesos
10,000 pesos after devaluation, although that
still
the dollar equivalent
We
If
expense
went down.
It
wasn't that easy, of course.
raw materials
of importing
to replace imports with locally
manufactur-
produced materi-
We maximized
which reduced the dollar/peso discrepancy.
als,
for
output from local paper mills and minimized imports.
We were among ernment Finally,
We
the
for price relief.
first
companies
We
didn't wait
we became much
tougher
to petition the
and study
it;
Mexican gov-
we went
after
it.
terms of collection and credit.
in
cut off sales to marginal customers.
The bottom
Mexico: Devaluation or not,
line in
we had
record
earnings.
o o o A
real strategy looks at short-term
and
at
long-term results. You've
know where you are going today and tomorrow, because decisions you make today will influence you beyond today. got to
the
Executives must commit to a continuous, strategic process with plenty of
room
changes.
A
for
change, because the business environment always
proper strategy breathes
must have a direction If
your strategy
and day-out
to
is
to
that dictates
new
life
every day.
Still,
what you do on a day-to-day
you
basis.
have a global brand, what are you doing day-in
develop
it?
Look ahead ten years but don't expect or demand precise adherence
to
such a long-term vision. That approach
will
bankrupt you.
new goals along the way, adjust annual plans so they into new strategic directions. Review action plans daily,
Instead, set
dovetail
weekly, monthly, and yearly, to assess whether conditions have
changed and whether
it's
time for you to
shift in
a different direction.
Get a Real Strategy
Most companies are generally good
and
think through developing products
Where
they
out a strategy. They
the competitive market.
implementation. Walk into most businesses and
fail is in
show you a
they can
in laying
101
thick strategic plan, attractively
beled. But just putting the plan together doesn't
make
bound and it
la-
happen. You
have to have follow-through and the discipline to implement your plan or to change
is
it if it
not working.
Most executives don't follow through enough. Or, they do
it
over
such a long period of time that the competition beats them to the
fin-
ish line.
Culture has a
do with
lot to
it.
process where getting something
A
company's culture may create a
new
into the
marketplace requires
a tremendous amount of internal consensus. You have to get manufacturing, technology, marketing, sales, leadership,
Imagine coming up with an idea
to agree.
who
will insist
whether they're necessary or All
it
takes
wheel and slam the process porate bureaucracy
all
to create value that re-
on being involved
in the process,
not.
one doubting Thomas
is
board
the
and then imagine the number of su-
quires a $100 million investment,
perfluous people
and
to a halt.
—corpocracy—
to put a
cog
A good
idea can get lost in cor-
for
in the well-greased
months, even years
in
some
cultures.
A corporation
that can't reach a decision demonstrates the depths
of the organization's
and
novation, there must be ten times
one out
the leadership's aversion to
risk.
Find a manager
who
is
risk.
To get
right ten out of
and you've found a lousy manager. Find one who
of ten times
you can find one
—no, you don't want
who
is
right six or
in-
is
right
that person, either. But
seven times out of
ten, that's
if
your
manager. Corporate culture and smart executives must allow people to
make
mistakes.
must take
it
to the
line, the chief
executive
risks.
Along the same the time
marketplace quickly and you
You must get
gets
everything
is
down
may
give an order but, by
a couple of levels into a corporate bureaucracy,
subject to debate.
And maybe
that's
OK— for about ten
minutes. The chairman should not be a dictator; every
company
Four Simple Rules
102
should welcome a degree of open debate about any substantial action
about to be taken. But
getting closure, for
when
making
the questioning ends
at
some
point there must be a process for
decisions,
and
for
going forward. That's
and implementation begins.
People are either prepared to be on the team or they are not. That doesn't
mean
they can't challenge management, but arguments
should be considered, decisions made, and actions taken. Let's say
I
go
to
my
director of investor relations with an idea.
director should listen, but even better, he or she should
ahead
of
me. That director should come
the department head,
mind. The window
it's
safe to
to
assume
for discussion
is
me
I've
very narrow.
have good people doing their jobs well.
If
be ten steps
with ideas.
already
My
The
If
go
I
to
made up my strategy
is
to
they do their jobs well they
should be ahead of me.
o o o I
often hear this question from people frightened by large-scale
structurings:
How do you
novative and creative
keep your people and your organization
when
all hell is
rein-
breaking loose around them?
how the good ones earn the big paychecks. We must take the people who remain and make them think of themselves as winners, make them unThat's the art form to leadership
and management;
that's
derstand they can play to win and cannot play not to lose. Take an aggressive stance
and define
do, proactively, to improve the business? What's the
are their individual roles in making the
You
can't inspire 90 percent of the
start letting
don't
people go, when
combine
What can they game plan? What
the template for success.
game plan succeed? remaining people when you
their friends leave the business,
if
you
the cutback with a vision for the future.
Without a platform of strategy that makes sense, without a way to win, the
around
whole thing
is
a
sham and you
it.
o o o
can't build
any energy
Get a Real Strategy
How
far
ahead should a company look with
Ten years? Your vision must be short-
and
its
strategy?
103
One year?
long-sighted because
if
you
don't get short-term results you will never survive into the long term.
A
one-year plan should be a very detailed document, but
be done
in the
plan for reinvesting the cash wisely while investment to shareholders. If
you expand,
From
until
it
starts
How do
had a
it
busi-
needed a contiguous
still
providing a return on
you create value with
you commit
its
It
that doesn't take a year,
the time
Once
assets.
ness that could generate cash, what then?
base?
has to
context of something else. Scott Paper focused on
primary business and unloaded noncore
three years.
it
it
that asset
might take two or
to putting in a
new machine
making product, usually you've gone beyond a
year.
So
a one-year plan has to be created in the context of a longer term.
Three years turing).
very desirable for planning (as opposed to restruc-
is
You should know,
each product category, what you
for
in-
tend to do in the next three years. You should have a vision of the key things you intend to
A ten-year, of
to
produce value.
on the other hand,
detailed plan with lots of numbers,
makes no sense bunch
do
me. The world changes. What
to
numbers
that project six years
will
you do with a
from now other than some
need
for eq-
you be a $12
billion
basic financial planning that helps you understand the uity vs. debt? If
you are a $5
billion
company
today, will
company seven years from now, or a $7 billion company? If you are in a cyclical business riding the upward curve now, it is important to understand what will happen during the next cycle. You can anticipate and plan for
it,
and allow
for
continuous earnings improvement.
A successful strategy includes planning what you will do with the new money
generated. Are there other businesses you should be
in,
other businesses you should divest? Are there joint ventures that
make sense? Are
there business combinations
Kimberly-Clark, for example part of strategy.
—
that
make sense?
—Scott All the
Paper and
answers are
PART
Who
I
I
Am
III
and Where
Come From
Chapter
7
NOTHING KID FROM HOBOKEN "A
'
in
I
was
Lesson: The only barriers your career are self-imposed
London
in
tempted $23
BAT
in 1989, at the
center of Sir James Goldsmith's
billion takeover of the British
Industries.
Among
mogul Kerry Packer and Every day,
Sir
tobacco and
international financier Lord Jacob Rothschild.
amazement Packer and me.
as
if
I
is
amazing!"
were Alice
the slums of
in
I
in
said to myself, dazzled by
my
surroundings,
Wonderland. Imagine me, a nothing kid from
Hoboken,
New
Jersey, serving as
chairman and chief
executive officer to three of the richest, most powerful world.
How
could
three billionaires,
at
—
the cast of characters: Goldsmith, Rothschild,
"This
retail giant,
James's partners were Australian media
looked around the conference room
I
at-
this
happen? Me, planning
men
in the
strategies for these
and along the way becoming a multimillionaire
myself. It
his
was a world away from where
this
son of a shipyard worker began
life.
O O O My success
has everything to do with being a poor kid
ways being put down. Making my way self-respect for
you can't
just
me, of a kid trying
brush
me
off
who was
al-
in the
world became a matter of
to prove
he was worth something:
because I'm poor.
I
can do anything, and
I
107
Who
108
Am and Where
I
Come From
I
can be as good as anybody. about self-respect and
It
was always about achievement
up
living
to potential.
The money
I've
me,
for
made
is
wonderful, but secondary.
remember going to a friend's house, a very nice house. We were playing a game when his mother said to him, "I don't want you to invite him again. He lives over in the apartments." The way she said it made it sound like a four-letter word. may have been a nothing kid I
I
from Hoboken, but
I
show you what a boy from
thought, Til
the
apartments can be."
My
father, Albert,
A very
Shipyards.
spent his entire
life
working
in
Hoboken's Todd
passionate union person, he rose up to
become a
union steward.
My
would be
father
want
didn't
to
laid off
from time
to time, not
because he
work but because there was no work. saw him go I
work on days he
to
my family believed you had to
didn't feel well. But
was it. You had to do your job. Dad always bought lottery tickets and believed one day his number would hit. Little did he know then that luck would skip a generation and visit his
go
to work; that
only son.
Money was always a cause taught you shouldn't waste
it.
me,
you'll
"Al, you're
make
I
tell if
was always intense and
me to study hard was going
I
was
Grandma, but there
ally nice,
I
a smart boy.
$10,000." That
to rise
had a healthy respect
I
cause there was never enough. to
home and
of friction in our
fifty
years ago.
cash be-
$10,000
thought, That's
I
Nobody had
knew well what was expected
above the poverty
into
re-
whole world.
in this
disciplined, even as a kid. I
was
remember my grandmother saying If you really work hard, some day
isn't
in school;
for
I
of
to
me
which was born. I
was so small was constantly bruising my knees, banging against the furniture. knew was poor because could see other people were richer than me. But didn't think was I
grew up
in
a bedroom
that
I
I
I
I
I
poor
in the
sense of lacking opportunity.
work hard, make sacrifices, pay the this day,
to
do
That
I
feel
I
well, then
may sound
price,
I
was taught
don't deserve the wealth
screwy, but that's the
that
you could
and you would succeed. To
have to prove and reprove myself. I
I
way
I
If
I
don't continue
and success feel.
I've
gained.
'A Nothing Kid from Hoboken"
My
mother, Mildred, was a strong, disciplined
tough goals and objectives
my
myself, rules
her kids, the
for
my
companies, and
me
home
the self-discipline
at a certain time, I'd
right,
would hear about
I
it.
same kind
set
later set for
I
it
and you gotta do
this
took to succeed.
be home. And I
woman who
employees. She said, "Here are the
—follow them. You gotta do
stilled in
109
if
was expected
my
If
I
She
in-
was expected
grades weren't just
do well
to
that."
in
school and
stay out of trouble.
My
family offered constant encouragement and believed passion-
My Aunt Bernice, my grandmother, my mother and could do no wrong. It all were my greatest fans. In their eyes,
my
ately in
—
father
future.
I
was
the only grandson, the only son,
didn't hurt that
I
nephew, so they
all totally
Physically,
my
For fun, ing a I
I
doted on me.
was a bigger man than grew up to be, but we walked and looked alike. My mother was
father
people remarked that very pretty;
I
my wife Judy says
have
I
my
mother's eyes and nose.
played city games such as stoopball and stickball, swing-
broom handle and
using manhole covers as bases. For a while,
drew boxes on a factory wall
a crashing halt factory
and the only
when
and almost
When was a that we moved I
A window
ten.
pitching. That
high above
fell
came
to
out of the
me.
hit
teen,
was
I
my
to practice
work was
out of
finally
Hoboken and
steady enough for into a
house
my parents
nearby Has-
in
brouck Heights. At Hasbrouck Heights High School, in athletics
—working
at football.
I
After
was named
and they came
my
parents,
to the
my
how being
to every
great growth experience, but the
you about
I
life.
commitment
it
maximum
also
to his job
liked sports
well.
My
and excelled
All-Star football
team
football success thrilled
game and rooted us
my
on.
Andrew Kmetz, on me. Many people may won-
high school football coach,
sent out to get
who demanded
I
Bergen County
probably was the next great influence der
took a more serious interest
out, lifting weights.
and was a shot put champion as parents,
I
knocked on your
ass qualifies as a
was. Kmetz was a stern disciplinarian
out of his players. Contact sports teach
was struck by and his boys.
the coach's nothing-held-back
Who
110
Am and Where
I
Thanks
to
Come From
I
my performance on
the football field,
mouth. But the Ivy League wasn't
I
was
the
equally significant,
from
tiny
was
I
my
in
the
me. The school
for
Academy
the U.S. Military
person
first
at
West
first
I
person
first
of
my family to
in
men
our family
in
exempt from
my appointment.
reputation that West Point offered a great education and
be very
that military life could
cult until
Point.
industry personnel and
critical
My parents were enormously proud
knew by
wanted was
I
person ever appointed to West Point
I
serve in the military. Working in the shipyards, the
the draft.
offered foot-
family to go to college and, almost
Hasbrouck Heights. also was the
were always considered
was
League schools such as Brown and Dart-
ball scholarships to Ivy
more mesmerizing:
I
But
difficult.
my first days as a cadet.
It
seemed
had no idea how
I
as
the instructors spoke
if
a foreign language. They were constantly chewing us out.
prepared
for the military life.
The two biggest drawbacks
the Point
were
march worth a damn and
wanted
to
that
couldn't
I
be an engineer, the primary career
Academy were trained. lawyer, actually.
I
Frankly,
was drawn
and saw the law as a way
I
The Point was extraordinarily the outside, but inside there started with 998 cadets
my original I
especially
"Whatever thing
—
it
to succeed,
back then
takes,
I
—
I
wanted
I
at
never
I
at the
be a
to
It
looked glamorous on
was nothing but hard work. My
I
I
was one
committed
was enormously
will graduate.
of
them be-
for the full term. task.
Even back
competitive.
the right thing
is
It
class
560. Of the eleven in
no matter what the
—
I
said,
the smart
to do."
My parents were so proud when ing West Point
was ever going West Point be.
difficult.
something
to
me
for
that
ill-
skills to effective use.
and we graduated with
committed
I
would do anything
then
my verbal
barracks, only four of us survived.
cause when
was
competitive, adversarial nature
its
of putting
I
which cadets
for
hated engineering.
to
diffi-
was not to
is
just
came
they
to visit.
I
decided surviv-
a matter of meeting a single challenge.
be somebody
in life,
I
had
to get
through
this
If
I
first.
a great place to be from but a very difficult place to
Through my whole
uct of West Point
is
responsibility. That's
life,
it
character.
why West
my stature. The end prodmen and women who take
has raised It
builds
Point
is
the best business school in the
"A Nothing Kid from Hoboken"
world.
On
the
same page
as West Point, Wharton and the other lead-
ing business schools are but a footnote. West Point teaches you
how to think, how to deal with how to detail your actions. It
to lead, sibility,
poses, but
its
cal
to
I've
I
teaches you for military pur-
It
teaches about
how to deal with people at all. When newly minted MBAs and discussed their need to
do
the lowly jobs
clear they've wait.
it
a world of difference. The typi-
is
learn manufacturing or marketing, they have to
to take respon-
doesn't understand
interviewed
want
how
wonder how much
be a businessperson. There
MBA
adversity,
how
lessons can easily be applied to business.
Wharton teaches business.
how
111
and learn
been trained
just doesn't
work
to
interest.
to the top.
They don't
They make
be chairman, and they don't want
it
to
Too many MBAs are arrogant and
that way.
have a superiority complex.
little
way
their
Some
don't live
up
to their potential be-
cause they've skipped the rudimentary lessons gained from working with and managing people.
By
contrast, I've interviewed
and they working
say, "Give shifts."
their fingernails
One
me
and are West
me
a chance. Let
They want
institution,
West Pointers
to
just
out of the service
learn manufacturing by
succeed, aren't afraid of
willing to prove Point, teaches
else
I
hire
And
I
look for the
under
it.
its
graduates to work
the other, Wharton, says, "You're anointed, you deserve the former every time.
dirt
same motivation
like hell;
it."
in
I'll
take
everyone
—no matter where they come from.
The most important job
in the
world to people
job they are doing now, at this point in time.
than anybody
else, they will
be discovered.
next job and not doing the job they are
never reach their
in,
If
in
business
is
the
they do the job better
they focus on doing the
If
they will ultimately
fail
and
full potential.
O O O After graduating from West Point, at Fort
I
earned
Benning and became executive
installation
on the Eastern Shore
of active duty
were up,
I
paratrooper wings
officer of a nuclear missile
of Maryland.
was ready
my
When my
three years
to try the business world.
Who
112
Am and Where
I
1
Come From
There was only one problem: people, but
I
I
manage and motivate
know anything about business. Kimberly-Clark had a management training program; him or her through
hired one person a year and put
shifts.
to
didn't
Fortunately, it
knew how
I
all
work
the
applied for the junior executive position and was hired.
It
turned out to be a job that nobody else with a college education
wanted because
it
the labor pool.
was not
ally learn
at all
New
I
grimy bottom of
thought
I
might actu-
did.
I
Milford, Connecticut, mill so
I
could
every job. Besides learning about manufacturing products,
ticed
more than expected, especially
ment
ineptitude.
My in
at the dirty,
glamorous, but
something valuable. Which
started in a nonunion,
I
do
It
you
literally started
no-
I
and manage-
next job was a promotion to the Kimberly-Clark paper factory
Neenah, Wisconsin.
the paper
my experience when
workers
My
I
became a superintendent,
and converting machines during my
facturing, scheduling,
dent,
laziness, waste,
very
and handling raw
working on the shop
I
shift,
materials.
floor,
I
all
including manu-
And because
of
could be of great help to
process problems arose.
first
day,
I
walked up
Ben Nobbe, and introduced
"Hi,"
responsible for
said, putting out
to the plant's general superinten-
myself.
my hand, "my name
is
Al Dunlap."
Looking down through his bifocals, Nobbe eyed
hand and looked me
over,
my
outstretched
up and down.
"So what?" he sniffed, and walked away.
But he ultimately liked me, even though he really didn't care college guys and none had done terribly well with him. Nobbe,
was
in his 60s,
was a
stern disciplinarian
take crap from anyone.
and a tough guy who
He was always chewing me
out.
If
for
who
didn't
he didn't
way something went during one of my shifts, he would wait got home and was probably about to fall asleep. Then he'd call
like the till
I
saying I
I
screwed up something.
remember going
counter looked I've
heard
my
at
into a
bank
in
Neenah and a woman behind
my paycheck and
father
chews you out
said, "Oh, so
all
the time."
the
you re Al Dunlap!
"A Nothing Kid from Hoboken"
Nobbe
Still,
won my undying
rapidly
cause he wore his bastardness
like
113
respect and admiration be-
a well-earned badge of honor.
He
own and became the first strong influence in shaping my business life. Nobbe set high standards, always demanded the best, and made employees realize their potential. One day, Nobbe took me fishing. I'm an inner-city kid from Jersey. What did know about fishing? But there was in a boat on the Fox had done everything on
his
I
I
River with
my curmudgeonly
the anchor," so
I
one point he
boss. At
threw out the anchor
—without tying
"There!" he exclaimed with great pleasure.
guys were I
dumb
hand,
fifth
knew
to the boat.
all
you college
a couple years in Neenah, learning
for
—machine tender, back tender, beaterman,
hand, third hand.
making paper products. It's
"I
it
"Throw out
as hell."
worked blue-collar shifts
every position
said,
very different than
I
learned a
I
learned about
most people
lot,
and not
life in
think.
I
saw
fourth
just
about
a factory on
shift.
the inefficiencies,
management bureaucracy. learned why products get made right and why they get made wrong. saw some really good leadership and saw terrible management. The good came from Nobbe. He would walk through the mills and talk to workers. He knew them by their first names. He was tough, but he knew and respected his people. He'd get his hands dirty. Like me, he was a guy who came up through the ranks. He'd give you hell but he'd stick the
I
I
I
by you,
too.
There were things that even Nobbe couldn't control or didn't see, however, such as the people
second or covered
third shifts,
for
who came
who would
them. Once
I
saw a
down some stairs. Bad management stemmed ease: layers of ally
sleep
tired
in
too tired to work on the
some place while someone
man
drive a forklift
backward
most cases from "ivory-tower"
managers sending and
shuffling
memos, never
difficult for
workers on the shop
worst example of ivory-tower disease.
England didn't know how
to get to
floor.
One
(Years
later,
of the top Scott
I
dis-
actu-
answering questions or solving problems, and always making
more in
in
saw
life
the
managers
our local plant from the airport.
Who
114
Am and Where
I
Literally,
Come From
I
he couldn't find his way to his
good way
production
facility.
Not a
to impress the boss.)
During
my
Neenah plant, rose from superinin R&D, then in paper machine start-
four years at the
tendent to project leader,
up and
own
As a
installation.
first
result,
I
I
received a hands-on education in
the entire pulp to tissue to converting to finished product process.
When was in R&D, I
I
learned
how to blend my practical knowledge
with our scientists' research and innovate better products and processes. I
took
my
experiences along with
ladder. Nothing
made or
was unimportant; every
the next challenge
media
—easier
—whether
it
to
every higher rung of the
bit of
data and experience
in tissue, cups, timber, oil, land,
to conquer.
Kimberly-Clark had a need for
we bought
me
some
extra production capacity, so
from nearby Sterling Pulp
&
Paper
in
Eau
Claire, Wis-
Nobbe and set up the deal. But they had all kinds of problems with a new pulp mill and paper machine, as well as labor and operational problems. By this time, had become knowledgeable and experienced in every facet of plant operation. What didn't come naturally, Nobbe taught me. was making great strides in confidence and savvy. He was the kind of mentor everyone needs but few are consin.
I
I
I
lucky enough to meet.
Nobbe and me to dinner a few times, and we got on well. One time it was just the two of them and Mr. Meyer said, "I have too many problems here. need someone who can properly run this company." To which Nobbe replied, "You need Ely Meyer,
owner
of Sterling, took
I
Dunlap." At Kimberly-Clark
Meyer
at Sterling,
I
I
learned about managing. Working for Mr.
became a manager and put my
training to work.
He gave me my first big break and even introduced me to the woman who would become my wife. Sterling, which made private-label/store-brand tissue paper and had about 1,000 employees, had gigantic problems. Mr. Meyer had borrowed a great deal of money to put in a new tissue paper machine
and a new pulp machine. He picked up a
lot
of debt,
and the equip-
ment wasn't performing. There were problems upon problems.
"A Nothing Kid from Hoboken
The banks were uncomfortable with the equipment Schleck, president of
you
First
because the
fix this
Wisconsin Bank, said to me,
last
thing this
bank wants
loans. Roth "I
own
to
115
sure hope is
a paper
machine." Sterling
had purchased equipment
that
much
bigger companies;
it
was
the major leagues. But because of
was able
put them into competition
like
going from triple-A ball to
My view
Moving
of facilities.
be a big
at Kimberly-Clark,
I
rolling.
has always been that you should
the large corporations.
tunity to
my experience
back up and
to get Sterling
sophisticated
It
than anything they'd ever had before. with
was more
start
work with one
of
They give the best training and have a variety
to a smaller operation then gives
fish in
you the oppor-
a small pool. You can really prove yourself,
management experience, and then move on to a larger company where you can continue building expertise and management
gain
ability.
That's a faster, smarter path than spending a career in the
same corporation and waiting for your turn. It's also ness world is moving. Fewer and fewer people are The smart person takes on a series
ees.
different
That's exactly the reason Mr. Meyer,
me
to
run Sterling.
valuable experience.
I
the busi-
employ-
of challenging experiences at
companies and builds a valuable
time, asked
way
lifetime
the
portfolio of skills.
who was
My work
at
seventy-five at the
Kimberly-Clark gave
broke away from the herd and raced past
me my
contemporaries.
Although
I
another one ter I
home
didn't
had moved on from Kimberly-Clark's Wisconsin plant
in
Memphis, Mr. Meyer invited
Tampa,
in
want
to
Florida.
go back
I
me
to visit
knew he wanted me
to
him
work
at his
for
to
win-
him, but
to bitterly cold Wisconsin.
He did ask me to come back the following weekend. agreed and the same thing happened. By the third weekend, didn't know what he was up to, But that
first
weekend, he didn't
offer the job after
all.
I
I
but
I
sure liked Florida in the winter!
subzero winter and thereby turning fered
—was
to ask for
So when he ready.
My strategy down
for avoiding
the job
—
if it
what thought was an outrageous I
did, in fact, finally ask
me
to run his
another
was ever
of-
salary.
company,
I
was
Who
116
I
"Well,"
Am and Where
1
Come From
moon,
said, asking for the
I
Mr. Meyer looked at
me
"I'm not going to pay
you
"I'd
have to make $20,000."
moment and
for a
that,"
thought about
it.
I
was
relieved.
my
first
sixteen weeks,
he said, and
Then
he said, "I'm going to give you $25,000."
So
I
took the job.
Whatever could go wrong did go wrong.
we had
a flood, a
The flood
.
.
.
fire,
was a
Chippewa and Eau
big runoff from melting
and we had
to the plant flooded,
were pumps
basement
in the
wouldn't short out.
The explosion
.
.
It
was a
fire
.
.
the explosion,
The
with the water, covering
in
It
blew the roof
week.
We
cap
off the building
and
sent our people out on
damaging product and shutting us down
pany goals and
strategies.
its
As a
they did business. In
The union
result, strikes
fact,
labor. Sterling
was
were almost a part
of
employees there would go out any
A change
was enough
tried to leverage the
in
result of
in the
manufac-
to instigate a wild-
company's financial woes
a state of labor chaos.
It
wasn't limited to Ster-
however; the whole town was a union nightmare. Uniroyal once
had a giant plant mately they shut I
a day.
employees or getting across com-
turing process or a scheduling snafu
by constantly being
for
between the flood and the explosion, a
time there was any kind of disagreement.
ling,
when an
air
later,
new replacement equipment.
not very skilled in listening to
cat strike.
There
took place in one of our warehouses a few weeks after
strike ... hit
way
in.
raised off the floor so they
poor communication between management and
the
winter,
The road
rain.
a rowboat to get
happened about a month
.
half the plant for a
.
we
One
at
true disaster.
planes to find and bring back
The
to take
that
over the paper dryer exploded.
down
Claire rivers.
snow and a heavy
And sand was coming
the paper machines.
shut
strike.
occurred because the Sterling plant was located
the confluence of the
there
an explosion, and a
In
told the
strike
in the city.
down
union leaders, "This
forever."
ulti-
local operations completely.
— nobody benefits from
can stay out
They had so many labor problems,
this.
is
nuts!
You
can't
keep going on
The next time you go on
strike
you
"A Nothing Kid from Hoboken"
"When
you
will
talk to us
117
about our grievances?" the union leader
asked.
"As long as you are out on an
and we were
said
Finally, "If
at
an impasse
illegal strike,
you want
to bust this
never talk to you,"
I
for several days.
called the union leader
I
I'll
and gave him an ultimatum.
company,
to operate a business like this.
We
sphere of constant blackmailing.
I
that's
it;
it's
over.
I
am
continue in
will not
you
will not allow
not going
hold
to
atmo-
this
this
com-
pany hostage. "Look,"
I
"we can
said,
sit
on each other's lap
in the electric chair,
but what does that accomplish? Let's get this place running right and
we
will
be able
to
both out of a job
pay you more money. But
if
we go
bust,
we
are
—you and me."
The union wanted respect and
I
wanted
to give
it.
But
it
wasn't
easy on either side.
When
I
me because
started at Sterling, people there didn't respect
remember a reporter got my age wrong and wrote that was 30 instead of 29. Someone said, "Doesn't that upset you?" "No," said with a laugh. "If it makes me seem older and more mature, maybe people here will finally pay I
was an
outsider
and a very young one
at that.
I
I
I
attention to me!"
From then
We
on,
had a
good
pretty
relationship with the workers.
talked out various issues through the appropriate grievance
mittees. Sterling still
I
is
now
the only major
operating in Eau Claire.
None
bloated payrolls and high costs until
But
in 1967,
1
was brand-new on
company from 29 years ago
of the others recognized their it
was too
the job.
I
late.
knew when
there were problems, but a flood, an explosion, a
were beyond on.
None
training.
It
corrective
of
my
wildest imagination.
the
hand
I
was
dealt, so
I
fire,
started that
I
and a
strike
addressed each disaster headI
I
measures so that problems
wouldn't happen again. (Floods I
I
them panicked me, which
was
com-
attribute to
played that
it
my
and put
West Point into place
could be controlled
couldn't do anything about.)
remember going home on a Sunday
night to get
clothes after working straight through the weekend,
some clean
and discovering
118
Who
that
my
"God
trying to
patched
I
people
and
I
Come From
Mustang, had a
car, a Ford
is
But
Am and Where
I
me something." up myself, my car, and fired the
I
me
Meyer treated
like
company.
the
who
people
put the right
I
weren't performing,
when
and new product innovations.
He was very good to job done. was only 29
a son from day one.
but nevertheless expected
years old
thought,
I
once again became a great success with increased mar-
ket share, greater profitability,
me
tired,
tell
in the right jobs,
Sterling
Mr.
Dead
flat tire.
me
to get the
I
started there as general superintendent, but he
I
handed me the keys
manufacturing plant and
to his
all
the responsi-
bility that entailed.
Sterling
though
was my
first
real
didn't realize that
I
just there
doing a job
Intuitively,
I
knew
I
We
something around, even
doing. To be honest,
profitable.
was manageable as long Under my watch, first
as
I
kept op-
private label disposable diaper,
also converted pulp mills to secondary fiber, using in drastically re-
costs.
Even though
I
didn't realize
it
at the time,
mulate the four simple rules covered here
good management
getting a ness;
was
Sterling entered the
waste paper instead of virgin pulp, which resulted
duced
I
instinctively, cutting costs, hiring better people.
diaper business, producing the "Pee Wees."
to turn
was what was
the business
and
erations simple
chance
and getting a
I
in
was beginning
to for-
Chapters 3 through
6:
team; attacking cost; focusing the busi-
real strategy.
o o o Sterling Pulp
opment,
&
Paper was an important step
in
my
personal devel-
too.
Mr. Meyer threw himself a big birthday party each year, inviting
about 200 people. The
first
year went, I
I
found myself assigned a plum
seat next to the boss.
"You're here by yourself?" he said unhappily, shaking his head. U
A1,
1
what,
want you find
I'll
"No,"
I
to like
it
in
you a nice
said,
Eau Claire and make a home here.
girl."
somewhat
flustered.
77/ find
me
a nice
girl."
Tell
you
"A Nothing Kid from Hoboken"
man who
But he wasn't a
By the end in
took "No" for an answer.
of the evening, he said he
a few social favors. "Come to
Meyer said.
ner," Mr.
He
"I've
wasn't kidding
—
my
that girl
had checked around, pulled
house tomorrow evening
got a nice
girl for
was Judy
you
for din-
to meet."
whom
Stringer, 26,
Eau Claire was a small town
ried less than a year later.
119
in
I
mar-
those days;
everybody knew everybody. So when Mr. Meyer made inquiries on
my
Judy worked
behalf, he didn't have to wait long.
some
in
a local bank,
whose directors were friends of Mr. Meyer. When saw her for the first time, she struck me immediately as a beautiful, intelligent woman who initially didn't seem that affected of
I
by me. Indeed, Judy's thought like
I
first
impressions of
was handsome, but
a locomotive
—not
me were
also aggressive
like the restrained
not inspiring. She
and brash.
Midwest
I
came on
fellas to
whom
she was accustomed.
But she must have seen something she liked because regular item over the next six months. it
was my
got engaged and
intention to get married before the
tax deduction. Six hundred dollars
seemed
"No, no, no," she said, "things are I
We
didn't give
up
easily,
president of the bank, to try
and
end
like
a
moving too
even going so talk
we became I
told her
of the year
lot of
a
—
for a
money.
fast."
far as to recruit
some sense
her boss, the
into her. But in the
made me wait until March of the following year. Sterling was a company in huge financial trouble, which is why Mr. Meyer hired me. He needed an outsider to do all the unpleasant things that a restructuring called for. It was just a job to me, but it was tough on my fiancee and her parents. Judy, the second of three children, comes from a working-class background similar to mine. Her folks, Joe and Virginia, instilled in her the same basic values and sense of humor that mine gave me. That's why it hurt when peoend, she
ple
son
would say I
terrible things to
was, or that
I
them about what a
must have had no feelings
to
cruel, cold per-
have laid
off all
those people.
There were also physical threats of violence.
mous calls and
letters
my car or shoot me
from nuts
in the
who said
parking
lot.
We
received anony-
they were going to blow
up
Who
120
Am and Where
I
I
Come From
Years later there was a happy ending to
my
&
Sterling Pulp
Paper
experience. Judy wanted to attend her twenty-fifth high school union, but because
thought
it
had been responsible
pleasant, but
We went
I
many
me
out of going with her. She thought
it
she
layoffs,
me, and
for
could be un-
went anyway.
and then dinner. After dinner,
to a cocktail party
men's room. As soon as
talk to
for so
would be awkward (and maybe dangerous)
she tried to talk
to the
I
re-
I
was gone, old
went
who wanted
to
Some time passed and, when Judy grew worried that somebody had taken me
Judy alone converged on
hadn't returned,
friends
I
her.
I
outside for a get-even thrashing.
Then she looked over and saw me
at the
end
of the bar,
surrounded
who had worked at the paper mill. Much to both our surprise, were buying me drinks, congratulating and thanking me for sav-
by guys they
ing their jobs.
They were
grateful for
what had done 20 years I
earlier.
o o o After
I
had been with him
entered a hospital and never
in his eighties,
on the way home, would I
matter
how
to go.
We
ill,
almost seven years, Mr. Meyer,
for
visit
him and discuss
both
knew
his days
when entered I
his
out.
it
was time
were numbered when
room.
It
was
Every night,
the day's business.
he would always shake hands when
completely gone. Even then, the expression special
came
now
in his
eyes
No
me
for
his grip
was
made me
feel
like losing a parent.
Mr. Meyer's family sold the plant to Gulf -I- Western after his death (it is
now owned by Pope & Talbot), and moved on I
group strategic planning
at
American Can Company's Greenwich,
Connecticut, headquarters in 1977.
I
got the job following a chance
encounter with the vice chairman, Harry Howard, ing.
He suggested interview
After
I
restructuring
and
responsibility-free matrix
matrix management,
hands-on
issues,
I
some
to take a role in
at
at a
business meet-
American Can.
rightsizing
Sterling,
American Can's
management made no sense
to
me. Under
some
for
for administrative things. In the matrix,
no
reported to several different people,
single person could fire me, nor
was any one boss responsible
for
my
"A Nothing Kid from Hoboken'
work.
It's
the direct opposite of the military,
As head
of special projects,
that studied the matrix system
more
which has a very clear
command.
chain of
to
121
I
coordinated an American Can group
and convinced management where ultimate
traditional business units
to return
responsibility rests
with the head of the division. Most businesses have chucked the matrix in the
years since, returning to a direct system of responsibility.
As another
result of the
same
study,
American Can
business comprised of four basic business units.
them, the Performance Plastics division.
became
was handed one
I
made
It
itself
plastic
wraps
a
of for
meat, cheese, cream cheese, potato chips, and Kool-Aid.
The chairman said
to
me, "Take
this thing for a
year and see what
you can do." Everyone thought the division should have been a great success, although
it
had always been a
disaster.
Promoted
nior vice president
and group executive, my
around or dispose
of
was brain dead, but changed I
daydream about decisions and in rapid
up.
was
task
to either turn
it
it.
Performance Plastics had never amounted the division
to the level of se-
much. Management
to
Instead of letting
that.
strategic moves,
I
made
succession and tossed overboard anyone
My method was simple: "Do
it,
things
who
in
them
happen
couldn't keep
dammit!" which employees referred
to as "D-I squared." I
took us out of a multitude of money-losing businesses such as
bread wrap, which produced the plastic bags bread are stored. The manufacturing process
was too expensive Instead,
for us,
we moved
compared
what
to
into the high-end
and
for
it
far
which loaves
in
of
making these bags
cost our competitors.
more
profitable
meat
wrap.
Then we cut
new
heck out of costs and came up with numerous
the
products, such as the retort pouch, a reheatable food package
used by the military facturers of
TV
for
food
dinners;
polyfoil tube that could
blob of toothpaste.
It
rations;
microwave
trays
and the glaminate tube be rolled
like
had a "dead-fold"
be folded and would stay folded.
used by manu-
for toothpaste,
metal to squeeze out the characteristic; that
We
is, it
a
last
could
also developed the tubular
Who
122
I
Am and Where
Come From
I
water-quench process, which brought together seven different types of plastic all at once.
American Can's philosophy
my
niche markets. Under
time was to pursue specialty
at that
leadership, Performance Plastics estab-
lished itself as the leader in the higher-profit plastic
tube markets, ing areas.
We
and laminated
in the sophisticated
photographic and medical packag-
expanded our
position in the growth segments of
also
the high-performance food film business.
As our business evolved, in Scranton, Pennsylvania.
uct that our competitors
money and was this didn't
down
wrote a
down
a large American Can plant
had produced a commodity
It
made
The plant was
for less cost.
losing
go over well with some people, especially Lieutenant Gov-
He
III.
anyone
didn't like the idea of
clos-
a plant in the town bearing his family's name. Scranton
American Can's chairman
letter to
"You've got this terrible young executive
be
resin prod-
too expensive to continue operating. Naturally,
just
ernor William W. Scranton ing
shut
I
of the
who
board
that said,
did this and he should
fired!"
But the chairman admired tenant governor and, after
my steadfastness
laid out the fiscal
I
down
in facing
a
lieu-
reasons behind
my
My letter to him somehow circompany giving me a sort of folk-hero status
decision, reiterated his support for me.
culated throughout the
with
some and
attracting flak
from others.
management executive committee in 1981, mold of the prototypical American Can executive.
Despite joining the
never quite It
was a
stifling
the
fit
I
traditional conglomerate,
bureaucracy, a stodgy, out-of-touch management, and a cost
structure that
was out
of control.
decisions on the spot instead of faceless committee.
If
challenging the
way
making my share
next project
code name all
of
the time
for
it
made
today,
off into the far-flung future.
things
were done, saying what
enemies
at
was truly a maverick there, making shuffling responsibility off to some
I
a change needed to be
today instead of putting
My
complete with an innovation-
in the
made
it
was always
thought,
and
corporate hierarchy.
American Can was "The
development of a
I
I
I
plastic
and never understood why
Gamma
ketchup
it
had
to
bottle.
come
in
Project," the I
use ketchup
a heavy glass
The
bottle.
oned
bottles broke
all
would bounce, not break, it
123
We
reck-
and weren't
the time
ketchup bottle would be
that a plastic
While
"A Nothing Kid from Hoboken"
if
functional.
lighter for shipping
dropped.
sounds simple, manufacturing a
plastic
Ketchup spoiled. Or the
was almost
killed
it
a funny
lids didn't close. In fact, the project
out and accidentally dropped
sauce everywhere.
It
looked
it,
like hell.
it
in his refrigerator.
splattering plastic
But
development and
in the
new
the manufacturing snafus by developing a bottle's successful
left
when the chairman of the company took home a
prototype one-gallon container and put
took
ketchup bottle
Some
wasn't easy. The original designs broke or cracked. taste.
and
rollout
His wife
and tomato
we overcame
end,
resin process,
pushed us
and the
into the very
high end of plastics packaging.
By
this time,
specialist, but
job.
I
I
I
pretty well
still
knew what
wasn't doing
it
I
was doing as a turnaround
as consciously as
I
would
was focusing on good managers and marketers,
out of costs, and selling assets.
doing everything on automatic
I
at
my next
cutting the hell
didn't have a philosophy then;
pilot,
based on what
felt right
I
was
and what
delivered the most value to the shareholder. But out of this madness, a
method was beginning as
CEO
of Lily-Tulip.
to take
shape
—one
I
employed
in
my
next job
Chapter
8
RAMBO
PINSTRIPES
IN
(AKA "CHAINSAW AL")
Lesson: Don't take the easy way out. It's always easier to take the easy wrong than the harder right.
Few people
Company
at Lily-Tulip
Ohio, the U.S.'s second
in Toledo,
largest supplier of disposable cups to the food service industry, had
ever heard of
knew was
me when was I
hired as the
new CEO
in 1983. All
they
somebody was coming in from Kohlberg Kravis Roberts & Company (KKR), the Wall Street investment banking firm that
which pioneered the leveraged buyout (LBO) purchased
Lily-Tulip for
$180 million
in
in the
1970s and had
a well-publicized, highly
leveraged buyout the year before.
There was great trepidation about what the perception was that
was a KKR person, but
I
KKR.
Eugene Clayton. But
knew
for certain
was
that
my
it
I
that wasn't true;
was recommended
prior association with
around consultant
L.
new CEO might
was
all
for the job
do. I
The
had no
by turn-
that Lily-Tulip's staff
getting a tough business manager.
move today, but in the early days at Lily-Tulip, my ideas and management methods weren't widely known. The executives had my resume and knew was a take-nob_s_ West Point graduate, but that was it. The press follows
every
I
They expected the
company and
ticipated things
KKR would turn
it
around. Even so,
were going
to
manager to change don't think anybody an-
bring in a tough
change
I
to the extent or as rapidly as
they did.
125
Who
126
Am and Where
I
Come From
I
Morale was horrendous. People told
resumes on the
company
street
in the city.
from
me
there were probably
more
employees than from any other
Lily-Tulip
Everyone was figuring how
to bail out;
was a
it
sinking ship.
How bad was
it?
The debt-to-equity
nine times more debt than
we had
Most companies have a debt that
tive:
uity. Lily-Tulip's
9:1,
meaning we had
To put the
ratio in perspec-
ratio
equity. is
was
equal to or
less
than their eq-
debt was outsized; there were leveraged buyouts and
then there were overleveraged buyouts. Our situation was over the top.
A
9:1 ratio at
that
had a
9:1
company making money was no problem; a company ratio and was losing money hand over fist was terrible.
a
At the time, however, this type of crushing debt arrangement was not
uncommon; Lily-Tulip
today,
most acquiring firms are fortunate
was financed
the prime hovered
at
prime
in
a leveraged buyout.
company, and the banks were going losing
its
ass, $1
1
Pretty sad, especially considering in
running
The problem was not plastic
and foam cups,
carriers for the bottling
It
was choking
on sales
of $275 million in
KKR's equity investment.
KKR had
given the old manage-
Lily-Tulip.
in Lily-Tulip's
products
plates, bowls, lids,
—disposable paper,
foam
and beverage markets.
from the LBO. No, the fundamental
It
labels,
and
lousy.
was
And
it
that
involved in
KKR because
man-
wasn't as
no one knew. As Forbes magazine reporter Allan Sloan put
millions instead of
plastic
wasn't even the debt
crisis at Lily-Tulip
agement's way of running the company was
many people
the
nuts.
million lost
just the first year, representing one-third of
ment an equity stake
when money in
rate plus 2 percent at a time
between 16 and 18 percent. That's big
any deal, but especially
KKR was
to get 1:1 ratios.
it,
if
"Too
the deal were contemplating their paper
making paper cups." The banks were screaming
at
was straining loan covenants to keep Lily-Tulip afloat. The company was so badly managed it couldn't even scrape together enough money to pay its monthly debt service. Bankers Trust and Continental Lily-Tulip
spun
off
it
Illinois
my first month. people who had been
threatened to pull the plug during
was a $300
million business run by
by Owens-Illinois, a $3
billion business.
They sustained a
large-company mentality that was no longer appropriate. The reason
Rambo
the
company had no money was
in Pinstripes
management had
that
12?
up
staffed
at
the administrative level, imitating the Owens-Illinois model, rather
than designing a new, more modest model to Tulip.
Everyone had a secretary and
it
fit
was not
A
spouses or adult children on the payroll as well.
pany didn't warrant
its
own plane
agement didn't understand latitude to
its
that,
much smaller Lilyuncommon to find
the
$300 million com-
man-
or limousine, but the previous
and KKR, which granted tremendous
managers, didn't care about those things as long as the
company made money. The mood around agers hoped the to
do
it
and
company could
really didn't believe
In Lily-Tulip's case, the
headquarters
when
Lily-Tulip
Out
level.
I
was
arrived
Man-
fatalistic.
how
survive, but didn't have a clue it
could be done.
problems were primarily concentrated in the field,
our products were
still
at the
selling.
customers included McDonald's, 7-Eleven, Dairy Queen,
Lily-Tulip's
Hardee's, Kentucky Fried Chicken, Taco Bell, Wendy's, White Castle,
company was
Coca-Cola, 7-Up, and Pepsi. Because the
people knew
how
really
bad the
few
private,
situation was. Executives in a private
company are more
insulated against adversity because they don't have
to report details in
documents such as annual reports
My
first
day on the
job,
called a short meeting of the senior
I
agement. The company was
managers were
to
remain. "You two stay did
I
and most
in terrible trouble,
blame. Looking around the room,
marks simple and pointed
How
to stockholders.
my
—the
know who
index finger
rest of
you are
stayed and
at the fired.
people
later,
I
was
on who was deadwood and who had the potential pany, such as the newly installed CFO, Art Witt. tion
and used my own
who
got the ax.
instincts.
I
my
wanted
re-
to
Good-bye."
who went? As
board of directors would do many years
of these
kept
I
man-
I
the Scott Paper
briefed by
to
grow
took
this
the
KKR com-
informa-
There was nothing random about
way they did in the past. Most LBOs, if they fail, do so because management was poor in the first place. If lousy management hasn't changed following the LBO, how likely is it to be any brighter now? Lily-Tulip's senior executives didn't People perform
in the future the
recognize themselves as the company's problem and they didn't
Who
128
Am and Where
I
I
Come From
express any interest in change. ever
it
The
took to
make money
financial record of
those executives
I
needed people
for the
what occurred
—as documented
would indicate my
shareholders
in
willing to
do what-
—KKR.
at Lily-Tulip in the
absence of
Forbes and reported by
intelligence dossier
on
prior
CNN
management was
well
informed:
1982: Lily-Tulip lost $11 million the year before
•
was
at
dipped
to
on
profit
its
went
public, earning
We
two and a In those
my
first full
year; debt
KKR
a $120 million stock
$30 million equity investment.
Furthermore, on the day listed.
hired; debt
$43 million.
1985: Lily-Tulip
•
was
a record $165 million.
1984: Lily-Tulip earned $23 million after
•
I
ultimately sold
arrived, Lily-Tulip's stock
I
it
at $18.55,
was
$1.77 un-
an 1,100 percent increase
in
half years.
same two and a
$19 million to $108 million lective investment,
half years, shareholder equity rose
—
all
from
as a result of drastic cost-cutting, se-
and common sense. Headquarters staff was cut
in
was cut by 20 percent. The Toledo headquarters was closed and moved closer to our plants in Georgia, where we paid just $10 per square foot for office space. We grounded and sold half.
Salaried staff
the corporate in
jet.
We
unloaded unproductive manufacturing plants
New Jersey and Maine. Waste We increased our budget for
product was cut by 15 percent. research and development, and
spent capital on making manufacturing efficient.
And we launched
a fabulously successful
co-extruded Trophy® XL cup, the
posable
for either hot or
Lily-Tulip
became a
less labor-intensive
first
product, the dis-
cold liquids.
great success.
It
demonstrated that when
betrayed the firm's weakness, of course:
pany,
and more
two-ply foam-and-plastic
gave great freedom to talented executives,
tives, the results
new
we
it
got great results.
When KKR had bad
It
KKR also
execu-
were horrendous. A very supportive parent com-
KKR was dependent on
its
operators because the
KKR
people
Rambo
Pinstripes
in
financiers, not managers. Their success or failure
were
was
129
predi-
cated on their ability to get top-flight managers. Unfortunately, they
tended
support bad managers too long. But as history has shown,
to
more often chosen
they have
quality people
and been rewarded.
They are the most successful leveraged buyout firm
in
American
his-
buying and or selling companies such as RJR Nabisco, DuracelL
tory,
Borden, and Safeway.
A
cover story in Georgia Trend magazine, reflecting on the speed
with which called
me,
me
we changed end
Seven months into going well, and
"I
and my personal
"Georgia's Toughest Boss."
really; at the
me at the
Lily-Tulip
KKR
everyone knew
of the day,
my
didn't matter
It
I
got the job done.
tour of duty at Lily-Tulip, things were really
Huntington Hotel if
in
little
San Francisco. He toasted
you were twice as good as
I
dinner
said "I
it
I
said, "that
is
not what you said
would be a slam dunk
lied,"
for
when you
for
me and said. thought you
were, you would have a 50 percent chance of pulling this thing "George,"
it,
what they called
partner George Roberts threw a
always thought that
doing
style in
off."
hired me. You
me."
he said.
That night, they
made me chairman
of Lily-Tulip.
O O O In
December
1985,
an executive headhunter
for the
search firm of
my name on to Sir James Goldsmith. European billionaire who had just acquired a failing San
Heidrick and Struggles passed
Goldsmith, a
Francisco-based timberlands company,
someone who could save
it
from
needed
Crown-Zellerbach.
itself.
Goldsmith was an Anglo-French financier turned statesman whose net worth
was
$1 billion
multibillionaire now. tionally
by
when
When
I
met him
our paths
renowned hostile-takeover
British
Labour Prime
when he devoted
all his
Minister,
first
He
crossed, he
specialist
is
reportedly a
was an
who had been
interna-
knighted
Harold Wilson. Until the early 1990s,
energies to politics and environmental issues,
he ran a business empire with operations States,
in 1986.
in Britain, France, the
United
Mexico, and Guatemala. His best-known company was the
Who
130
I
Am and Where
I
Come From
Grand Union supermarket chain, which he acquired million.
A London journalist once said of him,
of the hostile takeover, but he took it
into a
work
for
1973 for $62
"He was not the inventor
across the Atlantic and perfected
it
of art."
my boss, KKR partner George Roberts, who deKKR knew of." That was enough who asked me to his home in New York City for an
he called
In 1986,
scribed
in
me
as "the best operator
Goldsmith,
interview.
Afterward, Judy asked don't know,"
"I
I
me how
it
said. "He's very
went.
smart and he talked about a
lot of
things."
"Did you like him?" she asked. think so, but he's different than
"I
also doubted that anything
I
But three days later
don
I
anybody
would come
of
I've
ever met."
it.
got a call from Sir James, inviting us to Lon-
Christmas week.
for
There were many parallels between what
and what needed doing pinali's,
I
had done
at Lily-Tulip
at Crown-Zellerbach, and over dinner at As-
Goldsmith's London gaming club,
I
detailed the turnaround
of Lily-Tulip.
That was
"We I
will
all Sir
James needed
work out a
deal,"
to hear.
he said
said, "Yes, Sir James."
—Jimmy.
me James," he said, then changed his mind. "No, no You must call me Jimmy because that is what my friends call "Call
me."
O O One on gaged
was not your typical predator enElegant, gracious to a fault, he was ever
one, Sir James Goldsmith
in hostile takeovers.
came up through great war and hard times. He climbed
the sophisticated European. But in reality, he
hardships in his time, including life's
rungs one step
at a
time
Goldsmith's father once
—
just like
managed
great connections, but no money. ily
fled
Europe and emigrated
to
me.
hotels in Europe, giving
Then came World War
II;
Jimmy
his fam-
England. Whatever they had had
Rambo
before to the
was
lost,
and Jimmy's
in
Pinstripes
131
father enlisted in the British army, rising
rank of major.
Jimmy entered adulthood as a roguish playboy. It wasn't until later in life that he became the billionaire everyone knows today. He made his money the oldfashioned way, as they say: He earned it. He often remarked to me, "My dear boy, you and have an enormous respect for money because we had to make it. We had to live by Despite the hardships that beset his family,
I
our
wits."
Sir liant,
James was a
He backed me duced me
He was a working
to
in
I
everything
the world. I'd just
Until
I
out of the corpo-
He encouraged me and
intro-
me was
all
done a
ran
I
life,
I
financially sophisticated
of his business activities.
all
more
the
point in
became
I
significant because, consider-
already thought
I
was on top
high-profile turnaround at Lily-Tulip for
of
KKR
millionaire several times over.
met
States. I'd
and
him. For six years,
my modest starting
and was a
me
today.
did.
I
fished
bril-
another world, a world of enormous wealth and power.
His impact on
him
man who
me what am
brilliant financier,
for
influence on me, an absolutely
life
dynamic, and gregarious
stream and made
rate
ing
larger than
Sir
James,
been a good
that there
is
far
all
my
experiences had been
generalist
up
more business
than within. Working with him,
I
to
until then, but
I
United
in the
learned from
be gained outside our borders
found myself
at the center of enor-
mous power. learned how to do international deals, buying and selling assets, and how to deal more effectively with investment and I
commercial bankers. In
every deal
I
It
broadened
my horizons tremendously.
ever did with Sir James,
he was always more generous with special aura about
him and was fun
me to
when
it
came
time to
than he had to be.
settle,
He had
a
be with.
He once said to me, "It's amazing how we always come to the same conclusions." Jimmy never second-guessed me, was always supportive. He never came out and ordered me to do anything. His manner was more, "I would appreciate it if you would look at this." He was subtle, and was more like a sledgehammer. Jimmy had a charming, aristocratic personality except when provoked. I
Who
132
I
Am and Where
Come From
I
He's in politics now, and I'm on the board of his private company. I
miss him in business.
think
I
we were an
absolutely unbeatable
combination.
O O O James was the
Sir
me "Rambo
to call
first
in Pinstripes."
something he said offhandedly
to a reporter
and meant
compliment. He explained
me this way,
"You're like
go
it
to
into a situation that's totally chaotic
good
fight,
and when you
my
During
leave, you've
I
never liked, but
Aspinall, the
won
it
was
be a great
Rambo. You up, fight the
the war."
days in Australia, restructuring companies for Kerry
up on
Packer, the press there picked
which
and you clean
to
It
famed
it
British naturalist
nickname "Chainsaw,"
the
stuck. "Chainsaw"
was given
to
me
and gambler. He once
by John
said, "Al
He goes in and cuts away all the fat and leaves a great sculpture." It, too, was meant to be a great compliment, but over the years it sounded like was some kind of serial killer. That is
like
a chainsaw.
I
my side. love the Rambo movies. Here's a guy who has zero chance of success and he always wins. Rambo goes into situations against all odds,
one's always been a bit of a thorn in I
expecting to get his brains blown out. But he doesn't. At the end of the day, he succeeds, he gets rids of the
bad guys. He creates peace
out of war. That's
make a
what
do, too.
I
decision.
I
It's
set myself apart
turnarounds, like Scott. The lot
of prisoners.
the right things
How do
I
don't get
and
you get
convictions.
always easier to
I
to
lost
why you
by taking on the most
causes.
I
didn't
difficult
don't worry about taking a
bogged down with the social baggage. do I
do them on a consistent be a "Rambo
criticism.
basis.
in Pinstripes"?
By making the tough decisions
away from. By taking
justify
By having strong
that other
By knowing when
people walk
to say "That's
enough," ending debate and beginning implementation. People want a leader they can look up
what
he's doing, but at least they
know
to.
They may not
like
him or
he's getting things done.
If
Rambo
you're going to be in public
in
Pinstripes
133
you must have a strong personality.
life,
It
inspires people.
The outside world
Damn
guy
tough."
is
bad employees, I'm the worst.
the effort;
I
And
I
am
tough.
good employees, I'm the best boss they could
tough. But, for
have. For
make
thinks, "This
I
appreciate a good job and
The business establishment either likes
who
appreciate people
reward people.
I
me
or they abhor me.
whose nice, comfortable bureaucratic hate me. Those CEOs who've been asked, "Dunlap
There's no in-between. Those
worlds did
it,
I've upset,
why
can't you?"
—they loathe me.
Employees never know what
them on
their toes.
join
I'll
them
to
expect from me, which keeps
at lunch, or
wander through produc-
and without a contingent
tion facilities in casual clothes
VPs
of senior
in tow.
Once
went on a
I
fact-finding trip to
one
crew there thought they would entertain
and then
slide show,
fore, at least.
I'd leave.
That's the
me
with flip-charts and a
way
they always did
kept them locked in a conference
I
swering tough questions.
One
of the
The
of Lily-Tulip's mills.
managers
room
all
it
be-
day, an-
later said, "We'll
do
anything you ask. Just don't send Al back."
o o o My
last
assignment leading up to Scott Paper was
in Australia,
running Kerry Packer's far-flung media empire, Consolidated Press Holdings.
When two
Packer asked
things.
want you
I
me
to
work
to run this
for
him, he said,
"I
want you
company and want you I
to
do
to train
my
son, James."
At that point
had worked of
it
in his
in Kerry's life,
his
whole adult
he was already a very wealthy man. He
life in this
family media business, most
legendary father's shadow, then as very
much
his
own
man. Kerry had taken a successful company worth a few hundred million
poor.
and pumped
He had
lost
its
value up into the billions. But his health was
a kidney, survived a cancer scare, and, in October
Who
134
Am and Where
I
I
Come From
1990, actually "died" for several minutes following a heart attack. For
the rest of his
life,
he wanted
do what pleased him. That meant
to
and preparing
ting his business affairs in order
of Packer
men
the fourth generation
owner's chair.
for the
James was a complex young man who idolized will is
one day be the
man
richest
highly intelligent
get-
in Australia.
—despite never going
be a good student with a burning desire
his father
and who
He has a quick mind and
to college.
found him
I
to
to learn.
was a very tough taskmaster with him. Then in his early 20s, James was too young to take over Consolidated Press Holdings, but I
men had all gone to their graves as relatively who had learned the ways of business the hard
the hard-living Packer
young men. Kerry
—
—wanted James made
way, without any direct tutelage by his father
ready
for
a lamb
any eventuality. He loved
among wolves
his
son and didn't want him to be
been when
as he had
his father died.
o o o I
ran Packer's companies as
if
every
last
penny flowed from me
personally.
One
of the reason Kerry
the years, his payroll
needed me
in the first
had collected a multitude
ical or sports friends of Kerry's
who were
place was
that,
of hangers-on
—
over
polit-
being paid by the company
but offering no return on his investment. There was no one else with fortitude
and backbone enough
to
in the past to
confrontation, the
manager would job.
I
decisions on Kerry's behalf.
clean up, but whenever there was a
He'd hired people
cause he needed the
make
didn't
either get fired or acquiesce be-
need the job and
wasn't intimi-
I
dated by Kerry. Kerry
is
a very big, strong willed, demanding person.
cally hired to
something
go
in
that has
and
fix his
I
was specifi-
companies. But when you change
been family-owned, you are messing with things
that the family itself put in place.
Packer's wealth, the family
tie
Even though
I
vastly
enhanced
always created an awkward situation.
Assume for a moment it is your business. You want it to be successful, you want it to make money. But you will also tend to be sensitive
Rambo
because somebody tack on you.
but
It
is
changing your creation; you
some
like
walk away from his operation anytime, and
when he was
full
an
at-
me.
I
could afford to
wasn't afraid of telling
I
Nobody else told Packer that, but way it had to be when was hired.
of crap.
we both agreed that that was the fired many people who had been
I
close to the family.
I
and sold family businesses
relationships
if it is
families.
Kerry didn't have anyone on his payroll
the boss
feel as
135
should be viewed as a dynamic business correction,
not that easy for
it's
Pinstripes
in
had
that
I
changed
lasted for years
and
years.
Kerry encouraged
ways
in
me to toughen
which business
is
done.
my own
son.
him
an employee. He was
like
He
is
and asked
thing
were mine.
I
I
his
son up and expose him to the
took him under
my wing like he was
going to be worth billions of dollars, but
his advice
was running
my
assistant.
on many
the
included him
I
I
treated
in every-
things, but the final decisions
companies on a day-to-day
basis.
Focusing, pruning, and reducing debt in the Packer businesses
meant
layoffs
James
to
"Life
you
and hard, unpopular choices.
be introduced
is
was a
is
not easy,"
difficult decisions
I
still
and know
that those decisions are
decision.
'Jamie.'
If
You have
you want
to
to play polo
skiing,
learn
how
run a business you have to
you can continue
to
told Australian Business that
political
me
—including
person he ever met. He saw
far
far.
you could push.
if
you want
to I
you want."
he had never seen anybody as
—but
that
I
was
also the least
me do things that he didn't think me that pushed someone or I
But he learned the lessons of
When
if
model every
become James. And James,
his father
could be done. Sometimes he told
something too
your heart
"you have to
different
be Jamie. But
believe you can be a world class executive
tenacious as
I'd say,
and take out a
and go
James
in
determine whether you are James or
night
to
know
the right decisions to make."
sometimes got upset with him. "James,"
make a
time for
"Sometimes
told James.
I
going to perhaps hurt other people. But you must that they are
difficult
to his father's world.
not easy, business
make
will
It
the Packers talked,
cally said "Yes" to whatever they asked
and
how hard and how
most people automatitold
them what they
Who
136
wanted
Am and Where
I
to hear.
or his father
be
was a new experience I
I
We
were such strong
One
of a lot bigger than me.
We
to
into the
was bound
ground except he was a
to
we
hell
reporter wrote that Australia wasn't big
hold both of our egos.
did have our calmer moments, however.
something snap and
I
suddenly
fell
I
I
remember
heard a
little
me up, and put me on a lounge man and a man who had political
chair. This
a wealthy
power,
tendon or
this
was not only was a
physi-
man.
cally powerful In the end,
playing
down. Kerry immediately rushed
over, picked
like
thought he
on.
personalities, there
tennis at his 70,000-acre ranch at Ellerston.
were
I
fought and argued on occasion. There were times
would have pounded each other
enough
James when
for
was wrong and would take them
Kerry and friction.
It
Come From
I
Kerry and
I
split
because we were
just
too similar.
We
two strong-willed, dominant animals who hunted together
and brought down
the biggest prey, but,
when
not hunting, fought
each other. Nonetheless, James and
I
became very
attached. For eighteen
months, he had an office adjacent to mine with an open door be-
tween
us.
friend to
had few
We spent an enormous amount of time together. He was a me in a place where the work could be quite lonely and I
friends.
James once said
me,
to
"I
you, born with no contacts the
way you
I
saw myself
I
how somebody
like
and no money, how you could succeed
did."
ing desire to kid,
can't understand
in
him
at that age, despite his wealth.
do good.
If
I
thought he was
just
would have had nothing to do with him.
great businessman
on the world
a hand in his development.
stage,
He had
a burn-
another spoiled rich
One
be a
day, he'll
and I'm proud
that
I
had
PART
IV
Dunlappino the Corporation
Chapter 9
LOOK DNDER "M" FOR
MARKETING Lesson: Don't be afraid to replace the way things were with the way they should be.
I
knew
was
I
in trouble at Scott
Paper when
I
started talking about
marketing and everybody ran back to their offices and looked
in the
dictionary under "M." Early on, say,
when
I
held meetings with the marketing committee.
I'd
"What are our plans?" This would be greeted by blank stares and
was a company
long silences. Here
business
was marketing products. When
they talked about tons. Everything
many As
tons I
and we
visited
we
them
sell
I
many
We
tons. "Oh,
didn't
to
profits,
somebody
branded products
own
inevitably
would
that?"
to
— improving or growing one
wheel and deal the price of a ton of
viewing the tons as an intermediary step to
Their other insanity bels over our
can."
somebody would say. But they even speak the same business language. And on
They were trying
paper as opposed ished,
this
tons."
they didn't think in terms of Scott brands or the other.
we
we produce
I'd ask.
get back to you
never did.
talked about marketing,
at the best price
brought up
sold this
"What's our margin?" I
was
I
its
our international plants and operations around the
world, whenever say, "Well,
"Can
that apparently forgot that
that
was a
command
fin-
a greater markup.
preferential attitude toward private
brands. Scott sold a third of
its
la-
manufacturing out-
put to private labels or store brands.
139
Dunlapping the Corporation
140
Why? We had
capital in place that required a gross return
on capi-
tal of at least 20 percent. But instead of selling Scott products,
provided double the margins of private labels, they settled that return,
which
for half
from no-name generic store brands.
They bragged
me
all for
nothing!
was They were throwing away a
third of Scott's capital assets for
no good
return.
to
crap because they sold
about selling it
The challenge we faced was not only to sell
in
it
product, but that
all this
to sell all the production but
And
a universal branded form around the world.
to
do
it
at
reasonable margins that generated an adequate rate of return for the
company and As
Scott's
its
shareholders.
branded products went down
ment moved more production sell the tons.
dollars
fell,
in sales, the old
manage-
into private label products, in order to
So not only did the sales dollars go down, the margin
too.
It
was a never-ending
spiral
because we weren't
in-
creasing sales of the branded product.
We had
engineers doing marketing, a mismatch
ever there
it
products,
rebuilt the marketing
department from scratch?
of our greatest challenges in marketing
Scott's industrial culture
ers of generic
was
the conversion of
from that of a paper producer to one of a con-
sumer products company. Instead
of seeing ourselves as manufactur-
paper products, we had
to recreate
our image as the
proud proprietors of branded household names such as Towels, Viva, and Cottonelle. lost sight of this
campaign
for
was
profit
well
That's
any brand, except Andrex
portant.
In fact,
United Kingdom, for
our brands were declining worldwide,
to extinction.
where Dick
Nicolosi,
whom
I
hired as senior vice president
Worldwide Consumer Products Business, became so im-
The veteran Procter
products and technology, itability
in the
margins were eroding. The old Scott consumer business
on the way
of Scott's
Scotties, Scot-
The previous management had obviously
image; there hadn't been a substantial advertising
more than a decade. and our
was
was reflected in lousy advertising, miserably packaged and no new product innovations. Is it any wonder that we
one, and
One
if
in
& Gamble
executive analyzed our
search of the pearls of value: prof-
leverages and growth opportunities. They were there, but
Look Dnder"M" for Marketing
141
they were hidden within a mindset and a prevailing belief that Scott just sold tons; tons
was
the
name
of the business. Looking at
the business category by category around the world, Nicolosi
recognized that
we had
to take
immediate action
to
staunch heavy
bleeding. I'm real
good
at
Nicolosi's talent
strategies
example
doing the nuts and bolts of running a corporation;
is
conceptualizing and implementing marketing
and business
of
how
1
+
1
plans.
Working together
can equal 3 or even
4.
Nicolosi put in place a product strategy that focused
product
lines:
bath
tissue, towels,
we were an
at Scott,
on three core
and wet wipes. Every product
would be fine-tuned or overhauled and then repackaged and launched under his direction. He had
to start
re-
from scratch because
Scott did not have a marketing strategy.
When you
play a sport, you have a
game
plan.
I
play tennis.
I
always
know what am going to try and do during the course of a match. may have to adjust as the game goes on and learn things about my opponent's strengths and weaknesses. That new knowledge requires changing the game plan. But always have a plan to win. The same is true of winners in business. Call it a strategy, an operatI
I
I
I
ing plan, or even a recipe; regardless of the
name,
it's
a
roadmap
for
success based on knowing what you do best versus the competition,
and recognizing customer needs. Scott had no
strategy. Not
on an
in-
dividual brand basis, not on a collective brand basis, not on a global basis. Nicolosi's first job
was
sumer business. Absent
that,
to construct global strategies for the con-
we might
as well have locked the doors
and walked away. Scott
had twenty-seven brand names
a reason for bragging. The
problem:
Many
company
in
America
actually
similar Scott products
Washington
different
State,
but the
were known by
name might be
—and the quality radically
that wasn't
had created a vexing
names. Consumers could buy Viva paper towels in
—but
different.
in
Connecticut and
slightly or
A
different
total
completely
hodge podge.
Same problem in Europe and Asia. Logically, everything should have been the same name; if nothing else, it was cheaper to advertise and manage one name.
Dunlapping the Corporation
142
Viva was a crap product
product
Southwest.
One
And
version
its
I'll
would be
never buy
coast and it
it's
it
was
quality
picked up the product ble!
United States and a good
in the Eastern
Midwest and part of the West, but
in the
softer,
inconsistent from market to market.
one more absorbent.
New York would
in
again!"
It
would be
try
like
it
it
tell
again.
And
would
his or her share of people, so this quality
poi-
problem
like wildfire.
best technology available in America,
product of
its
made with
1
in
its
it
was
the highest quality
category. Scott had the technology
decades but didn't have the brains truly
and
the
kind. With proper marketing know-how, Nicolosi said,
Viva should have been No.
was
It
the
every consumer
Viva paper towels in the Western United States were
for
is terri-
Someone who had
son the predisposition of the consumer forever.
spreads
say, "This
caramel colored, and buying one on the west coast and
looks and tastes like watered-down iced tea.
going to
and
A consumer who
buying a Coke on the east
watered-down iced tea once would never buy
is
didn't exist in the
it
remarkable
how
Nicolosi consolidated Job effective scrub cloth
blind
to get
word out
and nonproactive
Squad towels
into Viva
to
consumers.
It
company was.
this
and added a highly
from the Away-From-Home business.
O O O Our new strategy became
new
consistency in bath
plicity of
strategy.
names and
"Scott the
tissue, towels,
We
and
We established a
facials, instead of
in
Zimbabwe
believed Scott had
or Duluth
a multi-
Coke has
qualities throughout the world.
You can buy a Coke
Coca-Cola.
World Over."
and
a great franchise
it's
that
always
name and our
products should be Scott the world over.
The worldwide branding earlier,
lessly
sues.
but the previous
issue should have
been
dealt with years
management was too bogged down need-
expending capital and seeking executive consensus on
No one was manager
They were
all in
in
charge of breaking the logjams or
endless detente. Because of
was marketed and
all is-
that, the
ties.
same product
sold in different ways in different places. That frag-
mentation around the world prevented Scott from truly becoming a
Look Dnder "H" for Marketing
global brand.
It
was not
positioned;
as one brand. These people
these decisions of
is
was not marketed
or advertised
—more than a dozen people were making
—did whatever they wanted. And whenever any one
them was questioned, a This
it
143
somebody
finger got pointed at
else.
many companies that have brands
a fundamental problem in
throughout the world: They don't have a worldwide, coherent plan and positioning for their product. In
viewed as junk;
mium Cola
another area of the world,
product. But what does
—you know what
did.
Its
it
it
stands
dominant
it
may be
may be viewed
as a pre-
of the world, it
stand for? That's the beauty of Coca-
for,
worldwide.
Pepsico Foods apparently
In late 1995,
we
in
one area
soft drink, Pepsi,
is
came to the same conclusion known the world over, but its
potato chips went by different names. In Britain, in
Mexico, Papas Sabritas; and
aged and relaunched
its
in Spain,
product sales
in eighty countries,
had
was Walkers
Matutano. Like
product under one label
company with operations
Scott, a
it
in
us,
it
Crisps;
repack-
—Lay's chips.
twenty-two countries and
being a big
lost the benefit of
global operation in an evolving world economy.
O O While we were repositioning products and adding new ones, we also
made
significant decisions about eliminating products.
We dropped brand
in the
actually in the
product lines such as Family Scott, a regional
tissue
West and Southwest that had no
competed with
West; the brand
the Scott line.
was
distinctive identity
We also discontinued
and
Chelsea,
sold mostly in select trade channels, such
as warehouse clubs.
You won't
find our moisturizing cream, 24 Hours,
anymore. Gone, too, tion: Scott training
diapers. All
were
We saw no
is
Scott toilet bowl cleaner. Also missing in ac-
pants for small children, and Promise, our adult
poor-selling, ill-marketed efforts.
advantage
and Cottonelle
—being
in
each of our paper brands
in the
We
retooled
it
to
—
Scott, Viva,
was a lowresources away from
dinner napkins business.
margin category that drew valuable capital other things.
on the shelves
It
one product, Scott napkins.
Dunlapping the Corporation
144
In
western Canada,
Canadian
toilet tissue
just
we had
across the U.S. border,
brand that existed nowhere
Purex, a
else. In eastern
Canada, we didn't produce Purex; our brand there was Cottonelle.
some stupid reason, we didn't produce Scott Purex became Scott Purex, then Scott by Purex. For
Canada
in
Being so spread out kept Scott from maximizing
its
at all.
business and
marketing investment. Redundancy and duplicity flourished across the board. Plus,
we had
a confusing plethora of different stock keep-
ing units, or SKUs, because
we had
different products with different
packages and different market positions
mented global business
that
for each.
would reinvent
the
It
was a
frag-
wheel 100 times
without getting any economies of scale or leverage
in the global
marketplace. In all,
had
we
we
eliminated 31 percent of the consumer product items
offered, while creating, reformulating, or repackaging 107 prod-
ucts that sold better
and were more
wide finished product inventory
profitable. In total,
levels actually
our world-
went down by almost
25 percent.
Reducing the volume of different products cut our the remaining product
mix went on
more than they ever had before
Combined market shares
—
at
total sales,
to sell over half a billion dollars
twice the profit margin.
of Scott Tissue
and Cottonelle grew
we
roughly 20 percent; Scotties grew to 7 percent; and once its
consistency problems and
but
made Viva
the United States, the brand rose almost
to
solved
a high-quality towel across
two share
points,
up over 30
percent in less than a year's time. Meanwhile, our Away-From-Home
products for commercial and industrial markets showed sweeping
in-
creases in product variety, geography, and sales.
The one product Tissue,
that
which we renamed Scott
sheets in each efforts to
roll
company was Scott 1000s (referring to the number of
worked hard
still
for the
of toilet tissue). Despite years of neglect
it had held up and was became a cornerstone from which we could
tank that business,
going profit center.
It
build a healthy product as sive care or
on
its
and great
a substantial, on-
opposed
deathbed.
to yet
We broadened
another patient
in inten-
the architecture of Scott
Look Dnder
toilet tissue
Cloths;
and Scott
was another
was
that
brand that refused
tissue
positively
sumers and another
was
that
name, decent positioning
The brand had two
bath
for
not.
So we had a brand
in limited
and "angel"
We
the category.
tissue.
softness,
different formu-
enthusiastically accepted by con-
We
that
had a neat
markets, and a real viability to
restaged the Cottonelle brand
around the concept of advanced personal hygiene
new concept
to die, a regional
and
be nurtured and expanded.
able"
145
Extra.
as opposed to a national brand.
one
Marketing
for
products through line extensions: Scott 1500s; Scott Moist
Cottonelle
las,
1"
—a breakthrough
While other products talked "squeez-
we were
the
first
to bring
new
a
benefit to
introduced a series of brand extensions, including
a hypoallergenic product and another that contained baking soda.
We
also laid out plans for an antibacterial Cottonelle product.
The relaunch worked.
we could make It
was sent
lected
Retailers
gobbled up every case of Cottonelle
—product often never even made
straight to trucks
no dust once we
and on
to the stores.
it
to the
Our warehouses
revitalized these products.
We
and
at the
head of
its
col-
took Cottonelle
from being a regional, multiproduct, unfocused brand national
warehouse.
to
one
that
was
class in terms of growth.
Some people asked why we didn't put the Scott name on Cottonelle when we took it national. That was a judgment call. Nicolosi and
I
felt
that Scott stood for a different set of values
ferent character than Cottonelle. Scott est
American
value."
and trustworthy, a by enduring
for
It
had the
utilitarian
and had a
was what we'd
tradition of
call
dif-
an "hon-
something long-standing
product that had achieved credibility
decades. Cottonelle, by contrast, cost a
little
more
and attracted a more upscale consumer who had much more
so-
phisticated needs.
As we did our market segmentation work, we concluded
was a
role for a no-frills
brand
—Scott 1000s—as well as Cottonelle,
which represented added values
The two products were distinctive in positioning
support both brands.
that there
all
driven by chemistry.
distinctive in personality
and character,
and consumer appeal. That convinced us
to
Dunlapping the Corporation
146
On
we continued
products
growth of 24.5 percent and
producing, Scott achieved sales
tissue
margins of 20.4 percent
in less
than two years.
O O O Our goal
in
marketing was to build not only a sense of competi-
As soon as our marketing department
tiveness but of winners.
some
self-esteem
and developed some courage,
it
felt
would succeed
big-time.
Momentum was key for rebuilding this part of the organization. That's why we hired fourteen experienced marketing directors with history at Kimberly-Clark, Procter & Gamble, Colgate-Palmolive, and Coca-Cola.
We
reorganized the marketing hierarchy by category of business.
For the profit
first
and
so on.
It
time,
loss,
was as
business.
we had
a person
in
volume, share, dollar if
each category responsible sales, margins, inventory,
he or she owned a small paper towel or bath
Each person made decisions and was accountable
for
and
tissue
to im-
prove P&L, volume, share, and margin. The second thing they were
accountable
make
Asia to
for
was working with
their colleagues in
Europe and
sure that the best ideas overseas were being used in the
United States, and, conversely, that the best ideas in the United States
were being applied
in
Europe and Asia.
bang heard 'round the world, as opposed barely
made
A good to a
cap
pistol shot that
a sound.
We got higher productivity out of those who because we assigned personal accountability
remained on the team
around indulging themselves with tions like, "Wouldn't
it
be neat
paper?" They lacked a vision for the product could
product develop-
for
ment by group and by category. Before, a group
how
idea would be a
of people
scientific curiosity,
to see
how
the
be translated
if
this
sat
posing ques-
could be done with
consumer would
into
had
benefit, or
something the consumer
would want. They never worried about whether the market was big
enough
to justify
developing the product, either. So
where they had created all
the world wanted.
nifty
little
we had
situations
inventions that only ten people in
Look Under "M
As
was
mentioned
I
war with
at
earlier, the
consumer business
Away-From-Home
the
business.
for
Marketing
147
at the old Scott
New
products
in the
Away-From-Home business would be ignored by the consumer side
—or maybe
out of pride
jealousy.
They
just couldn't
condescend
to
use Away-From-Home inventions.
We said, U A good All we're
counting
idea is
is
a good idea.
Who cares where
from?
it's
number of dollars we make in the sudden, new ideas were like low-hanging
the total
marketplace." All of a fruit.
The breakthrough idea was
this:
Away-From-Home
consumer products because
ucts were often superior-performing
they had to
do double
duty.
They had
to
succeed
in stressful, tortur-
ous situations. Interestingly enough, that made them cessful as
all
the
more
suc-
consumer products, because a meaningful percentage
consumers always want the Mercedes-Benz
had a
industrial prod-
So we
product development that was already done but Scott
lot of
wasn't using
of performance.
of
it.
Those two
factors
made an enormous opportunity
for us in the first
eighteen months. Nicolosi also looked at our
Baby Fresh product, a premoistened
was a technologically advanced released a microencapsulated lotion as the baby was
hygienic tissue for wiping babies.
product that
It
cleansed, leaving a protective layer on the baby's behind to prevent
No other competitor had this product but consumers even know it existed! We closed this gap with advertising, and
diaper rash. didn't
Baby Fresh regained category leadership
in the U.S. market.
For nine years, Scott had been sitting on advanced technology for
manufacturing moistened colosi supervised
its
and Andrex Moist
in the
strong brand
We
name
toilet tissue,
but never marketed
it.
Ni-
release as Cottonelle Moist in the United States
United Kingdom. (Andrex was a particularly
in the
United Kingdom and
we stood by
it.)
estimated the potential market for moist tissue was at least $1
billion.
Why?
Traditional dry toilet tissue doesn't clean,
it
wipes.
We
believed most households would stock both, once they understood the advantages of moist toilet tissue.
knows
if
we were
right.
It
will
be years before anyone
Dunlapping the Corporation
148
One problem
in exploiting the potential of
ing a dispenser that handled both dry
R&D
and moist
paper dispenser.
into a traditional dry-only toilet
and
moist tissue
I
invent-
but
toilet tissue
told
people that when they figured that out, the
place would be at our
was
fit
my marketing home market-
feet.
They agreed and immediately created prototypes and began con-
sumer
testing.
The bigger problem was
that Scott couldn't afford to effectively
market new products such as these as long as
it
was pouring hun-
dreds of millions of dollars into capital projects such as S.D. Warren
and
the Mobile,
Five, "Rule 3:
Scott
prove like
Alabama, co-generation energy
Know What
Business You're
had reached a point where
its
it
In" for
plant. (See
more
Chapter
detail.)
couldn't afford to invest
branded products, which exacerbated
and im-
their decline.
It
was
having an artery cut on your arm. You bleed and bleed, getting
weaker and weaker. can't
All of a
sudden you
walk anymore, then you
While
I
can't run anymore, then
you
die.
worked on unloading
costly assets
and redirecting
capital
toward value-added endeavors such as product exploitation, Nicolosi reapplied core competencies in the areas of leadership, marketing,
business strategy, and analysis.
spending way too
much
He
in trade or
also recognized that
we were
co-op funds and rechanneled
about $100 million into advertising and consumer promotion without spending an extra dime rectly to retailers in the
common mand
hope
retail practice),
ourselves.
Then
needs or lose business
it
we
in total. Instead of giving
that they
efforts
money
di-
might market our product (a
did the advertising and drove the de-
was up
to retailers to either
to stores that did.
meet consumer
We took moneys we were
al-
ready spending and spent them more wisely and more strategically.
o o o Some
things, like developing advertising for a brand, or
new
pack-
age designs and market positioning, take more time than others.
Even before we had a
strategy,
we appointed new
global advertising
agencies and assigned our brands to packaging-design houses so
Look Dnder "M" for Marketing
that
we could
get that
149
work under way. Operating concurrently, we
avoided the dead time of doing these things sequentially. Part of the challenge
was thinking through
all that stuff:
Which decisions
could be implemented simultaneously and which ones had to be
sequenced? Part of the reason Scott
was so
disparate in Europe
company's original strategy had been panies rather than build
facilities
was
that the
to partner with local
and products from
com-
scratch. This
made the company a 50/50 owner in many existing brands. In the late 1980s, Scott management maximized its investments and bought the other 50 percent of most of its European companies. Where it fell short, until came along, was in establishing the Scott brand across all these product universes. Even when 100 percent Scott ownership went into effect, every country's producer was left to its own devices. Also complicating Nicolosi's task: Each country has its own needs when it comes to products such as toilet paper. The Dutch I
want plain white paper, but is
in
Belgium, the only product that
sells
imprinted with designs. In France, there are five different colors
and each has a
that sell,
consumers
insist
The width
it's V4"
Some
paper
size,
In the past, there
tion of the Cottonelle
vertising
also varies from the is Vs"
smaller. That requires different machines.
was a strong brand
Belgium.
roll
countries use a model that
could consolidate to one Scott
campaign
German
four-ply paper.
of a toilet
North America. ers
on
different perfume. Meanwhile,
we saved
one we use
in
smaller; in oth-
So wherever we
a ton of money.
in countries
such as
Italy,
Spain,
and
had been also a halfhearted introduc-
brand without a
—the company's
distinctive marketing
first
move
to
and ad-
have a worldwide
brand name.
The thing
was how
that surprised almost everyone, in the
little
name above
consumer resistance there was
to
company and
out,
pushing the Scott
regional brands.
Even more
fascinating, as old borders to eastern
down, we found
that English-language
Europe broke
brand names such as Scott
were eagerly scooped up because the name immediately suggested quality in places
where standards
in the past
were not as high.
Dunlapping the Corporation
150
As one
make
part of the "Scott the World Over"
Scott facial
and
toilet tissue
campaign we plotted
and paper towels as ubiquitous
around the globe as McDonald's or Coke.
Just as Scott put out differ-
ent toilet paper brands within the United States,
names around
roster of in the
the world.
United Kingdom, Servus
in
to
we owned an
We produced Andrex
Germany, Page
entire
bath tissue
in the Netherlands,
Popla in Belgium and Luxembourg, Scottex in continental Europe
and
in parts of Asia,
As
Canada, our
in
name
the
and Sujee
grow and
first
"Scott" before
in
Taiwan.
step with these various brands
was
to put
them and gradually have the Scott name
the regional brand shrink until
it
disappeared altogether.
Every single package was changed. Every single brand was repositioned.
Each regional and international brand required unique ing
and marketing campaigns. Many
Scott companies;
were started by
of these brands
some were acquired but
advertis-
the previous
management
moved to consolidate them. In the United States alone, we had same brands with different products in different parts of the
never the
We
country.
tively sell
had brands
them
that weren't national so
in the national
we
couldn't effec-
accounts, the Wal-Marts, the Kmarts.
This hodge podge prevented us from maximizing the business in any
way, shape, or form.
money being spent as a result of this scattershot approach was criminal. At one point, we had eleven different ad agencies around the world. When we cut to three proven worldwide agencies, we saved millions in agency fees. And whereas the previous management had spent $14 million annually in worldwide market research, we reduced that amount to less than $3 million a year The amount
and got
of
results.
Marketing Scott across Europe was pretty easy, as long as with universal themes such as kids, dogs, and cats. They can
we stuck sell
any-
thing around the world. It
was
terribly
was only one
important that the entire organization
strategy for the brands
around the world, and
that there
and only one
know
there
set of products
would be no equivocation on
that
Look Coder "M" for Marketing
approach. This actually
made our worldwide
job easier
151
and allowed
us to operate even more effectively with fewer personnel.
o o o The marketing lessons from Scott Paper were:
1.
Define what the problem
2.
Define alternative solutions to the problem.
3.
Evaluate the possible solutions.
4.
Pick the best solution you are going to lock and load on, and
execute 5.
it
is.
right away.
Quickly develop a winning cadre of people
who
will play ball
with you and your organization; encourage a winning attitude, strong self-esteem, and the courage to take
risks.
6.
Establish goals that stretch traditional expectations.
7.
Hold the marketing
staff
accountable
without equivocation; teach them to two-letter words: 8.
"If it is
to be,
Establish a strong monitoring
what will
is
it is
up
know about
becomes bigger
it
achieving these goals
live
by the following ten
to me."
and control system so you know
happening, when, and where;
then
for
if
there
is
a problem you
quickly and can take action before
or gets out of control.
it
Chapter 10
FIRE ALL THE CONSULTANTS Lesson: But if you absolutely must work with one, here's what to do.
The opportunities
to save
money
across the corporate world are phe-
nomenal. Cutting back on consultant expenditures
is
a good place to
start.
Scott spent $30 million on consultants before
And
look at the mess they were
All consultants
do
stacks of consultants'
is tell
you what you want
to hear. Scott
handsomely bound ten-year strategic
do what
on the stack with both hands, and throw them
who wrote
arrived. $30 million!
in.
you're surrounded by similar reports,
sultant
I
I
had
reports.
If
did: Get a firm grip
out.
Then
fire
the con-
them.
You must have goals and
objectives, but they
and they must be ladder rungs
that
must be your own
you can climb. Your man-
agers and employees must be able to understand what you're talking
about and what they're doing.
If
people were so clever that they
could predict the economy ten years ahead and could ucts will be hot in a decade,
I'd
what prod-
tell
hire them. But these people don't
exist.
No-account CEOs hire consultants so they don't have sible
and so
badly.
they'll
Some CEOs
have someone else to blame
to
be respon-
when
things go
lack the strength of their convictions or don't feel
they have the clout to sell an idea. In those situations, the consultant is
a source of much-needed credibility. In the lower levels of
sions, talented
an organization
managers
ideas they have
that has trouble
will bring in consultants to
been pushing
for
a long time
making
deci-
simply reinforce
— ideas
that
upper 153
Dunlapping the Corporation
154
management will
Remote executives won't
not otherwise accept.
cept the recommendations of their
own people
in the field,
ac-
when
but
a consultant says the same things, they anoint them with meaning
and substance. Consultants generate ten-year plans for
CEOs and
boards. That way, the
CEOs
the consultants
take to their
to
buy themselves a
credibility policy for ten years, a kind of cover-your-ass pension plan.
When none of the
plans or predictions has worked out ten years
"unanticipated developments" can be blamed, and
can get pretty
A
some
later,
of those
creative.
real chief executive says, "Here's
how were gonna do
it,
here's
when
what we're gonna do, here's we're gonna do
it.
And
I'm
accountable."
One look at
of the
first
things
of the previous
all
I
do when
I
run a company
management's consulting
is
take a hard
contracts.
wipe
I
out most of them.
The worst example million
sense.
of consultant excess at Scott Paper
was the
spent developing a compensation system that
it
And
that
was
spent on consultants
What was
just in
one-tenth of the $30 million the
one year before
made no company
arrived.
Scott spending $30 million to learn about?
Scott used consultants in ing, training,
I
$2.8
human
resources, marketing, manufactur-
research and development, delivering process changes,
and compensation and
benefits.
on outsiders who specialized
in
The previous management also helping people
make
relied
decisions.
How
do you get a large group to reach a consensus? Every consultant has a different pitch,
ing a consensus
and the old Scott paid on any one
to
hear them
all
—never reach-
solution.
company understand how it stacks up against the competition by asking: What are your relative strengths and weaknesses? What is your cost position?
Some
Before
consultants help a
I
arrived, the
work Andersen Consulting did
on the manufacturing side
to lower costs
justified the expenditures. Scott subse-
quently developed strategies that dealt with a culture resistant to
change. The Andersen consultants armed us with
them as
levers to force change.
facts,
and we used
Those expenditures on consultants
Fire All the Consultants
much, maybe
didn't cost very
155
So the previous manage-
$1 million.
ment could have cut consultant expense by $29 million and not missed the
results.
The most ridiculous consultant expenditure under
management was
make employees
related to
an individual
paper machines, or people
commodity
—
advantage, under his scheme,
do any particular task.
It
you reduced the time
to get
them
who came
and
in
it
is
And
business
like
is
not cash,
the time
it
takes to
a brilliant concept at the outset:
takes to innovate, to develop products,
into the marketplace,
this
the ultimate competitive
came from reducing
sounded it
time.
in the
tried to
He had
think differently about their business.
notion that the most valuable
If
Scott's previous
you would be very
and
successful.
This consultant had executives and managers look at the whole process of researching, developing, financing, manufacturing, and selling
He
a product.
said,
"If
you look
make even more money." His approach fell apart and
at
it
as one process and shorten
it,
you
will
when
it
became
people stand
in
touchy-feely.
else as a catcher,
was
that the catcher
and a
to the catcher,
spected
and put
been enough
third person as
for
it
who then
threw
he would have
an inspector. The idea
it
to the inspector,
most people, but
this
And
in-
it
consultant lined up thirty
took for the whole process
be completed. His point was, "What would you do
time?"
who
on the ground. Got the idea? That would have
people, in teams, to measure the time to
his point,
was across the circle from the thrower and the was somewhere else across the circle. The thrower threw
an orange it
To make
a circle and designated himself as a thrower, some-
one
inspector
with Scott's hierarchy
lost credibility
sure enough, you could reduce the
to shorten that
amount
of time.
What if the guy who is catching is also doing the inspecting? The was good but, thanks to the wacky way it was presented, the
idea
message got
lost in the
laughter and orange pulp.
O O O Coopers I
& Lybrand
have ever trusted
partner C.
in fifteen
Don Burnett
is
the only consultant
years as a chief executive.
I
have great
Dunlapping the Corporation
156
respect for Burnett, one of the few outsiders
who can
influence
my
thoughts and decisions. Burnett
tough standard. He knows
He
tions.
me
gives
I
I
hold him to a very
execute based on his recommenda-
will
extra eyes, extra ears. He'll take his team out to
everybody. They'll
talk to
He knows
a down-to-earth guy.
is
come back with
a plan and help
the specifics. They're the only consultants
me
master
ever thought were worth
I
a damn.
me
Look, don't get
wrong:
I
obviously use a consultant.
And know I
he represents a firm of over 30,000 people around the world. But the reason our relationship works and again
is
that
he gets the job done.
want
go back
I
If
to hire a consultant
I
want
who
and over
to Burnett over
to
improve efficiency and
and
cut costs,
I
sensitive.
Other chief executives go wrong by randomly hiring consul-
tants
who
don't give
is
them confidence enough
recommendations. That's a double cost isn't
just that: efficient
implement
their
for shareholders: their
CEO
doing the job he was paid to do and neither
hired to bail
him
me. The point
to
the consultant he
is
out.
Not everyone can use Burnett personally for
cost-
is:
—then he'd have no time
Develop a long-term relationship with one multi-
faceted consultant, but no more.
Coopers
&
Lybrand helps
an opportunity
to jump-start
decisions or give
They get
me
me up and
me
organize a plan of action, providing
a company.
I
don't rely
on them
to
make
a scapegoat for a corporation's past misdeeds. running, identify opportunities, feed
me
invalu-
able information, and then formalize a plan that's been shaped and
influenced by me. I
think one of the most significant things I've learned from twenty
years of working with Burnett
that the consultant
is
must work
for
and
report directly to the chairman of the board and/or the CEO, not a division head. study, the
Why? Because whatever
recommendations
atop the organization chart
Because
I
if
will
the results of the consultant's
need the driving force
something
is
hire Burnett every time out,
that by
now he
haven't
been paying
most people probably think
gets a sweetheart deal with fat payoffs. attention.
I
of the person
going to be changed.
Those people
cut as good a deal with Burnett as
I
Fire All the Consultants
would with any
supplier.
down
negotiate that
he says something
If
as far as
can
I
157
a $2 million job,
is
go. However,
do know
I
I'll
that the
$30 million Scott spent could have bought eighteen separate studies
from Coopers
&
Lybrand, and
I
bet they would have launched eigh-
teen companies to greatly improved profitability.
How
&
does Coopers
Lybrand
I
business, but they're not getting rich
their auditors
cut with them, but that hasn't
my money. They
stopped them from taking
them a degree
about me? Well,
feel
always complain about the deals
on
of notoriety that hasn't
it,
don't lose
And
either.
money on my has earned
it
been bad. Recently, Burnett
did a review of business relationships at Coopers
work he had
&
and he
ated a tree-chart, of
all
rectly or indirectly,
$25 million worth of work back to
because Burnett and
I
the
gotten,
once had a good laugh
He
Lybrand.
cre-
traced, di-
at a friend's
me
—
all
expense.
O O O Don Burnett and American Can at the after four years as
friend of ours, at
I
met
time,
CFO
socially in 1977.
and he had
I
was an executive
& Lybrand paint company. A mutual
just joined
of a Chicago-based
American Can comptroller Walt
which everyone turned and teased him
double-teaming poor Walt, Burnett and
I
hit
&
Lybrand
Plastics division
The
division
to help
me
threw a party midst of
in jest. In the it
off.
when
I
hired Coop-
downsize American Can's Performance
and Burnett was assigned
was
Coopers
Scott,
Fate threw us together again shortly thereafter, ers
at
losing a ton of
the job.
money. Everybody thought
plas-
was dead; it was a dog job. American Can threw me in there cause was the kind of mutt who might yet save their investment.
tics
be-
I
Performance Plastics oversaw maybe a dozen plants. of restructuring,
Coopers
&
Lybrand worked with
agers to plot out what they could
make
my
is
the plant
plant
What Coopers does
managers themselves had
it.
man-
not do,
to understand, participate in, en-
and present the consultant's recommendation, not
behind
course
in-house presentations on behalf of their clients, so
however,
dorse,
fix.
In the
just
hide
Dunlapping the Corporation
158
remember the day the manager of plastics' biggest plant a meeting to make the first restructuring presentation. "We are going to let people go," he said. "How many and when?" asked. I
got
up
at
I
"Thirty this month," he said confidently, "40 next month,
the
month
after that."
"Wait just one minute," tion
is,
when for
said, "that
I
month are
this
That was not
and need
my
just
all
is
not the question. The ques-
those people going to go?"
manager's
first
much manager who
my methods
indoctrination to
speed, but Burnett's as well.
He coached
future
agers of mine to prepare
faster action plans,
confront another
intended to stretch out painful
Burnett's philosophy don't
need
in
I
Many
is
that while he
can
what departments and how
staff reductions, I'm
which
and 50
implement
management.
is
mine
make
man-
never had to
I
me what
layoffs.
positions
implement
to efficiently
The speed
the decisions.
I
at
to determine.
of Burnett's clients are
ing people, so he
I
tell
and
uneasy when
it
comes
would many times give them an
they should eliminate 100 people, he'd say,
"I
to actually
out.
If
fir-
he thought
think you can get by
with cutting 120 jobs." Then he helped them add back the 20 people they thought essential. With me, he quickly learned,
if
he said 120
were expendable, 120 were gone.
my career, was between assignments and Burnett, a true friend, brought me to New York. He put me up in his own home for a time, gave me an office in which to work and access to his own secretary and introduced me to several executive headhunters, a process that led me to KKR and the CEO position at Lily-Tulip. Burnett wasted no time in joining me at Lily-Tulip. He packed a bag and arrived in Toledo, Ohio, on my second day on the job. Together we toured the company's headquarters and facilities, Later in
I
looking at everything. By day's end in
Toledo? There
is
I
said, "Don,
why
the hell are
we
nothing here except the corporate headquarters.
Why are we not down at one of our plants?" When you locate a corporate office at a plant, plicate finance, duplicate
human
resources,
you don't need du-
and so on. Don agreed
Fire All the Consultants
and, before long,
moved
I
gia, the location of
one
Lily-Tulip's
159
headquarters to Augusta, Geor-
of our best plants.
Most companies don't need a big corporate headquarters. often repeated, almost as a mantra, Sir
when he
that
We
James Goldsmith's comment
sees a beautiful headquarters edifice, he knows the
people inside are very happy, but he also knows that he can make a lot of
lieve
money.
now
am
I
not sure Burnett always believed that, but
ting
We
make
to the
we can outAnd we are get-
also believe that
we thought possible. basics where the men and women in
many more
back
be-
that a corporate headquarters belongs at a plant or a mill,
not standing alone somewhere.
source
we
things than
the plants really
and earn the money.
the product
Burnett and his team of engineering and manufacturing consultants
went through that
numerous
of Lily-Tulip's plants, discovering
all
were not being done
effectively or efficiently.
things
They even tested the
types of glue being applied to certain products. Their manufacturing
study led to our investment in what
became
the revolutionary Trophy
cup, which held hot or cold liquid. Based on Burnett's observations,
we
closed plants, laid off unnecessary workers, and relocated
facili-
New Jersey, plant. The working relationship between Burnett and me at Lily-Tulip was pretty simple, really, and always productive. When decided some-
ties
such as the underutilized Holmdel,
I
thing
had
spoilage
to
is
be done,
high,"
I'd
give Burnett a theme, such as, "Waste
and then
I'd
always add, "Go
team who knew the machinery, the were needed
Hands-on work sultants rarely
in the plants
know what
who know how
takes to
make
it
run
flow,
how
to stop
difficult,
and paper-shuffling con-
the
machines do. Any factory worker can
A
smart consultant has knowledgeable
fast the
faster.
is
equipment can
They recognize
really run
that
paper can be caused by a number of things at the
work
He'd assemble a
to operate efficiently.
spot a phony a mile away.
people
it."
high,
how many people were needed, and what
spoilage and reduce waste, skills
glue, the
fix
is
and what
an increase
in
it
waste
—running the machines
wrong speed, poor maintenance, using
incorrectly sized sheets,
laying out the sheets wrong, or just plain inattention
on the part
of the
Dunlapping the Corporation
160
operator.
They also know the difference between spoilage and waste.
When you
hire consultants, their only valuable skill
not
a conference room with hot
filling
is
experience
and a bookshelf with
air
paper.
Burnett brings in the right people
He
ence.
—those with
industry experi-
puts manufacturing people on manufacturing issues, engi-
neers on engineering issues, and sales and marketing people to look
and marketing.
at sales
Burnett organized teams that examined
human
resources, legal, administration,
same procedure we
later
went through
all
the overhead, finance,
and so
on.
It
was much
the
at Scott.
O O O Business leaders must decide for themselves whether they need consultants.
If
the issue
do
it,
then
can't If
a
is
one
maybe
company pays
consultants,
And
what the
the
its
and the business leader
of implementation
company has
the
wrong business
executives big salaries and hires
hell
hiring consultants
is it
paying the executives
leader. all
these
for?
works only when they're given a specific
timetable and a targeted outcome. The process should not be too fluffy or
open-ended.
I
initially
hired Coopers
&
Lybrand
to
do some-
thing very specific at Scott: reduce costs. That included looking at
people, purchasing, controllable costs, assets
adding value
—anything
that wasn't
to the business.
good ones, can fail because they only recaction; they still need somebody motivated and
Consultants, even the
ommend a
course of
in a position to
implement
their
recommendations.
doesn't implement, the consultant's job
academic exercise. reflects
something
I
in
is
I
am
somebody
no more than an expensive
implement because the
which
If
final consultant's report
deeply involved.
O O Consultants
who
haven't run a
academic, esoteric reports that
company
sit
or faced a payroll create
on desks and shelves forever but
Fire All the Consultants
most of these reports never amount
to anything
—they
recommendations implemented. Burnett once
get their
probably up to 70 percent of
can't even
me
told
that
may never be
consulting studies
all
161
implemented. Burnett understands what
I
want
in
a report: a true executive sum-
mary. Work out the nuts and bolts with the appropriate department
manager or senior vice spell out
my
president, then bring
action plan.
plan's preparation
If
my managers
and approved
things should
its
knows
own
need
in excruciating detail
some group
what
a hell of a
is
in the
must do.
it
company
our goals.
thing you are not going to
—you'd
do
It
If
there
is
Under
it.
team they
me
what
precisely
will
—or Burnett, If
us, I
do
can't
walk over
do some-
for that mat-
something couldn't be it.
and over again because
to the well with Burnett over
He knows
example,
and assign somebody
recommended
no learning process between
kissing ass.
for
you believe you cannot
better have a can-do attitude.
go back
of action.
knows what systems
Burnett's
tells
done, Burnett's team wouldn't have I
when
lot of detail.
the people standing in the path of progress
who can accomplish
in the
know.
of the total report that's appropri-
something that the consultants say they can do, we
ter
to
responsible and
The accounts receivable group,
function.
must change. There If
is
I
be done. That becomes the company's plan
Each department gets the portion ate to
three pages that
have participated
that's often all
it,
team generates data on who
Burnett's
me
no courting
want and
I
ritual
and no
know he has
the
horses to deliver the goods. I
I
most often credit Burnett personally
for
our many successes, but
recognize that he, like myself, leads a talented team of go-getters.
One
of his partners
on every one
of
my
Andrew Molenaar, an engineer who has been
is
jobs.
gets into the trenches
and determines what
Burnett knows that
team.
I
won't trust
While Burnett keeps
my
I
like to
see a
little
is
me
happy, Molenaar
needed.
age and grey hair on the
billion-dollar corporations to a
bunch
of wet-
behind-the-ears kids just out of Harvard Business School. That's the youngest
men and women
Burnett puts on
least thirty-five to forty years old.
my
why
account are
at
Dunlapping the Corporation
162
He almost snuck a
kid past
me
at Scott,
however.
During an early meeting with Burnett's team
we were
Philadelphia,
Plaza in
at Scott
talking about the kinds of waste that could
be
eliminated at headquarters.
"Why do we have a medical rid of them!"
I
staff at
corporate headquarters? Get
thundered. "And while you're doing
that, get rid of the
nursery school!" "I
hadn't seen a nursery school," Burnett said, startled that he had
missed something. "But
Then he caught
I
will
be glad
to get rid of
it."
the twinkle in
my
eye, followed
meant
the
young kids on Burnett's
my
gaze around
the room,
and
When
the room, he compiled a dossier of his team's age
left
I
realized
perience to convince
Age
me
I
really the issue,
One summer,
and
ex-
they were right for the job.
aside, over the years,
right personality for
staff.
some
of Burnett's
working with me.
like
I
people haven't had the
tough people. Age
isn't
competence and toughness.
it's
Burnett brought in a kid
who was
in his
second year
& Lybrand. My usual attitude toward such kids made me leery until Burnett told me that the young man, Wesley Mukai, had just lost in the NCAA Karate championships. That impressed me because here was a kid who had at
Harvard Business School and interning with Coopers
excelled in something. (Wesley later told Burnett that
I
reminded him
He subsequently was on hand at all of Burnett's meetwhether it was one of my guys or Burings. And any time somebody nett's made a silly comment, I'd laugh and say, "Wesley take care
of his father.)
—
—
—
of them!"
O O I
late
when
brought Burnett along
Sir
James Goldsmith hired me
1980s to turn around his U.S. ventures.
same questions
as
we had
We
raised
at Lily-Tulip, including:
many
Why
is
in the
of the
the head-
quarters for Crown-Zellerbach's forest products division in San Francisco
when
all
was cheaper,
of
its
operations are in Oregon and Louisiana? Portland
labor costs were lower and everyone
raved about the wonderful
lifestyle. All
it
who
lived there
lacked were decision makers.
Fire All the Consultants
163
During the Crown-Zellerbach restructuring, Burnett had a top-
named
notch management information systems (MIS) guy Solano. Solano
Redwood,
we could in
was dispatched
California,
and
to Crown-Zellerbach's
and combine
Portland without any disruption.
about
Eau
I
remember
night in Eau Claire so
my
city-bred guy, he
was
did!
We
hometown.
a
were staying over-
cornfield, Solano said, "What's that?"
As a
had never seen corn growing!
me on my
Zellerbach's facilities in Bogalusa, Louisiana. left
who was
out for dinner and a sunset drive in the
Burnett and his team accompanied
there
with MIS operations
the day he flew with a group of us to
wife's
we went
As we drove by a
country.
And we
it
best about Solano, a Bronx native
thirty-five at the time,
Claire, Wisconsin,
facility in
a couple of days he convinced us that
in
close the whole facility
But what
MIS
Pete
be desired.
lot to
In fact,
one
first
tour of Crown-
Our accommodations
of Burnett's guys refused to
was so infested. Somebody else put his valuables in the bathroom sink and covered them with a towel. Another guy blocked his door with a chair. It was
sleep underneath his bedsheets because the joint
filthy, hot.
after that,
The next morning I
I
decided
we were
all
Not long
leaving.
closed the headquarters and transferred
its
operations to
Portland.
The Coopers
&
Lybrand team spent
on the Crown-Zellerbach turnaround. world
All the
tain mills
knew
it
was poorly
run.
It
didn't require a lot of thought:
They recommended closing
and outsourcing a multitude
of functions.
Crown-Zellerbach's habit of cutting timber Burnett backed
me up on
was an ass-backward way view,
it
was
stupid;
essarily destructive.
we
cut trees.
When
weeks working with us
just six
when
cer-
When examined I
the prices
were
low,
paper with research confirming that that of doing business.
From a cash point
from an environmental perspective,
We changed the price
the policy.
When
went down, we
laid
it
was unnec-
the price
people
of
went up,
off
and cut
fewer trees. That decision alone played a significant role in boosting
cash flow from $15 million a year to $180 million a year.
On
when Burnett looked at our troubled inproducts company, he recommended combining its twenty-
another occasion,
dustrial
two warehouses located throughout the United States
into just four
Dunlapping the Corporation
164
strategic locations, to continue to assure twenty-four-hour deliveries.
We
accomplished the consolidation
of days.
them
We
itself
lightning-quick, in a matter
closed the warehouses on Friday, emptied eighteen of
and reopened
into long-haul trucks,
fully
stocked the following
Tuesday morning.
With that company, perhaps the only time said he could year's end,
do something but he
December 31,
the
loss for the
He assured me
failed.
that
company, which was losing over $1
a month, would break even. But
lion
twenty years, Burnett
in
didn't.
it
by
mil-
registered a $14,000
It
month. The new president of the company called Burnett
to discuss the situation.
"We have a presentation tomorrow in our offices and we are going have to tell Al we didn't make break-even," the man said. "I don't
to
want
we
to surprise
him tomorrow: Can you
him
call
tonight
tell
him
are going to lose $14,000 this month?"
Unfortunately for him, Burnett delivered the message. it
and
well.
The next
day,
perhaps, because
we
I
didn't
speak again
eighteen months.
for
Russ Kersh finally broke the ice between Burnett and
"We have been
between
didn't take
gave him an earful at the meeting. Too much,
nizing a dinner at the Harvard Club in nett,
I
friends too long to
New let
a
York
little
City.
I
me
by orga-
said to Bur-
thing like this
come
and he agreed.
us,"
O O O Here's an example of one of the
Jack Dailey,
my
And
Dailey
him,
although
was
we had
computer company
we became
going to be
the house, but "Well, shit,
reacquainted, and
I'll
I
turned the
day, Burnett called Dailey
in I
Burnett.
San Francisco
can only stay
meet you
"No, no," Burnett said,
in Silicon Val-
not worked together for seven years,
the right guy for the Scott restructuring.
The very next
am
I
senior purchasing executive at Lily-Tulip, had spent
the years since then working for a ley.
more unusual ways use
later this
less
rather
knew in to
over to Burnett.
said, nonchalantly,
week.
I'd like to
"I
stop out at
Dailey said.
come
I
put a call
than an hour."
in the city,"
"I'd
and
rest
I
out to the house."
Fire All the Consultants
165
home by
That very Friday night, Burnett was driven to Dailey's
someone from Coopers & Lybrand's San Francisco office. Dailey, his wife, Beth, Burnett, and his driver walked to the backyard, shared a bottle of wine, and socialized for a few minutes before Burnett asked if Dailey would go to work for me again. Dailey was surprised, but said yes, of course he would.
They chatted a few more minutes, then Burnett got up and
"What the
was
hell
left.
Beth asked her husband.
that all about?"
Dailey scratched his head and laughed.
Don
"Al dispatched
become he said ing
Californians,
—
correctly,
had happened
day,
I
might add. Burnett was
I
my
insurance that noth-
to Jack during the intervening years that
an embarrassment
The next
come out here and make sure we had not that we weren't stark raving idiots or drunks," to
me
to
would be
or to Scott.
offered Dailey the job of vice president of procure-
ment, distribution, and logistics for Scott Paper.
O O O When
Burnett
is
on a job
He
or three days a week.
and becomes a part were
filing
of calling
weekend
is
machine just
it
on the premises,
my
for that period.
wouldn't work.
the necessity arises.
The odd
than that with our wives. (Burnett's wife, Jara,
people on earth.
I
am
spect for our friendship, politics.)
will call
When
him when
body screws realm
at
Burnett I
of the
one
in
terms
on the
job,
if
it's
& Lybrand,
At Scott, Burnett spent
—we
more often most
most conservative. Out of
we have an agreement
he
late night or
of the
lib-
re-
never to discuss
he gives himself 110 percent.
have an issue with his auditors or
up. Even
Coopers
is
one
is
If
And when
usually forgiven by our personal relationship
is
play tennis together several times a year and socialize
eral
executives
enjoy carte blanche
I
two
typically in our offices
synthesizes functions with
Manhattan,
him whenever call
me, he
of our corporate
memos from
he's not physically
for
I
when some-
an issue outside Burnett's immediate he'll
many
get the answers or action
we
need.
of his long hours with Dick Nicolosi,
senior vice president of worldwide
consumer products. That was
DiiDlapping (he Corporation
166
when we
He worked side-by-side on that reorganization with Nicolosi and Newt White, senior vice president of Away-From-Home products. Burnett was at particularly true
reorganized Scott in Europe.
every major presentation; his people stayed six
weeks or more. Burnett himself saw
tions, flying in
seeing his
from
New York
all
Europe
in
of our
for stretches of
European
installa-
every week or every other week, over-
staff.
Even when he's not
officially
working
for
me, Burnett and
I
every couple of weeks or so. He keeps current on issues facing
talk
my
company and will call unbidden if he has an idea or suggestion. know he and his team will be there when need them. I
If
I
Burnett assigns nine Coopers
company, he expects nine
of
my
&
Lybrand people
people
to
work
to
work on my
directly with
them
know exactly what his people are thinking and to act as implementers when the time comes. And my people will also know how to do it the next time. because he wants them
Burnett knows ing"
(BPR)
(TQM)
is
I
to
don't go in for fads. "Business Process Re-engineer-
just consultantspeak, as
is
"Total Quality
Management"
or "Just in Time" (JIT). People fix companies, buzzwords don't.
We have learned
from each other over the years, and we've formed
a strong and firm platform about what works and what doesn't in a
corporate restructuring. Burnett told
me
recently that he
and
his
team are tougher than
they were twenty years ago. They cut deeper and
know what
a com-
pany can bare-bones get by with today, more so than twenty years ago. Together
we have
redefined what has to be done to restructure a
corporate headquarters and what should be done out at the plants
and
mills.
Chapter
11
REAL JOBS, REAL CUTS Lesson: Communicate, communicate, communicate.
Scott Paper issued three three-year plans in the four years before
ar-
They kept shuffling the plans but not the company. After look-
rived.
ing at them, In the
it
back
was hard of
my
to find a
coherent theme.
Scott office in Philadelphia
was a bookcase. The
When arrived at the Among other things, they
shelves were filled with restructuring plans.
company, wanted I
announced
to the
three years.
But
it
to see
fiction.
I
I
could use
this as
that hadn't
never identified the 8,300 people
I
people over
read the plan.
it
It
was not grounded
been quantified; the company
planned
to cut.
They were phan-
ever defined where those job cuts were going to
from. The board
was under
the impression that they
I
come
were already
when was hired, but was forced to report that cut, or some were cut but the same employees had
being cut weren't
off 8,300
a basis, so
threw out numbers.
just
was an idea
No one
laid out.
hate fiction.
That three-year plan It
what they
I
world a three-year plan to lay
thought
I
was
in reality.
toms.
I
I
the jobs mysteri-
ously reappeared on the payroll.
The cause
three-year restructuring plan
last it
lacked specifics but because the
plemented
it,
my
predecessor,
was
was
hopeless, not just be-
man who
retiring.
should have im-
Changes were coming
but they wouldn't be his changes. I
ing.
told
my
Shred
managers, "This
all
is
so bad,
it's
going to pollute
these reports and take out the bookcase."
with Aboriginal paintings
I
had acquired
in Australia
I
my think-
replaced
it
because, to 167
Dunlapping the Corporation
168
me, the paintings made a
had
to survive
lot
by
their wits,
is
a lifetime.
more sense. They showed people who people who couldn't call out for room
service.
Three years
weeks ago?
three
anybody ever held one
was wrong he
caster
would you
What
is
the result of a three-year restructuring plan? Paralysis of
draw attention
People don't
become
will
fice as
pen.
How do employees
think,
"I
don't
to myself,
I
know what
want
don't
respond? "I'm going to
to take
want
any
to leave
the
risks.
my
don't
I
office, this
"What do you hear?"
most frequent conversation opener around the
weeks turn
It is
their status will be.
into
far better to
months
of-
of waiting for the restructuring to hap-
make a change and make
it
quickly.
Slow death
terrible.
The smart employees say, "This is
fore-
probably be the day they get me."
will
is
weather
any fingerless forecasters?
trust
be very cautious," they to
that every time a
of the
or she should lose a finger. That's extreme, but
the corporation. Paranoia.
want
them accountable? I'm reminded
of
who once recommended
disc jockey
what you said even
economists and weather forecasters. Has
like
It's
Who remembers
being
totally
plan. That's
you say
If
is
undermined." They can see
right
through a phony
what makes them the smart employees. that
your employees
you
will cut
1 1
,200 people over the next three years,
will polarize. They'll say,
"He won't do
it.
human
And
they're not going
to fight you.
nature says, "We've had enough of
you and you
But
it."
twelve-month plan, people expect change, they're ready crave
My future
nonsense, I'm leaving.
for
in
my
they
it,
Beyond twelve months,
this,"
and people
will fight
will lose.
A three-year restructuring plan is the addle-brained notion of woefully weak executives who cannot face up to putting themselves in a twelve-month time frame. letting will
be done
in
If
you
tell
your employees that the blood-
twelve months, you have committed to a time
frame. You have set yourself a goal and promised to achieve
it.
You
have put yourself under scrutiny. I
tied the restructuring at Scott to
lysts
and shareholders
at
my
first
my
birthday, July 26.
told ana-
I
annual meeting, on June
3,
1994,
Real Jobs, Real Cuts
that
I
was going
to give myself
169
a birthday present by announcing the
restructuring. They were looking
something
for
to
happen
pretty
an eight-week time frame was extraordinary. And when we
rapidly;
announced
the restructuring details,
within six months, as
my
I
said
I
would execute our plan
Christmas present to our investors.
community and the media greeted the restructuring announcement and the speed with which promised its delivery with a big dollop of skepticism. was, as had become their habit, The
financial
I
I
by the Philadelphia newspapers. Analysts doubted
roiled
done; reporters and editorial writers feared
it
could be
it
not only could be but
would be done.
O O O I
made
the
first
announcement
Paper during a thirty-minute meeting staff in the largest of
running
this
way
it's
I
said,
been run
to Scott
general headquarters
for 1,600
our two cafeterias.
corporation the
were coming
that job cuts
"We
can't continue
in the past,"
and
I
laid
out the problems.
expected these people would be deeply concerned and they
I
were. But fice,
I
when
I
got done, they clapped!
said to Basil Anderson, "That
When
I
got back to
It's
is I
does an outsider wrest control of a
like building
a wall.
cracked and crumbling.
rarely see
any good
in
for leadership."
resistant organization?
don't start with the old foundation,
I
I
tear the
of-
was amazing!"
"These people," he said, "are desperately looking
How
my
whole thing down and
what came before.
If it
which
start over.
was any good, they
wouldn't need me. I
want executives and managers
a picture for them of the ture
is
dark, very dark, so
Next,
I'll
start
way
give
I
to
see things
my way.
I
will paint
the outside world sees them.
them the motivation
working on finding a core of people
to
The
pic-
change.
who can
initiate
those changes. Are the existing executives and managers tough
enough? Do they have the done? At
one
else
Scott,
I
spirit
and the
will to
released 70 percent of the
knew immediately:
"This
guy
is
do what needs
management team.
dead
serious."
to
be
Every-
Diinlapping the Corporation
170
I
think
takes great courage to
it
do
all this.
Not
just
on
my
part but
from the directors, executives, managers, and salaried employees
who must looked in
at the
balance sheet and found a way
we
to eliminate $2.5 billion
debt and quickly convert an incredible magnitude of assets to cash. In
a publicly held company especially, none of
vacuum. The if
contribute to an atmosphere of change. At Scott,
all
financial
and
local
communities are
occurs
this
all
in
a
casting a wary,
not disapproving, eye on a landmark institution undergoing radical
surgery to remove a cancerous and potentially lethal growth.
When
people read stories about Scott Paper
papers before
I
was
hired, the
in the Philadelphia
company appeared
at
war with
itself,
playing the blame game. That could have continued as a fight to the
death
in
which they
In 1993,
all
would have
died.
work was already being done
change. Establishing what
ment put people
in
it
to get Scott
Paper ready
for
called "jointness" committees, manage-
classrooms where they heard from marketing,
manufacturing, finance, and sales representatives. They would show fellow
employees
in different disciplines
how
to look at their business
through others' eyes, through customers' eyes, through cost position. I
followed up and used the jointness committees to keep
of the
company informed
the unions at every step.
of the I
changes being unleashed.
talked to
them
directly,
I
all levels
involved
spending time on
the shop floors.
The days
of the pitched labor battle are gone.
strikes at Caterpillar or the Detroit
Everybody loses
in
Look
newspapers and find
at the
1995
me a winner.
those things. In this day and age, you have to
communicate. In a
we
massive restructuring, you can't deal with the unions by saying
will fire
your people, change your
jobs,
and take our
profits out of
your wallets. Start at the top! Get rid of the corporate toys, squeeze the corporate headquarters, shrink high-priced management. The thing you
waste I
do
first.
is
deal with the unions, so they
That gives you credibility
can imagine the doubt on your
unions are unions; they won't give
know you went
last
after real
in their eyes.
face. You're thinking: First or last, in quietly. Right?
Real Jobs, Real Cuts
171
Wrong. Scott released thousands of people without losing even a single day to
Scott
work stoppages or wildcat
had been moving
men and women on
the
for years
strikes.
toward granting
the shop floors
more
its
unions and
say-so about the con-
duct and productivity of plant operations. I'm not against
had escalated
But
it
such chumminess that Scott actually invited a
into
union into a plant instead of asking people to
that.
in the plant
if
they wanted
be unionized. set the standard right at the beginning, in a Philadelphia hotel
I
meeting with union leaders. One of them was incensed about the an-
nounced
specific plant in
"Every plant
him
He
layoffs.
its
is
in the eyes.
wanted
tested me; he
the I
way
to
if
might close a
I
entirety.
subject to being closed,"
told
I
"We won't keep operations
busy-work environment but, rather,
compete
that allows us to
to see
in the
if
in
him
plainly, looking
place just to create a
you can provide a cost-basis
marketplace and make money, that
is
keep plants open."
also told
him
Scott
would no longer
battle with
long as Scott shareholders were being taken care
its
of.
unions If
—as
that hap-
pened, the unions would also be taken care of and be respected. I
positioned
it
right
ployment but rather shareholders.
If
we were
front that
to take care of
We were
not there to preserve em-
customers and produce
Scott didn't cut back
soon be out of work. Scott
up
its
profit for
workforce, everybody would
going to get our cost-basis right again.
had too many people producing too
little.
We had
research that told us what kind of labor density
already done
we needed
to
be
competitive again.
We
made it clear to the people on the shop floors that our first targets were management and bureaucracy. Those jobs would be the first to go, and the proportion of job losses in their ranks was guaranalso
teed to be higher than those of the union
My
position with the unions
hurt you. In the
to be.
I
am
was
not anti-union and
I
staff.
simple: Don't hurt
me and
I
won't
wasn't going to de-unionize Scott.
back of our minds, we knew how delicate our approach had
We
could have been
hit
by crippling
strikes.
Dunlapping the Corporation
172
The thing
labor relations. of
am proudest of is what happened instead in our We had production and maintenance people, most
that
I
them organized,
in
paper mills
all
over the United States. About 22
percent of that workforce was eliminated.
We worked very hard with
was a bombastic, acrimonious labor/management relationship, in which Scott was coming off the worst strike record in the industry, and turned it into probably the the unions
and took what
in 1989,
best big labor/management relationship in the paper industry. The incredible thing
every
five,
yet
was
we
that
had no
eliminated 7,000 union jobs, one in
my
strikes and, to the best of
knowledge, no
grievances. Not one.
Other companies could avoid
groundwork
conflict, too,
for creating a nontraditional
if
they
first
laid the
labor/management envi-
ronment and then stayed the course, working with labor through the restructuring period.
The unions
because they were tutored
at
at Scott
provided leadership
understanding Scott as a business.
Most companies would never allow that
to
happen. Educate the
enemy? Never! They would never put themselves in a position where they would tolerate that kind of partnership with the union. But
we
took the time to educate our unions about what was coming
and why, no holds barred. what had
to
In the
end, they believed
we were doing
be done, not committing some heinous or arbitrary act
of greed.
This educational campaign had been started three years earlier;
we merely stepped up menting
real
the process
and prepared the troops
change, long overdue.
Scott had traditionally organized mills that had time.
the
We needed
way
for imple-
to eliminate the barriers
of motivating these
been around a long
and boundaries
work organizations and
that get in
initiate
proach that was nontraditional and would bring new thinking
work should be organized. Otherwise, those same completely uncompetitive. That was our tack.
mills
And
an apto
how
would soon be
the workers not
only understood, they appreciated our candor. Finally,
while no one was happy with the impending cutbacks, the
bulk of the remaining employees trusted us to do the right thing there were no pay cuts
—and
to treat those
who would be
let
go with
Real Jobs, Real Cuts
respectful separation packages. ing
where the jobs would
was a very
fair
The unions participated
We
be eliminated.
in
173
determin-
negotiated what
I
think
and caring package with the United Paper Workers
In-
ternational Union's seven union locals across seven different production facilities.
You don't get
dealing with issues of If
tell
I
need, for
a union leader that our of these reasons, to
all
first
trust.
then the message
sists,
to that kind of relationship without
is
company has 1,000 people and we get it down to 900 and he or she re-
that this person doesn't really care
know
if
this
that can't
be
a major effort with the leadership, both at the
in-
place survives. In this day and age, union people their role.
We went through ternational level
and
and
at the local-union level,
spelling out our specific problems.
talked through
looked
showing them around
We brought in
reports
and we
what our cost structure was, what the benchmarks
what the competition was doing, and what was happen-
like,
ing to our margins.
We started with why these things had to happen. We never blamed the unions for Scott's turmoil. We looked to them as reasonable people.
If
We
they weren't, they could never be part of any solution.
did this in a systematic fashion across our sites in the United
States, bringing in the
their questions.
union leaders and spending time answering
"Understand what
we have
to
do
to
all
be competitive
and save ourselves," was the message.
By the time we actually got had been done. They could them.
It
was
pretty clear
to the bargaining table, the hardest part resist,
but
we
what was going
to
didn't have to threaten
happen with
or without
their cooperation.
Unlike
many modern
chief executives,
I
relate to
working people.
That's genuine, something you can't fake.
There wasn't a conscious the midst of
all this.
to the
weekly timecards.
was going ment and
to
I
people
went
have to happen.
labor, at the plants.
I
to
my working-class roots in part of who am. don't have
market
That's just a natural
any problem talking their
effort to
who
I
fidget over every
I
minute on
every plant and talked about what
got to the right people, both manage-
Dunlapping the Corporation
174
was expensive, but
It
I
was
willing to support the cost of helping
people leave with dignity and have a few dollars could find something
until they
else.
them over
to tide
Cut that out and you destroy the
unions' ability to help you.
We respected the
union leaders' dilemma. After working with us
structuring the cuts, they
and
say, "Look,
it
had
to stand in front of their
much
could be
in
membership
worse."
O O me anticipate the question you've been dying to ask since page How do as a human being, justify putting that many people
Let
one:
I,
out of work?
When permost
people, of course
fire
I
in
my mind
is
that
have to cut more of them
piecemeal
is
if
I
I
I
a fraud upon everybody
execute
my
my own
may
I
it
fire
if
I
do
don't
this, all
35 percent of the work-
remaining 65 percent have a more secure future than
didn't have the guts to
criticism
keep up-
and completely.
responsibilities, thoroughly
they ever before had in their I
I
today, I'm going to
included, will be safe
say to myself, in the cool of the night, that
force, but the
like
them
—the employees, management,
job,
these people will lose their jobs.
If
them! But what
months or a year anyway. Doing
in six
and the shareholders. No one's until
feel for
I
don't release
lives.
do
it, if
I
wasn't willing to take the intense
and take the personal and emotional anguish,
almost any other CEO. They look
for the
I
would be
easy way out. But that
would be dishonest.
o o o My
philosophy
sales, too
many
Scott, "Let's
do
is
to err
layoffs.
this
I
on the side
am
of too
much. Too many
a less-is-more guy.
one time and do
it
right,
I
as
told
asset
my managers at
deep as necessary,
and we can always add back." Coopers facilities
& Lybrand
did the critical analyses that designated which
and systems worked, what was core and necessary, and
Real Jobs, Real Cuts
what had
be done
to
in the future.
175
thumb
Their formulas and rules of
how many people had to do different tasks enabled us to quickly get down to what was appropriate for the work and size of our about
business.
The average cost per person
laid off
was about $60,000
or $450
million.
With every person that you have on the payroll, phone
go up,
electric bills
everything.
office supplies
The cost
go up, there
factor involves
like that
only
wear and
more than one person's
Cut back the payroll and everything goes
Numbers
is
bills
make sense
if
down
go up,
tear
on
salary.
proportionately.
you cut permanently. Firing
people and then rehiring them as temps or contract workers accomplishes nothing.
If
you
lay
them
off
doesn't work. In our restructuring,
and then bring them back
we
in,
spent $60,000 on each
it
dis-
missed employee one time rather than spending $60,000 per person in perpetuity. If
you do a restructuring
amount
that
right,
you take a
fat
one-time
would soon be much greater than the
hit
hit to
save an
you took. And
you create a long-term impact on the business. Your short-term gets
you a long-term
gain.
hit
Chapter
12
THE BEST BARGAIN AN EXPENSIVE CEO
IS
Lesson: Tie executive pay to shareholder value.
Many
times during the years
would say
to
I
worked
for Sir
James Goldsmith, he
me, "My dear boy, I'm a very clever
fellow.
percent of the work and get 5 percent of the return. the
work and get 95 percent I
of the return. Aren't
I
I
You do 95
do 5 percent
of
a clever fellow for
hiring you?"
Very clever.
And while
my ideas,
a result of side
James, Kerry Packer, and Scott Paper grew richer as
Sir
them and
produced on
decisions,
and innovations,
I
profited right along-
commensurate with
their shareholders,
the returns
I
their behalf.
James knew all came down to this: You cannot overpay a CEO and good you can't underpay a bad one. The bargain CEO is one who is unbelievably well compensated because he's creating wealth Sir
it
for the shareholders. ers' returns,
If
his
compensation
is
not tied to the sharehold-
everyone's playing a fool's game.
Even though
walked away from Scott more than $100 million
I
richer than
when
America.
created $6.5 billion in value; the shareholders
lions.
$9
I
I
arrived,
I
was still
The company was worth $2.9
billion
when
I
left.
I
the biggest bargain in Corporate
billion
when
I
arrived,
made
more than
received less than 2 percent of the value
ated at Scott, but at $100 million,
I
was still
bil-
I
cre-
the biggest bargain in the
corporate world.
17?
Dunlapping the Corporation
178
my
Negotiating
deal at Scott,
had strenuously
I
my com-
insisted
pensation be tied to shareholder value. That was an eye-opener and
almost a deal-breaker. The board, which had negotiated multimillion-dollar contracts before
by contrast with
his results in
and some reticence
my home
compensation with performance.
in a consultant to cut
Boca Raton,
in
Florida, but
Gary Roubos
Scott director
little
directly linking
The board brought to
—my predecessor was certainly well paid recent years — had experience
that
he
just didn't get
would not continue
I
He came
a deal with me. it,
and
I
told
the negotia-
was not the issue; incentive was. Roubos and another board member, Bill Andres two men with CEO credentials themSalary
tions.
—
selves that
—stepped
was
I
the right
would
"I
level,"
in,
Roubos
have
To
man
rather see told
and underperform.
who
grasped what
much
this day,
I
and took a leap
rather see
it
is
just
you be
what
is
it
in
so
little
of the action at that
too easy to take the at risk
I
money
than the employees,
going on in the company."
time, but neither
conceivable
of faith
quickly closed the deal.
doubt either Roubos or Andres ever guessed
They thought
five years'
after,
you guaranteed a piece
less control of
handsomely rewarded plaint.
We
for the job.
me, "because I'd
was
I
had room
might pick up
work. I'm sure they never dreamed
I'd
for
be so
com-
$100 million for
would happen
it
in
eighteen months, but that's the result of being properly motivated. Besides,
my success was theirs and that of every person who invested
in Scott Paper.
Scott could have disappeared
have bet on someone
down a
who would
have cost
person have gotten the same job done?
been
less,
The board could
but would another
Somebody
else could have
hired, laid off all these people, sold assets less advantageously,
and been paid a huge amount the results. That
fact that
a bargain.
I
My
of
guaranteed money no matter what
would have created a tremendous amount
ment and negative The
sinkhole.
attention for
the company and
was successful beyond payoff
have been valueless
their wildest
came from 750,000 shares if the company did worse,
viously the right incentive
model
in
its
of resent-
shareholders.
dreams made me
options that would
not better.
for Scott at the time.
It
was ob-
The Best Bargain
The best bargain
CEO who
a
is
package with an opportunity
money
on the equity tive
justifiable, not just
don't think
I
Herculean task or
it
money
When
is
must be tradition-bound
a board should provide incen-
an extraordinary executive.
believe passionately in motivation.
card. In business,
it
has ever done before, either to accom-
to attract
reward successful people.
a board throwing
The board must be competitive
side. In special situations,
above and beyond what
plish a I
side, but
179
has a competitive compensation
at the chief executive.
on the cash guarantee
an Expensive CEO
a big stock equity payoff. Such a deal
for
must be shareholder-friendly and piles of
Is
I
believe corporations should
you're in school, you get a report
our measurement; money
is
a CEO's
re-
port card.
So many CEOs and other executives have nothing
one study showed
that 73 percent of
incentivized their CEOs.
Why?
companies
They're
at risk
that lost
all living
and yet
money
still
well with nothing
but disdain for their shareholders. They view shareholders as a nuisance, a necessary
evil.
They won't speak
bed
them unless push comes
When shareholders call me, pick up the phone and talk to They own the company. They take all the risks. When they go to
to shove.
them.
to
I
at night,
if
I'm not doing a
good
job, they are
screwed.
If
I
don't
care about them, they don't have a chance. They're dead.
why
That's
—shareholdgaining ahead of the CEO or along with the CEO — the boards
return.
ers
executive compensation must be tied to shareholder
If
boards always align
need no further
who
justification.
it
with shareholder gains
But
if
you reward
have no stock, what do they have
at risk?
porations, chief executives are paid scads of
failing
Nothing. In
executives
many
cor-
money, they get huge
bonuses, and, by the way, results are secondary. This applies to
we sought to answer performance-based compensation system we put into place
executives and managers, and
with the
all
it's
this
behavior
at Scott.
Newsweek once described me as being critical of executive pay. Not at all. At one company where was the CEO, was not the highest I
I
paid person in the organization. That honor went to the sales manager.
And
if
you are lucky and smart,
that
is
what you want because
Dunlapping tbe Corporation
180
makes money on commissions. Likewise, the board of dishould want the CEO to make money only when he or she
that person
rectors
makes money
for
everybody
There are some
else.
who would
say nobody
or $10 million a year. But
lion,
compensation
if
the executive doesn't get a
sults,
worth $1 million, $5 mil-
is
dime extra
if
is
tied directly to re-
the stock price doesn't
go up and options can't be exercised. Scott shareholders
not just rich people
saw
their shares multiply in value.
who owned
sion
and mutual funds,
who
put their hard-earned
If
you do the
job,
These were
millions of shares of stock, but pen-
the investments of everyday
money
moms and
and were rewarded.
into Scott
you should be well paid.
If
you don't do the
you should not only lose your incentives, you should lose your
Why reason
don't is
more boards
that the
CEO
There are relationships
fire their
around.
If
the
CEO
keeping the
situations,
was impossible
it
CEO on
is
to
1
know board may feel
goes, the directors
had worked assiduously and, due
igating circumstances,
job.
on the board.
the people
all
they will be next to walk the plank. In other cases, the that the individual
job,
nonperforming CEOs? The No.
probably chose all
dads
to
produce
temporary, mit-
results. In
those
understandable; rewarding him or
when the company loses money isn't. Was worth $100 million to Scott Paper? My answer
her
I
is:
Go
ask the
shareholders. They should be very happy with the return they
earned. In terms of the gain they got, what
I
picked up was not a very
large figure.
We
are very inconsistent about pay in America.
time you heard
somebody say
Microsoft's
Bill
When was
the last
Gates makes too
much
money?
O O O Before
I
started at Scott, senior
management executives received
2,000 options a year, every year, regardless of performance. They nor-
mally received salary increases, regardless of performance. The centives they received were outrageous. stunk!
The year before
I
And
their
in-
performance
got there, Scott lost $277 million, but the
The Best Bargain
senior executives
and
an Expensive CEO
Is
181
picked up their options, their benefit programs,
all
their perks.
Their options were worthless at that time, of course, because the
was worth
stock
than the value of their options. But nobody was
less
going broke working for the company, either.
My
plan was to recast Scott Paper as an entrepreneurial company.
How? By example. On my first day on
worth of stock. The stock price stood
lion
made with no
my
the job in April,
Scott loans or guarantees.
pocket, the
same
the stock rose to $50 ticularly
I
you believe
Our chief
called in
in this
will
go up," they
company,"
I
said,
Our top a risk and
I
got there.
it
ten executives soon
was up
it
He was a
owned $10
to the
and weekends. Many
we produced
of us traveled for
significant results
creased value of our stock.
Many people
—heads
stock."
all
of them.
was
in
bank
what we were doing.
fail. If
its
team did
at
—days,
If
they
nights,
a time. But in the end,
and were well-rewarded
My team made
They took
the
richly rewarded.
very long hours
weeks
at Scott
like the other
million in stock.
would be
We worked
buy
father of two, divorced,
to them, and only them, not to
failed, they really failed.
the
to
wasn't easy for
money. But he went
the job for the shareholders, they
a
said.
want you
"I
guys and took out a loan because he believed
A
par-
my top executives for a meeting. By then,
financial officer, Basil Anderson, for example,
didn't have a lot of
that's
later,
around $63.
for
twenty years before
Options
few months
I
Most were instantly amenable. But
and
A
out of
in cash,
and bought another $2 million worth. That
our stock was selling
for
mil-
impressed stock analysts following the company. "He must
September,
"If
bought $2
That investment was
was paid
It
as any other shareholder.
be pretty confident the price In
at $38.
I
money on
in the in-
stock.
get options and/or restricted stock. That's nice.
you win,
tails
you don't
lose.
Restricted stock,
gift.
restricted stock grant
CEO
option only has value effect, is
a
that there
is
different
from a stock option,
in
which
granted options to buy a stock at today's market price.
is
gift of
is
if
the stock goes up.
stock to the executive.
An
A restricted stock grant, It's
in
restricted in the sense
a limited time to exercise the grant.
If
the
CEO
is
given
Dunlapping the Corporation
182
restricted stock grants for 100,000 shares
today
is
$30 a share,
and the
price of the stock
has a current value of $3 million. That
it
is
real
money.
Some packages will be more
subject to criticism than others
rewards are not related to significant accomplishments.
be
ple of this might
if
the
One exam-
restricted stock grants.
Such grants often vest over
years at 20 percent per year, so the
five
executive would get 20,000 shares per year free and clear at whatever the price of the stock. There are rules for restricted stock grants,
but they have the equivalent of cash once the restriction I
is lifted.
have always received options and restricted stock
panies
I've run.
could have avoided taking chances with
I
money. Those deals have no
who
comfort to the people
risk
and
my own
upside. But that's no
lots of
invest in the
com-
at the
company.
If
they think
it's
a
good investment, then if I'm going to run it, I'd better think so, too. The critics said that was showboating at Scott with these big stock I
purchases, but did
it
first
all
was doing was
I
when went I
200,000 shares and vately held stock
than one-third of
had a $1.77 book value.
the banks wouldn't
worth $1.77 "I
in
a
believe in the
He wasn't didn't have
equity and
Lily-Tulip
had
it
company that looks like it's going future." He said, "You're nuts."
any money
the stock as collateral.
in the If
bank.
that thing
I
to
go bust?"
being too high; he also
about putting any of his
went
The long and short
of
own money it?
I
sold out
sour,
I
was
a loan.
I've
been
always invest
in
I
was
said,
knew
I
broke. is
gun-shy
at risk.
my Lily-Tulip stock after two and
a half years at $18.55, and nobody had sympathy for me. started, but
I
borrowed $500,000 by pledging
But only a hypocrite takes over a major corporation and
I
more
lost
was headed toward bankruptcy. But
just referring to the price
money when
pri-
KKR sell for less than $2.50. My lawyer said for you! How can you pay $2.50 for a stock that's
let
even
"Al, this is nuts
to Lily-Tulip in 1983.
I
bought 200,000 more out of pocket. The
I
its
my belief in myself. KKR gave me options for
investing in
willing to put
my
butt
willing to take that kind of risk again
me and my determination
to win.
I
didn't have
on the
and
line for
again.
I'll
The Best Bargain
Scott employees,
who, before
Is
an Expensive CEO
came, were too smart
I
183
to invest their
retirement funds in Scott stock, also got our entrepreneurial religion
do
believe me, they didn't
demanded
They did
it.
it
it
And
of stock through their 40 IK plans.
and bought $250 million worth
because
I
called
them
into
my
office
and
because they were working harder and
in-
creasing productivity, and they wanted a piece of the payoff.
An
Australian television crew
on the Scott turnaround, and
showed how our employees talking to the reporter
it
came
captured a few candid moments that
felt
about
their Scott stock. In one,
We
love
it!"
was
Then there was a woman
packaging product, who, before the cameras were
My
'Thank you, Mr. Dunlap. I
I
and two guys leaving the plant shouted, "Keep
that stock price going up, Al!
sion plan because
do a story
to Philadelphia to
said,
rolling,
children will go to college on
my
pen-
invested in Scott stock."
O O O Money
is
very important as motivation. Not long before
I
was
hired, Scott paid consultants $2.8 million to design a compensation
program.
I
had run seven companies before Scott but
I
couldn't un-
derstand this plan. Sometimes the financial goals weren't set at the
Managers
start of the fiscal year.
would be
until
ing the rabbit.
thinks he
an
won
didn't
months had passed, so they
It
was
like
somebody who
a round because he shot
1
know what
their targets
didn't start right off chas-
doesn't understand golf and 10
and
the other player shot
80. I
believed Scott needed a more appropriate and just system of
re-
warding performance. Scott's consultant, a very highly recognized
and regarded compensation expert, wrote a mind-numbing it,
Scott's
some stand.
annual incentive plan had double and
triple thresholds
other things based on subjective criteria that It
wasn't that
I
was unable
to
plan. In
understand the
I
just didn't
and
under-
I
just didn't
Basil
Anderson,
detail;
understand the philosophy.
The consultant came
Newt White,
in
and gave us a presentation.
vice president of corporate
human
resources John Nee,
Dunlapping the Corporation
184
attorney Chris Sues and visual aids
found tant,
do,
which purported
me
what they have
stuff,
I
were
room looking at graphs and other show how people got paid. Even Sues
in the
to
too complicated. After twenty minutes,
it
"Don't give
bonus.
I
want
don't
I
don't
to
produce,
it
I
don't
want
to see all this fancy
subjective."
The consultant was startled, as spell
to
form of a business plan, to get a
in the
to see the graphs,
want anything
said to the consul-
I
Show me what my people have
all this bullshit.
if
no one had ever dared ask him
to
out in English before.
all
Not long
after,
Newt White,
if
I
asked the two best people
come
they would
my
to
at Scott,
office
Anderson and
and explain the com-
pensation plan to me. They sat very quiet and sheepish before Basil
took a shot at
it.
When
he was done, there was a long silence.
"You guys really don't understand
it,
do you?"
I
said, laughing.
"No, not really," they said, looking worried. I
told
"I
them
to relax.
thought /was a
I've got.
If
total idiot,"
you don't understand
I
it,
said. "But you're the smartest
guys
feel vindicated. Let's trash
and
I
it
get a system that works."
One
of the
most significant steps we took was
stricted stock unless they hit certain targets. In
a
You
gift.
All of
shaking up our
Managers would no longer receive a share
stricted stock rules.
it's
in
just get
it.
Those days were over
company
If
you
hit the goals,
at Scott Paper.
as a whole had to achieve a certain goal or there
care
if
the
company
how hard somebody
didn't
works;
do if
the shareholders are not doing well,
The communities
in
shutting
we
offer
well, there
the
company
if
was no is
was no
you were doing pool.
I
don't
not doing well,
if
to stay will prosper as
we
invest in our plants instead of constantly
them down. The customers improved products
at a
will, of
course, be delighted as
competitive price, with improved
service levels. Suppliers, lenders, and bankers will be better off as create a revitalized
set
no one deserves a bonus. Period.
which we choose
expand our business and
We
you received a high bonus. And the
pool. Within that pool, there was a formula. But even
a good job,
of re-
most other companies,
our incentive programs were based on performance.
high goals.
re-
company
with a stronger balance sheet.
we
The Best Bargain
How
an Expensive CEO
Is
make
did Scott reform bonus compensation to
185
merit-
it
oriented?
Probably the most substantial change was
more important use
we
arbitrary in-house goals,
mance. At the end of the day, stock doesn't reflect
When
I
it,
let if
restricted shares. Instead of
the stock market
measure
perfor-
we've done well but the price of the
what have we
really
accomplished?
was granting stock options based on
arrived, Scott
tive criteria, as
and
of stock options
making better and
in
subjec-
a function of hierarchy. Everybody at a certain level
received 4,000 options, everybody at the next level got 3,000. They
were not performance-related grants
company was
the
money, the
losing
most
for the
part.
Even though
fact that, in time, those options
could be worth something was being ignored. Executives and man-
when
agers were earning options in years
made no provided for wads
wasn't ited
right.
of restricted stock.
stricted stock awards. But
buy
to
in,
Scott
was
losing
money.
sense. The long-term, subjective plan
It
out of pocket,
if
I
didn't
Then
I
was more than
It
inher-
mind having
my key managers wanted
first.
I
re-
them, they had
award
willing to
three shares of restricted stock on a vesting schedule for every share that they bought,
Before
company
this,
up
maximum number.
to a
management
didn't have to
make an investment
in the
be rewarded under a bonus plan.
to
We wanted everybody on
the same team working in the same disame things because now they had a personal investment in the company Under our leadership, many more people at Scott than ever before rection to accomplish the
were given
restricted shares, so their focus
mance became interest.
We ple
The
acute. Before
level of
I
arrived,
on the company's
perfor-
few had that kind of vested
awareness changed immediately.
took the options deeper into the organization and gave key peo-
more
of them.
We
also
changed how they were granted. Rather
than a few shares once a year, with each batch vesting over two years,
we
gave a large
years.
number
And we provided
of shares
is
their value
that
would
vest over five
greater opportunity because our mega-grant
that vested over five years
the shares
one time
had a
single strike price.
(The
on the day they were granted.)
strike price of
DiiDlapping the Corporation
186
At a certain level of the organization, an employee might get 2,000 shares under the old scheme. Those shares would be granted at $44,
with 1,000 vesting after one year and the other 1,000 vesting after the
second
the stock
up
When
year.
went up
was
the stock
$1, the options
at $44, they
were worth $2,000;
package was worth $4,000, and so
$2, the
were worth nothing.
difference between the strike price ($44)
forth.
if
the stock
If
went
The value was the
and what they were now
worth. The problem with stock options under the former Scott regime
was
company never performed
that the
mean
anything. Before
were granted
I
arrived, Scott
and
at $44, $42,
long
enough
had thousands
to
have them
of shares that
$41, but with the stock selling at $37,
they were worthless.
When we
granted shares under our
granted them for
five
new vestment
plan in 1994,
years at a strike price of $63.75. This
we
was almost
a 50 percent higher strike price than under the previous management. In effect,
we said: "Here
is
a
much
larger
number of shares, and 20
percent will vest to you every year. But the strike price will always be the same."
went down, we were not going
the price
If
to reissue at
a
lower price. So our employees had the advantage of the continuing
growth of the stock. handsomely.
If
the shares as
it
If
the price
went up, they were rewarded
went down, they got nothing.
many
We
didn't re-price
corporations do, increasing the strike price the
next year. Before the Kimberly-Clark merger arose, further into the Scott hierarchy, including
the stock option plan than the
you believed ment.
We
we planned more people
to
company had ever included
in this philosophy,
go even
globally in before.
If
you'd go deep into middle manage-
fundamentally offered stock down through senior manage-
ment and included a
significant percentage (but not all) of senior
management on a global basis. What we were talking about doing next was taking it even further into middle management and including more people worldwide, because we were acting and thinking like a global
company.
Roughly 8
to 10 percent of Scott's salaried
stock options.
we
continued.
We would It
was
employees received
have expanded that to 15 percent had
fairly
generous; other companies are less
The Best Bargain
generous, but
I
really believed in
Is
an Expensive CEO
187
engaging people with these stock
options.
For those
who were
already granted options, the timetable was ac-
and the options were
celerated by the merger
fully
vested from a sin-
gle strike price. In the
end, the five years' worth of options
were worth $120.00 (based on merger. That was no
granted
at
$63.75
Scott's presplit price) at the time of the
our people worked hard and made enormous
gift;
me, earned every penny be-
sacrifices to achieve that payoff. They, like
cause our shareholders
we
made money,
When you
too.
are tied to the
idea that the fundamental, essential responsibility of the corporation
is
shareholder equity value, your focus changes. Newt White's pre-
Dunlap options weren't worth squat. After working with me, he was worth approximately $23 million.
o o o People working in a company are looking In
for
a sense of security.
exchange, the company needs ways of perpetually motivating
why we must
employees. That's
hold them accountable.
have goals and accountability, whether promotion, or their
name
What executives countable
in the
If
its
must
form of a bonus or a
paper or on a reserved parking space.
lose track of
for their actions.
in the
We
is
that
people want to be held ac-
they are not held accountable, we'll
have the corporate equivalent of social anarchy: bankruptcy.
How do we
hold people accountable at different levels? There
must be a consequence they can control. will
be rewarded
countable
It
for
for his or
to
any action. And
doesn't do
own
same
if
you
set
raise regardless of
ployees
know
if
the person
as,
to
"You
not held ac-
"You will not get a
raise."
up a system whereby everybody
performance, mediocrity sets
in.
On
gets the
But
if
em-
they did a great job and they will be rewarded for
they will consistently improve on their performance.
want
is
to say,
that
actions.
Accountability can be as simple the other hand,
must be something
management any good
something Joe does," her
it
do a good
job.
I
it,
believe people
Dunlapping the Corporation
188
Financial incentives can be kept very simple. Tie rewards to the
How did a given department do vs. budget? tell my managers to give me four key goals for the year. What are you going to do this year? Tell me when you are going to do them, tell me why should keep you. A year later, ask, "Did you achieve all these goals?" and if not, why not? We can work out a recompany's overall performance. I
I'll
I
ward system It
that way.
doesn't have to be huge.
Everybody's coming
what
That's
their
to
It
has to be something.
work 52 weeks a
year, 40 hours a week.
base pay and benefits cover. Performance rewards
cover what employees will accomplish beyond the basics.
The next question must
new
ating a
How do we
be:
cre-
bureaucratic and paperwork nightmare?
Even with the best
of intentions,
Beat back corpocracy
vigilant.
reward people without
at
it
is
a constant battle.
We
must be
every turn! Outside bureaucratic
influences will require you to do certain things just by their nature. Establish
an internal environment
tolerated
and
is
in
which excess paperwork
is
not
discouraged.
we were not interested in drowning in a sea of memos. There wasn't much handwritten stuff. Memos are just reinforcements of a behavior we wanted curbed. "We will not have a rule book this big," we said. "We will have a rule book this small." Hold people accountable and much of that paper trail At Scott, our managers understood
will
go away.
Bigness by
itself
can cause bureaucracy.
If
everybody has
to ap-
prove everything, then that system becomes bureaucracy.
No
discussion of incentives
would be complete without an exami-
nation of executive and employee benefits.
Attorney Chris Sues handled employee benefit matters for Sir
James Goldsmith's American companies dating back
when design
I
was hired
my own
since then.
to turn
to 1981.
We met
—he
helped
around Crown-Zellerbach
benefits package
—and have worked together often
The Best Bargain
When
Is
an Expensive CEO
met him, Sues was with the New York law firm
I
known
Gould, best
for
founding partner
Bill
Shea, for
of
whom
189
& New
Shea
the
York Mets baseball home, Shea Stadium, was named. The firm often
New York-area sports
represented
franchises, including the Mets
and
Yankees, the football Giants, and Madison Square Garden. Sues's individual practice
cluding work for Hanson
benefits, in-
and Grand Union. When he went
companies, he studied packages and questioned expenditures
into
and largesse
that
nobody had properly questioned
James wasn't sure what he was getting
Sir
&
Shea
International
losses
due
relied
and documented
to benefits, Sir
when he
first
hired
millions of dollars in corporate
James was
sold. "That
guy
is
my
benefits
announced.
lawyer," he
efits
into
before.
Gould. But after Sues did an in-depth examination of Dia-
mond
I
was focused on corporate
Industries
on Sues during the Goldsmith years
and compensation packages
to reconceive the ben-
many companies we took
at the
over or considered taking over.
we encountered
During takeovers, called poison pills
—established by
trench themselves. Sues
was
all sorts
sitting
of benefits
—often
management teams to
en-
typically assigned to look at costs as-
sociated with those benefits and to assess whether they were ironclad or were so disadvantageous to shareholders that they
could be renounced.
cause
It
was an
intellectually challenging area be-
we were always uncovering arcane compensation
were established vantageous
for
twists that
a company's officers but were extremely disad-
to shareholders.
These included every form of compensation known
to
man: stock
options, termination bonuses, stay bonuses, merit bonuses,
nual incentive plans with triggers so that
occur tion,
five
it
might double or
triple
if
and an-
a hostile takeover were to
a payout. Various forms of compensa-
severance pay, and employment contracts would pay three to times a person's annual salary, and
newed annually At both take over,
re-
a five-year period.
Regis Paper Company, which Sir James attempted to
St.
and
of, his arrival
for
some were automatically
later at
Crown-Zellerbach, which he did take control
had been preceded by
significant contracts that
were
Dunlapping the Corporation
190
put in place before the companies were acquired. The
same
proach was used
Sir
at
Continental Group, another
company
ap-
James
bid on, but ultimately did not win. Let
me
put into perspective
why
executives set up such sweet
deals for themselves. Certain companies
became takeover
targets in
management was no longer doing the job for Management was lazy and sleepy but fat and
the mid-1980s because the shareholders.
—
happy, thanks to salaries and bonuses that had no basis in
They knew
if
they were ever caught in this
lie,
reality.
they'd lose their heads,
so they wrote golden parachutes as protection. The parachutes pro-
vided a
final,
undeserved pot
o'
gold in the event the no-accounts
were ever ousted.
May
In
1994,
1
hired Sues and turned
him loose on
He
Scott Paper.
tackled two jobs simultaneously: (1) generating reasonable separation
packages
for the
(2) reconfiguring
ees
who
1
and
1,200 workers laid off in our restructuring,
compensation and benefits packages
for
employ-
remained, based on performance and tied to shareholder
gains.
Bonus compensation
aside,
companies overcompensate many peo-
We
ple
and make labor much too
for
people exactly what they need and not more than
much
costly to the
company.
must provide
that,
and work
harder at making them understand the benefits that the com-
pany provides. You might think
of that as a
way
of giving less, but
comes from not providing
benefits that have
don't think that
is
no
from providing fewer options around what you
real value or
For example,
true.
It
when came I
I
to Scott in April 1994, the
an unbelievable sixty-one different medical plans!
get.
company
ran
In a matter of
down to six. How could a company even administer sixty-one medical plans? Bureaucracy had clearly run amuck. Someone needed a new plan months,
we
whittled
it
here and another one there; two options weren't enough,
let's offer
four.
In the late 1980s
and
early '90s, U.S. businesses shifted from
dollar indemnity coverage to
ganizations
managed
care, health
(HMOs) and comprehensive
clear, decisive shifts
from one strategy
first-
maintenance
plans. Rather than
to another, Scott
or-
making
commingled
The Best Bargain
plans. Big bureaucracies prevent
nimbly adjusting plans, and troducing
new
I
an Expensive CEO
Is
191
companies from decisively and
found Scott
a period of transition,
in
in-
plans without ending others.
not that big companies aren't trying to do the right things, but
It's
bureaucracies make these changes more slowly than they should. Scott also
and
of different kinds of leaves our
had an array
managers
executives could take: executive sabbatical, personal, educa-
tional,
and so
which we reduced ple's lives
were multiple long-term
on. There to
two options.
and costs more
It's
disability benefits,
this stuff that
in administration
complicates peo-
than the actual benefits
provided.
Corporations regularly review their compensation benefit pro-
grams.
When one company adds
do the same; they fair.
In the 1960s,
had
to
talk
a benefit, others feel compelled to
themselves into doing
for
reasons of being
enough companies had pension plans so everybody
have a pension plan.
In the 1980s,
ings plans. That's easy to follow. But is
it
everyone added 40 IK sav-
what happens
inside those plans
not quite as clear-cut because they keep getting bigger and
more
same way Corporate America annually and routinely increases executive salaries without tying them to shareholder returns. The same attitude draws them into saying, "We have 1 1 paid holidays, and the average is tending toward IIV2 maybe we should out of control in the
—
have another holiday." Scott Paper did not cut, in a significant way, any important benefits. We did not reduce holidays or any of the better medical plans. We made a shift to what would argue was a better pension plan. NoI
body I
lost
a thing. The 40 IK was
left intact.
believe that, under the circumstances, employees laid off by Scott
were dealt with very
fairly.
Every individual and every executive
re-
ceived a nice separation package based on the employment time with the
company, and
it
included pension protection and medical continu-
ation protection. Scott's termination policy
pay
for
of severance
week of pay for every and an additional week of pay for
every year of service, plus one additional
year of service beyond 15 years,
every year of service beyond 40 years, to a great
was a week
many people
left
maximum
us with a year's severance pay.
of 52 weeks.
We
A
negotiated
Dunlapping the Corporation
192
which was
similar benefits with our unions,
wasn't a perfect match, but
we were workers
truly generous.
was unusually close. For the hourly
know
one company
of at least
It
folks,
that laid off
1996 and gave them four weeks of severance pay no matter
in
how much
I
it
really extraordinary.
service time they had with the company.
most
Scott's existing labor agreements, for the
more than four weeks
of severance. But the
part,
provided no
company nonetheless
ne-
gotiated severance benefits similar to those received by salaried em-
and exceeding what was
ployees, ignoring
And five
enhancements
severe,
we
that included a factor of five;
years of service or five years of age were granted to senior em-
ployees tire.
our legal agreements.
where the job cuts were the most
at headquarters,
also provided pension
in
who had
the ability, with that additional service or age, to re-
For example, quite a few employees in the 60-64 age bracket
would have had
turned 65
to wait until they
pensions to kick
for
in.
But the factor-of-five plan kept them from waiting. Finally,
people
subsequently
Clark, received 52
The
final
who moved
lost their jobs
weeks
cost of
to
Boca Raton,
Florida, with Scott
and
as a result of our merger with Kimberly-
of severance pay, regardless of prior service.
employee restructuring
was about
Scott
at
$60,000 per person. That figure included severance pay, pensions,
and the present-value cost is
of retiree medical insurance,
number
a tremendous benefit. Quite a
have been
in a
would kick
in;
of our
which today
employees might
category where they were not age 65,
when Medicare
so people in that 60-64 age group probably found the
continuation of medical insurance a very valuable benefit.
Compare
that with situations
where people are
with a couple of weeks' pay, and of balancing the
needs of people
who when
with those of the people
were actually
in
I
place
who were Many
arrived.
its
feet.
we
just
job
not going to continue
We had to.
the opportunity to
Being
let
go
is
tough
was not necessary. We were not wanted to get the company back on
in the face
looking to hurt anybody;
fair
of our separation policies
change them and go cheaper, but chose not enough; being slapped
go, effectively,
think our managers did a
were. I
let
Chapter
13
WHOSE COMPANY IT, ANYHOW?
IS
Lesson: The people who invest in a company own it not the employees, not the suppliers, and not the community.
In
corporate circles, the world's most abused minority
the share-
is
holder. Barely tolerated, not respected. All
ment
you need
to
know about
of shareholders
is
a
company when
it
the answer to this question:
senior executive team, and the board of directors
vestments of their
own money
in the
company?
If
comes
people on Wall their
treat-
significant in-
they have, the rest of
large, they're not
it
together.
a bunch of rich
Shareholders are our parents, who've invested
Street.
pensions and 40 IK plans in our companies. Shareholders are the
people working teachers.
money ized
its
Have the CEO, the
made
the shareholders can sleep easier, because everyone's in
Who are our shareholders? By and
to
up
in
our
They entrust people
gets invested to
That's
factories. They're the police, the firefighters, the
me
with their safekeeping.
and a company does
and including the
why
like
It
their
be penal-
loss of their life savings.
a company's No.
but to the shareholder.
poorly, they will
If
1
doesn't
not to the customer
responsibility
is
mean
customer
that the
is
not of the
utmost importance. But when you adopt the attitude of shareholder value
first,
a function of If
way you spend the corporation's money becomes how you spend money on behalf of the shareholder.
then the
a shareholder calls
obligation to talk to
nounced plans
to
me and
him or
revamp
her.
all
says,
And
"I
want
call
to talk to you,"
me
they did.
I
have an
When we
an-
of our product packages, shareholders
193
Dunlapping the Corporation
194
Many agreed
called.
big risk?"
but were worried.
told them, "The important thing
I
walk down
supermarket
that
that
"Isn't is
that
an awfully
when consumers
Scott products must stand out
aisle,
from the competition!" Others wondered about the wisdom of entering the Asian marketplace. "There are 2 billion people in China," I'd reassure them.
we
could enjoy the percentage growth there that
we I
we
have elsewhere,
could double our business every four years." find people
want
to
And how their money is
be personally reassured about
sometimes they want a peek behind the scenes
at
strategy.
being spent and the logic of the decision-making process.
—
money think they're entitled to Some companies just don't see I
performance
is
lousy.
They
difficult as possible for
annual meetings
to
It's
their
—especially when
their
answers. it
go
will
that
way
to great
extremes
to
make
an unusual and distant location where
have even been known
as
it
shareholders to be heard, even moving their
convenient or too expensive
many shareholders
for
to take their
Another sign of disrespect
for
it's in-
Some
to attend.
meetings out of the country, to
escape shareholders. That kind of behavior
is
"If
is
reprehensible.
shareholders that really burns
me up
hearing about chief executives being given raises or being paid
huge bonuses even as
their ships are sinking.
CEO
cent but the board gives the
tough year," the directors will
a 40 percent raise.
say. Exactly!
the shareholders! They're the ones
great year!
The stock drops 60
who
It
lost
CEO
led the
"It
was a tough year money! The
The CEO's salary was guaranteed, the
world at company expense, the
Why?
per-
was a .
.
.
for
CEO had
a
CEO flew around
the
and used
the
good
life
shareholders' diminished returns to refurbish the corner office. It's
the shareholders' company, not the CEO's.
lose value, the
CEO
If
the shareholders
doesn't deserve to gain! Talk about mixed-up
priorities.
The
risk of
buying a share of stock
a U.S. Treasury certificate, which
it
executives of a
as an
awesome
enormous.
guaranteed.
It's
not like buying
When someone
buys
may lose some or all of that money. That's company must respect that investment and treat
a share of stock, he or she
why
is
is
responsibility.
Whose Company
Who
gives the shareholders their
Is
Anyhow?
It,
money back when
195
company
the
screws up? Nobody.
Most companies don't put the shareholders create
own
some shareholder value along
objectives, fine; but
is
it
happen
they
first. If
to
the way, while pursuing their
unfortunately not the sort of thing that
they are out there championing.
Shareholders
own
the
companies
employees
me
put
tell
you when you should
in perspective.
you can't
say, "Oh, no,
which they
—executives included —work
the
it
in
for the shareholders. Let
you own a house, do you
If
sell
let
the gardener
your house? Does your auto mechanic
your
sell
That means
invest.
Stock ownership
car!"
the only
is
sit-
someone who doesn't own the asset usually gets away with telling the owner what to do. It is very easy to spend money when it belongs to someone else. However, when a person invests in a company, the list of things he or she wants the company to do does not include pissing away the inuation where
vestment on exquisite perks and poison-pill takeover defenses. shareholders wanted their lodges, yachts,
money spent on
is
why
not
they gave their
mutual funds. They want the company
Most of If
a
all,
and
services,
they expect the
company
is
of directors
money to stockbrokers or new factories, inno-
to build
and enhance research and development.
company
to
make money.
not delivering shareholder results,
making changes. But many companies board
Paris apartments, hunting
and airplanes, they'd buy them and enjoy such toys
themselves. That
vate products
and management
don't.
sit
Why
should be
it
did Scott Paper's
on the sidelines year
as the
company
blithely spent billions in capital
market share? Not the directors or the managers holders If
who
—
it
and
was
after
Who
year and idly watch the value of Scott's stock deteriorate?
money
If
still
lost lost
the share-
took the beating.
you are shareholder-friendly, you
ment, the best products, the best the shareholders.
You serve
have the best manage-
will
facilities.
That's your obligation to
at their pleasure.
Don't forget
it!
Despite the logic of this perspective, you can count on one hand the
number of CEOs who lions they
are shareholder friendly, as evidenced by the
have created
in
shareholder value.
Among
bil-
them: Jack Welch
Dunlapping the Corporation
196
at
GE, Coca-Cola's Roberto Goizueta,
Bill
Gates
at Microsoft,
and
Dis-
ney's Michael Eisner.
O O O The worst kind utterly
and
of
CEO
for
shareholders
is
disdainfully rejects suggestions
holders. That's a
huge mistake. Even
if
the corporate
elitist
who
and pleas made by share-
that shareholder
is
only in the
company for one hour, he or she is still a shareholder. It was Scott shareholders who, when our stock began its dizzying ascent in mid-1994, first suggested a stock split to make our price more affordable. And it was the shareholders who stated the case for what found so obvious: Scott I
is it
in health
is
a consumer products company.
Why
care services and energy production?
They were asking the same questions we were asking ourselves They reinforced our thinking, confirming
ternally.
Our opinion wasn't owners were thinking the same way.
the right course.
At Scott,
America.
How
It
I
endeavored
to
developed
we were on
in isolation
—our
be the most shareholder-friendly CEO
was something took
does a
just
that
I
CEO become
great pride
in-
in
in.
shareholder-friendly? For starters, he or
she must be a shareholder. Read a proxy. You'll find
it's full
ishingly creative writing that attempts to demonstrate
of aston-
how many
shares of stock a company's executives hold. But they're usually just grants of restricted stock
were so tives
far in the
money
who buy stock
and options
that they exercised
when
they
they couldn't lose. Usually, the only execu-
in their
companies anymore are the founders.
O O O The most ridiculous term heard
in
boardrooms these days
is
"stakeholders."
Who the ers.
or
what are stakeholders? They're the company's employees,
community where a business
operates, even the company's suppli-
They're people or institutions that have a stake
in the
company's
Whose Company
well-being and continuity because they rely on
it
ply or service contracts, taxes, or, in the case of a
Is II,
Anyhow?
197
paycheck, sup-
for a
community, general
economic development.
CEOs who bow to multiple constituencies are shirking their duknow it has been fashionable in some communities for manties. agement to seek tax breaks or community support by emphasizing stakeholders over shareholders, but that moment has come and gone. We can do more good for our communities by doing right by I
our shareholders. Stakeholders! Every time
I
hear the word,
"How much
ask,
I
did
they pay for their stake?" I
object to the whole concept of stakeholders
from the shareholders,
tiated
who
literally
—who are
buy and hold
Stakeholders don't pay a penny for their stake. There constituency
I
am
concerned about and
that
differen-
is
only one
is
the shareholders.
down company
you see an annual report with the term "stakeholders," put
If
and
run, don't walk,
has
its
Well,
away from
upside down.
priorities
CFO magazine and
the
company.
It
means
Which companies am
the Walker Group,
stock.
the
it
talking about?
I
an Indianapolis research
firm, published a study in 1995 that singled out Harris Corporation
Eastman Chemical Company as businesses going out
and
way
to
more
in
of their
profess their devotion to stakeholders.
Companies such as these make major decisions
that are
tune with employees and the community than with shareholders.
They give away
to charity millions of dollars that rightfully
the shareholders.
They keep thousands
of people
on
belong to
their payrolls
even when they clearly cannot afford such largesse and are putting the entire operation at
risk.
think they're making a huge mistake. Shareholders take
I
risks; tors,
they
own
the
company. Everyone else
and the community
—
justly profit
when
—employees, the
all
the
contrac-
company and
the
shareholders do. I
am
not unmindful of interests other than shareholders. However,
managing ciary duty
for the interests of stakeholders
and destroys accountability.
It
runs contrary to our fidualso blurs
management's
Dunlapping the Corporation
198
concept of whose interests
it
serves.
You
You can measure success by
the interests of multiple stakeholders.
how
measure success by
can't
the shareholder fares.
Stakeholders benefit
performs well and benefits because
company Too
is
its
it
when
the shareholders benefit.
shareholders
make money, then
company community a
If
the
taxes people, and employees benefit because the
successful.
often, the notion of other interests
and other constituencies
becomes an excuse for flaccid management and poor results. Management at businesses such as these may spread assets around for purposes other than the core business of the company itself. Then when it doesn't produce profits, management points a collective middle finger and virtually says, "But we do all these other things, so it's OK not to make money." don't buy that for a second. The mission of a company is to protect the interests of its investors. They stand front and center for the gravy train, not at the rear of the line. A side issue is that, for the shareholders to do well we need employees who care about the company, work hard, and feel they are being treated right. It is important to treat employees well, and we do it because it's good business. That's another way to create shareI
holder value. That's the right
way
to run a business.
Employees are stakeholders but they don't deserve shareholders do, unless they've invested
working
they're for
for.
We
some money
have gone way overboard
way company
rights the
in the
in creating rights
everybody, and companies have been pulled into that mess.
makes management fuzzy and harder than ever As a
the
community
improving the friendly
to focus.
result of stakeholder pressure, Scott gave
money to
lives
instead of improving
and welfare
of
its
its
It
away
large
facilities
sums
and
of
directly
employees. Being stakeholder-
was nothing but a smokescreen
to
keep the management from
being held accountable to a measurable standard. Scott Paper, a
company
that lost
$277 million
in 1993, still
had $3
when was
million
earmarked
hired.
can't see the justification of such a giveaway in a profitable
I
1994
for charitable contributions for
corporation, so this certainly
made no sense
at all.
I
I
put an end to
it.
— Whose Company
Scott's giving
was not done
blindly.
Is It,
Anyhow?
199
was a very conscious decision
It
based on the previous management's philosophy that
if
you are part
of
a community you have to contribute directly to that community.
When butions,
charities
we
told
came around knocking
them
that
our No.
holder value. That was the policy, discussion.
little
whether
issue,
can deal with
Our
mill
it
at Scott's
was
objective
1
strictly
Once a corporation
upheld.
be charitable giving or anything
for contri-
creating shareIt
allowed very
establishes clarity else,
around an employees
it.
managers,
who
on a more
dealt with such giving
face, local basis than did corporate headquarters,
we used
door
had
to say,
it."
But there
know
"I
company policy has changed and have to was nothing stopping our managers or em-
to contribute, but
adhere to
face-to-
I
own pockets or volunteering These were steps we encouraged.
ployees from reaching into their
own time to help. knew would be I
I
severely criticized for ending Scott's
reputation as a corporate benefactor.
I
was.
the company's
it
was
hometown
enormous
Combined with our
ness cutbacks, taking this step did nothing for ity in
their
my
busi-
personal popular-
of Philadelphia. But
I
did
it
because
the right thing to do.
o o o If
you're in business, you're in business for one thing
money. You must do everything
fiducial, legal,
—
and moral
make
to
to achieve
And making excellent products that are expertly marketed the primary way of making money. Executives who run their businesses to support social causes
that goal. is
such as Ben
ment
& Jerry's or The Body Shop—would
dollars.
They funnel a portion
the whales or Greenpeace. That
want
to support a social cause,
my
invest-
of profits into things like saving If
you
you have these other agendas,
join
is if
never get
not the essence of business.
Rotary International. I
have no problem with giving.
ever to be presented to
I've left in
my
estate the largest gift
my alma mater, West Point. And Judy and
I
give
Dunlapping the Corporation
200
money
and animal
regularly to hospitals
we earned
But
shelters.
it's
our money,
it.
Corporate charity exists so that CEOs can collect awards, plaques,
and honors, so they can
sit
what the shareholder
paying them a million bucks a year
is
stock options and bonuses
Show me a
—
and time
show you a company
that
on
that's
to fifteen
who
boards and
five
My
community
when CEOs think they are
of shareholder
Can
—plus
began as
and
activities,
A chief executive
underperforming.
distaste for corporate giving
ladder at American
not
lends his
paid to run the company. That's the CEO's job. Corporations
woefully inadequate
is
to do!
chief executive who's
or her name, prestige, I'll
on a dais and be adored. But
great social messiahs.
worked my way up
I
is
become the
American Can gave away scads
in the 1970s.
money. As a representative of the Connecticut-based
company, an executive such as myself could have gone event every night of the
week
New
in
York
City.
It
was
to a charity
totally part of
the corporate culture.
One day
occurred
it
from a financial angle.
to If
me how
you went
wasteful this was, and not just
midweek and had
into the city
to
be at work the next morning, you couldn't help but be tired and unproductive Let's
and
—two big
assume
that
creased capital
causes.
to
Isn't
the tax
If
on
that in-
30 percent, that's $1.5 billion the shareholders
is
Much
for a corporation to
This policy
stock.
worth of value
money
of that
will
go
to social
better for $1.5 billion to go to social causes in that
to duplicate the
licly
all sell their
government.
it
manner than
against the shareholders.
that a corporation creates $5 billion
shareholders
its
would give
fat strikes
is
waste
its
time and resources trying
purpose of other agencies?
no
different
from the one
I
enforced with the pub-
held companies Sir James Goldsmith and Kerry Packer ran.
Goldsmith, for example, was a most generous benefactor gave large sums of tion.
He earned
his
money
to his favorite charities
knighthood
and the environment. But
it
was
investment of his shareholders.
am
going to
make
for his steadfast
his personal
He would
who
through a founda-
devotion to ecology
money
to give, not the
say to me, "My dear boy,
a donation of $500,000, but
it's
my
money."
I
Whose Company
know people charity? What
I
to
look at
me and say,
201
"He's against corporations giving
a cheap SOB!" But that
money
is
not mine to give.
have no right to give away a shareholder's money, but right to give
Anyhow?
Is It,
have every
I
away my own money.
Whether the United Way or the Red Cross should be supported decision that should be
man
of a
made by
company make a
on behalf
I
of shareholders?
individuals.
Why
is
a
should the chair-
decision about the worthiness of a charity It
would be
like saying,
know which causes are worth supporting will make that decision for you."
"We, the company,
better than you do, so
we
O O O In 1989, Sir
James brought me and my chief
Kersh, to London, fry.
where he was searching
Our new assignment was
management had neglected to
be severely undervalued.
ing assets
for
financial officer, Russ
new and
to identify U.K.
its
bigger
companies
in
fish to
which
shareholders, causing the companies
We would be
and quickly turning around
shareholder-friendly, buy-
their value.
Jimmy bought a 37.4 percent stake in Anglo Group PLC, a British leasing company controlled by the Rothschilds, and we used that as our acquisition vehicle to buy more companies. One of the similarities Sir James and immediately discovered that we shared was an unassailable commitment to a company's shareholders. It didn't matter to either of us whether the business was publicly or privately held, the best interests of the shareholders came first. I
I
would look
few directors, ets.
if
at the
any,
owned any
Then they would
their
own
boards of these companies and discover that
fight
stock bought out of their
own pock-
us using the corporate treasury to keep
legitimate shareholders from getting
what they were
enti-
tled to for taking risk. If
most directors and executives bought stock,
Paper, fewer of
them would be
fighting
like
unwelcome
we
did at Scott
takeovers.
They
would have worked smarter and better and created value. Then the
company would have been so to sell at full value.
attractive they
would have been happy
Dunlapping the Corporation
202
We came up
with about
pressed shareholder-value the deck, No.
on our
1
companies
largest
chains
But
it
in the
companies
list
owned
in all that
But no matter
criteria.
in Britain,
sified into retail (it
fifty
was always BAT
fit
how we
Industries,
our de-
reshuffled
one
of the
a tobacco manufacturer that had diver-
the Saks Fifth
Avenue and Marshall
Field
United States), Appleton Paper, and Farmers Insurance.
was a conglomerate
that
had
historically
underperformed. Russ
BAT and an American tobacco giant, Philip same operating income, although BAT was actually
discovered that in 1972, Morris,
had the
bigger than Philip Morris at the time.
volume
It still
is,
in
terms of the sheer
of tobacco sold. Fifteen years later, the difference in value
between the companies was sion alone
made more
in
far starker. Philip Morris's
1987 than
all
tobacco
divi-
of BAT's diverse operations
combined.
Jimmy that we look into it, and he was intrigued. At the time, he was contemplating a run at Britain's General Electric Company (GEC), which itself was eyeing another defense company, Plessy, in a hope of combining them. One day, about ten of I
recommended
to
—Jimmy, Lord Jacob Rothschild, Kerry Packer, Russ, myself, and decide a conference room several outside advisers— gathered us
to
in
which route
to take.
"We've got these two things," Jimmy said. "We've got
we've got BAT. GEC,
know
if
we can
get
I
it
get BAT, I'm not sure
What do
the rest of
room
said, "Let's
but
if
we will
little
go
I
for
11, 1989.
It
was
can't
to do?"
doubt
BAT.
don't
ever be able to do anything in Europe.
in
Go
anyone's mind. Everyone
for
it,
how the Anglo Group's $23
That's
on July
we can get, but it's a single. BAT— if we can, it's a home run. And if we
think
you want
There was very
GEC and
and
billion
in the
we blow we blow it." bid for BAT was launched
if
it,
the biggest attempt of
its
kind ever
in the
United Kingdom. The numbers rivaled the Kohlberg Kravis and
Roberts takeover of RJR Nabisco Today,
I
may be
Press Holdings,
known
Lily-Tulip,
for
but
terms of sheer
my work BAT was
size.
at Scott,
just as
Consolidated in
my
and
in-
important
demanded every bit of knowledge, strategy, which was capable. And while Jimmy was on the
development. vention of
and
best
in
It
I
front
Whose Company
guys
lines,
and
Russ and
like
fine print.
was
It
BAT was doing
me were
Is II,
Anyhow?
203
intimately involved in the details
the ride of a lifetime.
things that kept
its
shareholders from getting ade-
made an indelible impression on me. Its tactic of shareholder money to prevent shareholders from getting value
quate value, which using
was abhorrent
me.
to
The BAT bid brought together many est associates, including brilliant intellectual
known
best
and
of Sir James's best
bright-
Packer and his son, James; Rothschild, a
and well-respected financier from one
families in Europe; Kersh
of the
and myself; attorney Fin Fogg;
former Goldsmith European chief executive
Madame
Gilberte E.
Beaux; a dozen U.K. merchant bankers and lawyers; and U.S.
ment bankers.
It
was
Weeks before
invest-
quite a show.
the bid
was announced,
Sir
James convened us
all
was a great occasion, and atmosphere was charged with power. We met daily in a beautiful
into
the
what he called
his "takeover panel."
It
old house that Sir James had leased in London's
St.
James Square. He
and ran the show from a huge converted dining room on the second I
where
floor Sir
all
of our strategies
James's place wasn't
air
were devised.
conditioned, however, and
was one
it
summers in English history. One day, every window in place was open and there were at least thirty of us working in the
of the hottest
the
men were doing construcjackhammers. Jimmy, who rarely lost his temper,
conference room. Outside,
work with
tion
couldn't take
it
was
theirs
if
of his assistants to
and returned
"I
tell
they'd only be quiet for an hour.
here's the twist: Jimmy's assistant ing
Square,
any longer. He whipped out 100 pounds from
and instructed one
let
in the
his wal-
the workers the
money
The noise stopped. But
came bounding back into
the meet-
the money.
got 'em to quit for free," he said.
someone cracked, "you could have pocketed money and nobody would have ever known!" "You
We
idiot,"
all fell
over laughing.
The Anglo Group was nothing
would back
still last all
for
that
if
not well organized, but meetings
day sometimes, break
for dinner,
and then come
more. Jimmy was a forceful, dominant personality
in
those
Dunlapping the Corporation
204
He had
meetings.
icans because he
do
and
acquisitions
where the
rules
We had
me and my fellow Amerknew how things were done there. We knew how to particular advantage over
hostile tender offers, but
were
Jimmy knew how and
different.
a very powerful case setting out the underperformance of
management versus its competitors, as mentioned earlier. Management lacked a commitment to shareholder value. Our view was that to save BAT, we would "unbundle it," as Jimmy put it, BAT's
sitting
I
and concentrate on the core tobacco business. Everything
would be sold or spun
off.
we
Besides,
else
didn't think that the mer-
chants of death (tobacco) and the merchants of health (insurance)
should be
same company. On
in the
hypocritical conglomerate.
How
top of everything else,
could anyone
justify
it
was a
such an un-
godly marriage?
BAT would have been would have gone
to
$29
the biggest takeover in the world.
billion!
The next nine months were marked by a gotiations, legal
And we
and public
series of overlapping ne-
relations battles, the likes of
business had never seen before or probably since.
which U.K.
BAT management
fought us tooth-and-nail during those months. They finally divested
some
of the very noncore assets
support I
among wavering
was unrelenting
came
operandi
just
just to bill
because
him
it
for hours.
targeted, in an effort to raise
shareholders.
in protecting
and public
to legal
we had
Jimmy on
relations fees.
was a
big deal;
They had
I
I
the
didn't
when it change my modus BAT
deal
would not allow our hirees
to justify their fees in detail.
we hired submitted a bill Through negotiations, we got it cut to $300,000,
For example, the public relations firm for nearly $750,000.
mostly by suggesting their fees be audited. $5 million on legal fees the
we asked I
for
saved more than
Instead of just accepting
bills,
time sheets.
did chafe a bit
the United
same way.
We
—as did other Americans
in the
panel
—because
Kingdom businesspeople seemed so clubby and
class-
But they have a takeover
conscious
in their resistance to outsiders.
code
everybody observes. To get an approval, applicants go
that
through something
like
a stock exchange club. The Americans were
Whose Company
Anyhow?
Is It,
205
not invited to those meetings and neither were the British lawyers.
Only the merchant bankers took
part.
we were at their mercy. But Jimmy knew their game and prevailed on many points of preference. For example, on one problem, the takeover code said we couldn't do something that Jimmy said we should be able to do. The Americans suggested presenting a In a sense,
and they
written proposal to the exchange,
let
us do
it.
was launched in earnest and everything was off and running, we realized that we would have problems with U.S. state in-
Once
the bid
surance regulators.
must be approved
In
in
order to acquire an insurance company, you
each
tough, large state such as states follow
lead.
its
other says you're
It's
An
fit.
where
state
or
Illinois
hard
it
one
for
does business. Normally,
New York
state to say you're unfit
outside law firm
we
hired for
pertise didn't dent the regulators' resistance,
was brewing out
tipped us off that a storm tried to lators I
manage
would not
grew
it.
let
The problem was
if
a
approves a deal, other
its
an-
if
insurance ex-
which should have
we
of control, but
still
that the Illinois insurance regu-
us acquire Farmers Insurance.
frustrated by the insurance roadblocks. Gilberte
Beaux
in-
troduced Jimmy to an enormous French insurance company called Axa-Midi and tors.
If
we
cut a deal intended to assuage the
Illinois regula-
and when Jimmy took over BAT, Axa-Midi would have imme-
diately taken over the Farmers Insurance operation.
During the ten months of
bureaucracy we faced was
were
Sir
James's run on BAT, the government
stifling.
sixty-eight depositions that
On one
consumed
proceeding alone, there eighty business days,
in-
cluding two each for Sir James and myself. Eleven more depositions
were taken of motions
in
London.
were
Illinois still
turned thumbs
of
The it
—
in
was a
should have been done. Illinois
the deal.
The irony
let
Axa-Midi
is
that sev-
—joined
in effect
by the
buy control
a friendly deal.
failure of the deal
ated the
down on
same insurance commissioners
insurance commissioner
The Equitable
one proceeding, 177 pages
132,000 pages of legal documents.
filed, resulting in
eral years later, the
New York
In the end, for just
We
big disappointment to
all
of us
because
did everything that should have allevi-
insurance regulators' concerns, making
it
clear
we had
Dunlapping the Corporation
206
no intentions
of running the insurance
was expensive,
We
did nothing
ille-
was no hidden agenda.
gal or immoral, there It
company.
too, a battle royal that cost the
group $2 million
a week.
The whole thing ground a happy
result,
to a quiet
but Jimmy and
enough BAT stock
end on
April 22, 1990.
his partners actually
It
wasn't
had bought
that they at least covered expenses.
The com-
pany's value rose significantly during the takeover run as manage-
ment sold
off assets
kinds of thing
we
takeover attempt
said
—
—exactly the forced — by our
such as Saks and Marshall Field
to
we would
do.
They were
create shareholder value
that
otherwise
would not have been accomplished.
Why companies their entire
like that don't
reason for being,
I'll
always see shareholder value as
never know.
ness miss such an obvious concept?
How can anyone in
busi-
Chapter 14
BOARDS OF DIRECTORS, GOD FORGIVE THEM Lesson: Boards of directors perform best when they are aligned with shareholders.
Scott Paper's board included
man who board
gave
me
night sweats.
for several years. This
management's
one director best described as Mr.
He had served on
man
taste for luxurious
board
Judy,
and
appointments, judging by the conat the
had been invited
I
the Scott Paper
apparently had no problem with
spicuous excess he lavished on himself
My wife,
X, a
my
in Philadelphia, to celebrate
company's expense.
to a private
dinner with the
hiring. After a series of inter-
views with individual members of the executive search committee, this It
was
the entire board's
was
the only time
sion to needle to
me
I
first
chance
met Mr. X
to
meet and greet me.
face-to-face,
and he used the occa-
about the importance of the board and
how had I
heed the board's instructions on how the company should be run.
His message
was
simple:
it
was
their
company
to run; not mine, not
the shareholders'. That didn't go over real well with reflect reality.
needed
me
it
didn't
them what management to protect the sharehold-
and enhance everyone's investment.
answered him
"I
to tell
They hired
to do, not vice versa.
ers' interests I
The board hired me
me and
will fix this
in the
only
company,"
I
you're going to go through
change, I'm the wrong
man
way knew how: with
brutal honesty.
I
said.
"I
will get
it
right.
enormous changes.
for you.
I'll
do
it,
and
If
I'll
But rest assured
you don't want
do
it
my way. The 207
DunJapping the Corporation
208
changes
amount
be dramatic and
will
be an enormous
swift; there will
of criticism."
Those
—
X
like Mr.
hadn't met
me
—who weren't
on the search committee and
before that night bridled at
offered no reply. In Scott's case,
was
it
more
the assisted-suicide guy. I'm
my
razor's-edge retort but
me
either
and
fun,
or Dr. Kevorkian,
at least they
stood a
me at the helm. Mr. X's problem was that he saw himself as a member of a different
chance
of living through the experience with
class than the rest of us, the corporate elite, or "corpocracy," as Sir
James Goldsmith and I
come from
who
fella
from
corporate
holder value. Mr.
People
described their
a different culture
between a brash
member of the
I
X
The
own
not believe in
Jersey and a refined gentleman real difference:
I
believe in share-
well-being and not that of the shareholders. cast as a
new
aristocracy,
an
do
I
elitist
put themselves above the shareholders.
remember one board
that Sir
James had
in
London.
that said, "King Albert
J.
It
was
full
of
One day had some cards Dunlap." No one thought that was
the Right Honorable This or Lord That.
made up
the difference
—corpocrats—are bureaucrats who run corpora-
management being
(I
mean
did not.
tions for their
who
don't
I
blend the most stultifying elements of corporations
and bureaucracies
group
—and
New
elite.
ilk.
I
funny but me.) In the
days that followed
my
confrontation with Mr. X,
who said
I
heard
was a great deal of discussion about who was in charge, and who would be in charge, the corpocrats or me. It would obviously be tough for some to accept the cultural changes that would prescribe. Director John F. Fort III, former chairman, president, and CEO of Tyco Internafrom friendlies on the Scott Paper board
there
I
tional,
warned me,
"I've
never seen a board get into so
much
nit!
There are so many major, overall philosophical issues that are never discussed."
The next time arrangements
I
heard from Mr. X was when he was making
in anticipation of
travel
attending the company's June
1994, annual shareholders' meeting,
my
first
as chairman and CEO.
3,
Boards of Directors, God Forgive Them
was not reimbursing
At that time, Scott
its
209
directors' specific travel
expenses but was, instead, providing a generous expense
al-
lowance. Generous? I'd call it outrageous. The company policy was to pay first-class air fare from wherever the director was based, to never mind what the the meeting and back, plus room and board
—
actual costs were, because the directors didn't have to submit receipts.
they flew coach, they
If
pocket the difference.
If
two directors carpooled
each
to a meeting,
received mileage money. Whether or not they stayed in a hotel,
still
they
received hotel reimbursement. The most extreme example
still
was a director who spent a night at Scott and still put in for his hotel allowance. Paris to
New
York, then the Scott corporate
New York and jet,
Plaza, our office complex,
he informed us that he would
In Mr. X's case,
the
money and could
got first-class
still
he was
fly
him
it
would be
there.
That
the
Concorde from
would pick him up
to Philadelphia, then back.
us
telling
jet
fly
He wasn't asking
jet
in for
cost $3,000 an hour
to operate.
looked at his expenses and concluded they were
I
Scott could afford to pay.
would
He would
take the Concorde
expensive commercial
travel via less
just
jets.
He
more than
where others
stayed at
first-
class hotels instead of business hotels.
When
replied to Mr.
I
X via
fax that the
company could no
longer
af-
ford to provide the jet for his personal use, he replied that, in that case,
he would have to reconsider coming I
shot
him back a
letter saying,
"I
to the meeting.
accept your resignation."
didn't resign!" he protested.
"I
"Funny," In
I
said.
"I
thought you did."
England, where
America,
we have
I
lived for three years, they have real royalty. In
corporate
elitists.
Both are
self-inflated
windbags;
they don't believe they're accountable to anyone. They enrich themselves at the
expense
ally invested in
of
hardworking
our companies.
It's
men and women who
have actu-
time they were accountable to
someone.
The tor.
last
thing struggling Scott Paper
We'd never get
along.
needed was an imperial
The board agreed with me and cut
directies to
Dunlapping the Corporation
210
Mr.
X right then and to help
first
my
there, neat
and clean. Mr.
X,
who, I'm
told,
was
the
predecessor out the door, was no doubt surprised by
our action, as were outsiders.
when we accepted
Still,
no one raised a serious challenge
his resignation.
o o o It's
we have
not just the corpocrats
who
rectors,
to
beware
of.
Professional di-
earn their living from doing nothing but serving on
boards, are just as dangerous. Less damaging but equally undesirable on boards are
based on sex or
Too many and symbols
men and women whose
color.
of these directors of diversity
That's because
sole qualifications are
—are
—corpocrats,
just not
many boards simply
professional directors,
looking after the shareholders.
don't consist of the best possible
people.
A top-flight
board should be comprised
CEO and perhaps one
of outsiders, except for the
other inside executive. You need a brilliant
investment banker and a skilled lawyer, preferably one stands securities. You need people
who
under-
have demonstrated them-
on the job as great CEOs, not the token
selves
who
a job or a second pension. You need people
failed
who
CEO who needs
have global experi-
And you need people with real marketing people who will be resources to the CEO, people
ence, in Europe, in Asia. skills.
These are the
who add
value.
Too many boards skimp on these
who
rectors
is
like a sports
team. Give
female, black or white
is
somebody said they need a token African some other minority. To me, a board of di-
are there just because
American or a woman or
I
and include directors
essentials
—and
I'll
me
the best
damn
to the table, not
resent. I'm not against diversity
— male or
deliver the best results.
want the best people on my board, period.
what you bring
players
what part
All that matters to
rainbow you
of the
on the board.
I
just don't
want
me rep-
diver-
sity for diversity's sake.
And
I
don't believe in affirmative action. Hell,
poor, inner-city kid.
I
believe
if
you work hard, you
I
was born a will
dirt-
be rewarded.
Boards of Directors, God Forgive Them
I
211
never wanted to be anybody's token. Today's minorities, today's
women,
good as anybody and they
are as
don't
want
be some-
to
body's token. They want to get where they're going because they're
damned good.
just I
don't see men,
ified people.
many
I
see
I
don't see
women. And
talent.
look at a board and ask myself,
I
see qual-
"How
I
When you
Forget about being politically correct.
the
I
do see?"
qualified people
in front of correct,
don't see race.
I
no longer
it's
correct. Correct
is
put any adjective
By
correct.
itself,
word speaks volumes.
O O O Perhaps the only thing worse than putting people on a board
sake
diversity's
who
is
the professional director, the
serves on a multiplicity of boards.
What
sional director?
What
do you take
class
at
man
school to
woman
or
profession
is
for
a profes-
become
a pro-
fessional director?
The only profession Both do
est profession.
about the
that parallels professional directors it
who
the check. it.
on a few boards
and under carefully regulated People
Then they
The meeting's
of boards,
get the
over.
and
I
will
little
They wait
at most,
with term lim-
it
does
for this
briefing book.
who is on a multiplicity who isn't doing the job.
the person
the person
and keeping
company, such as
how "The new
month says we should be doing diversity
is
firing
the business focused
best. Instead, they spout off
manual says
They thumb through
next time. They get another
issues facing the
lousy managers, cutting costs,
rector
very selective
conflict-of-interest rules.
until the
Show me
show you
They never attack the true
manual
is
serve on multiple boards go to the meeting. They get
check, another briefing.
whatever
the old-
clientele.
Directors should only serve its
money, and neither
for the
is
important." Or,
this,"
or "The
on
director
new
di-
"Community giving
is
important." If
you
good
sit
on many boards,
director.
And
it's
probably a sign that you're not a very
yet the reputations
and marketability
of directors
212
Dunlapping the Corporation
who
have served on multiple failed boards do not seem affected.
Amazing.
Let's
hope
more wary eye on
change as
that will
the credentials
years and you're out.
know where
don't care
I
shareholders cast a
and past performance
favor term limits for politicians
I
activist
if
and corporate
of directors.
directors. Five
you walk on water, or even
if
you
Nobody can justify a spot on the board of a publicly held company for more than five years. After five years, go do a great job on somebody else's board. You start thinking of manthe rocks are.
agement as your No.
1;
and the company's
friends,
interests are
no longer
your friends are.
o o o Scott
Guiding
needed change from the top down,
me
through
found me, Gary
New
it
was
the chairman of the search committee that
Roubos, chairman and
L.
starting with the board.
CEO
of
Dover Corporation, a
York-based $2 billion manufacturing consortium. Together,
we
made quick but informed assessments based on length of service (too many years was a negative), overall contributions (we wanted to move forward, not back or stand still, as the pro-
studied the board and
fessional directors
was a
plus),
who was
We
and
would have had
attitude
us), skill
(who was going
(marketing background
to exacerbate
problems and
going to contribute to solutions).
also
trimmed the board from
thirteen
members
to nine,
and
cut back the frequency of board meetings from monthly to every
other month.
And we changed
rote recitations of the things strategic planning, I
same information so
go through
highlights.
its
I
hard
details,
handed out printed versions
directors could study
group used
report.
to
structure. Instead of bringing in a roomful
drone on endlessly,
Scott's finance to
everybody already knew
vision.
changed the reporting
of executives to
the
and
the content of these meetings, from
I
to take three
it
of
at their leisure.
hours of the board's time
cut that to thirty minutes, reviewing only the
Someone who needed
to
know more could have
it
in writ-
ing the next day. But the three-hour meetings buried the directors in
so
much
detail they couldn't find the important stuff
if
they wanted
it.
Boards of Directors, God Forgive Them
213
When we were getting together the first plans for restructuring Scott, was going to take my guys to the board wanted to know how long make a presentation. My own staff thought would take three days. it
it
said, "You've got
I
one hour."
How much work would
they have done to
three days? Think about that. But that's
make enough
charts for
how Scott's business was con-
ducted. Style instead of substance. Instead of wasting the board's time,
board meetings describing
my
I
spent a large portion of our
activities,
my thinking on
important
was taking on vital management decisions. know other CEOs crowd their agendas with housekeeping items and resolutions that need to be passed, but kept that to a bare minimum. used these occasions to speak my mind and confirm that the board and were still in tune with our goals and oband the direction
issues,
I
I
I
I
I
on divestment,
jectives
acquisitions, or strategic issues.
give-and-take in those meetings, instead of
committee making a
slick presentation
board's instant approval. The directors
because they
and
I
got
felt like
partners
me and
fail
welcomed
—and they were.
are the ones that have
ning of the company. not their job.
I
the give-and-take
wanted
their input
umpteen committees
and
It's
CEOs
—particularly the professional
di-
—see
into operational details,
Not only
is it
costly, too.
their role as
managers and elbow
such as hirings and
I
arrived, Scott paid
its
firings,
marketing and
many committees
and another $2,000
seemed
almost everybody chaired
If
like
for the
at least
you're going to be paid that kind of
up, doesn't that create a desire for
it
one committee! travel
get paid $1,000 per appearance, wouldn't you If
commit-
committee chairman. And
you could be on a committee, get your
could?
but
directors $45,000 each an-
nually, plus 2,000 stock options, plus pension, plus $1,000 per
tee meeting
their
fail.
counterproductive to operate so
When
everyday runit's
When board members
failed
in the
be-
fun for directors to play the boy CEO, but
product development, they cause companies to
it's
the operating
and then expecting the
cause the directors think they are being paid to be
way
real
it.
Boards that
rectors
We had
do
reimbursed, and it
money
more meetings?
as often as you just for
showing
Dunlapping the Corporation
214
What's more,
it
was common
fees for telephone meetings as
we
At Scott,
for Scott to
did for face-to-face gatherings.
it
dealt with this, in part, by simplifying the board's
committee structure from sixteen nating,
and
When
I
found that
pay directors the same
to just three:
compensation, nomi-
audit.
started
making deep cuts
at least
two of our directors
sional directors
—focused on
in Scott's assets
—the ones
I
and
would
staff,
we
call profes-
lesser issues, rather than the major issues
facing the company. "They're just trying to
be good directors
in the
only sense they know," another director told me. "But," rection."
I
said, "we're facing
The two directors
in
major problems that
demand
question subsequently
a
new
di-
left.
O O O The Scott board
inherited also included a politician
I
and a
think-
tank policy specialist. The politician had been a United States Representative for twelve years.
He
left
Congress
in 1991
and was recruited
to join the Scott board.
On ber
the surface, the politician
modern
for
self-made at Scott
member
this
of a cultural minority. But his attendance record pathetic.
and skipped others
left early,
the meeting at
board mem-
like the perfect
an accomplished, industrious statesman and a
board meetings had been
meetings,
I
times:
seemed
He had been
late to
many
altogether. In fact, he missed
which the board approved
hiring me.
told the board, "With his attendance record he doesn't belong
on
board!"
Maybe we could have handled certainly those
who
it
more diplomatically
—there were
advised us to be delicate. The politician and
I
subsequently had some heated telephone conversations. During one,
he protested,
"I
have advised kings and presidents, and
to listen to chief executives!"
two
billionaires.
members saw
nobody had
signed soon
I
answered,
"I've
don't have
worked
for
To them, kings and presidents are footnotes!"
Several board rived,
To which
I
after.
the nerve to
the
problem as
come
right out
I
did, but until
and say
so.
I
ar-
He
re-
Boards of Directors, God Forgive Them
215
some key directors and concluded that board member was not in tune with the new direction of
By the end other
of 1994,
an-
I
the
company. This man, the head of a Washington, DC, think tank,
wanted But
I
he would agree to
to study everything at length before
wanted racehorses, not plow horses. He
left
act.
the board as well.
O O O I
initiated
the
change
board members
of
Lochridge, and
Bill
—Gary
ple
we removed,
fix this
My
Roubos, John
Andres
shareholder value above
Fort, Peter Harf,
—who wanted what
all else.
I'm sure
they would say that
sell
answer? They should have done
—seventeen years
in the
if
you
I
Richard
wanted: to increase
talk today to the peo-
Dunlap did was come
all
business up and get ready to
the chance
agreement with a core
of directors in
and
in
money and ran. themselves when they had
it.
it
Got
his
case of one director. Then the
company could have saved $100 million and could have spent teen months fixing some other destitute company. I
eigh-
Of the original board of thirteen, seven eventually departed. The others were Vice Chairman
we sold
J.
Richard Leaman,
S.D. Warren, the business he represented,
former chairman and
CEO
of SuperValu,
tirement age and stepped down. rience,
Jr.,
I
was sorry
In early 1995,
A man
we
put up
scheduled board meeting all
the
left
and Jack
J.
because Crocker,
reached mandatory
new nominees in
way home from
in
for the
reduced board and
New York
before the next
He accommodated me by where he was on holiday. Those
February. Bali,
who were
not going to be renominated would not be present, but
proposed
slate of
•
•
newcomers would
be.
my
They were:
Gilberte E. Beaux, former chairman of the board of Adidas Sir
re-
sound principles and expe-
to lose Crocker's counsel.
Gary Roubos quickly interviewed them
coming
who
of
who
and
James Goldsmith's Generale Occidentale.
Mark
Davis,
Brothers.
head
of mergers
and acquisitions
for
Salomon
Dunlapping the Corporation
216
Howard
•
Kristol, the
senior litigation partner with the
firm of Reboul, MacMurray, Hewitt,
There would be no further changes rectors.
And when
1995, Fort, Roubos,
GmbH,
directors to finish
chairman and
Harf,
joined the newly
in the Scott
CEO
York
Kristol.
Paper board of
merged with Kimberly-Clark
Scott
and
Maynard &
New
in
of Joh. A. Benckiser
merged Kimberly-Clark company's board
what we
di-
December of
started.
O O company has proper They should monitor management to ensure it
Directors are responsible for seeing that a
management does what
in place. is
it
supposed
to do.
If
not, the directors
should take cor-
rective action.
The main
and
role of the
to set his
company
is
is
and
to hire
fire
the chief executive,
compensation. The biggest way that a board impacts a
to hold the
be absolutely certain ciary, legal,
board
CEO
that
to a very high standard.
Boards should
companies are run properly from a
and moral standpoint. Boards should
fidu-
participate in ap-
proving or disapproving overall strategy, acquisitions, and major capital expenditures. But
volved
is
not the role of the board to get
People
in day-to-day operations.
four, six, eight, or
a
it
company
think they can attend
even twelve meetings a year and know how
Directors often forget
shareholders
where
—and often act
that
management
their loyalty
to protect
should
last,
run
can. lie
—
to the
themselves and the person
gave them a board seat, usually the acting CEO. Their sole
legiance must belong to the shareholders, the
who
to
are totally deluding themselves. Boards don't run the
company, but they better be damn sure
who
who
in-
al-
men and women
money in the company. Now, at long boards dumping ineffectual CEOs who fail to
invest their hard-earned
we see
proactive
perform.
Management runs lating
the business
and executing
is
responsible for setting, formu-
My unhappiness with the original Scott view, among some directors, that they were
goals.
board was fed by the
and
Boards of Directors, God Forgive Them
somehow
equals with
management
ness issue, large or small,
became
in decision
217
making. Every busi-
a subject of board debate.
o o o With a strong, independent-minded outside board of directors place at Scott,
mind
all
was time
it
way back
the
to the Lily Tulip days:
instead of cash, pensions,
hand with another plan
fees.
and other
benefits. That
all
the perks in the world.
They even get pensions.
I
they're going to
be there
in
in
my
stock
went hand-in-
buy stock.
They get paid ob-
don't think any director should
have a pension. They're not employees,
sumes
paying directors
of mine: requiring directors to
Boards of directors have scene
pursue an idea that had been on
to
God's sake.
for
A
pension
as-
forever.
Reader's Digest Association, for example, gives outside directors a
Some automobile manufacturers
pension.
a
new
give their
board members
car every three months; directors of certain airlines get unlim-
ited first-class travel for
themselves and their families.
Many com-
panies justify these perks as the price of competition to attract the "best" directors.
This
a great social disease: the boards can do well, but the com-
is
pany can
fail. It's
Directors ask:
one
of the corporate world's last dirty secrets.
"Why should
I
take a risk?"
Why? Why? If you're
rector of a
company, you've got the opportunity
company.
you don't believe
personal
If
risk,
in
it
you shouldn't be on
have a lawyer friend. He said,
I
And
like lawyers, get
that's a director
I
that board.
never
"I've
"I
lots of
I
my
can lose everything. I
floated the idea of paying di-
and found many board members
Corporation, had already
many
a case." "Never?"
always got paid;
one, William A. Andres, former chairman and
as
lost
compensation analogy. Directors,
interviewed for the Scott job,
rectors in stock
to influence that
paid regardless of their company's performance. The
clients, the shareholders,
When
di-
to the point you're willing to take a
asked, impressed. "Nope," he answered, clients lost."
a
of his other
been taking
CEO
receptive. At least of
Dayton Hudson
his directors' fees in stock
boards as would accommodate him.
I
from
told the
Dunlapping the Corporation
218
board how we had started the process
coupon
Packer's Michigan-based
company
vately held
least half of
at the time,
compensation
its
Kerry
Inserts,
I
convinced the board
accept
to
at
The company did extremely
in stock.
and everyone was happy.
well, the stock followed, If
at Valassis
printing business. At Valassis, a pri-
shareholders look at a proxy statement and realize the directors
don't have any stock,
it
should leave a bad impression.
com-
the
If
why don't the directors invest? And if you go on a board, that should mean you think you can contribute, so you should put your money where your mouth is. Many directors do buy stock, but think that if director compensapany's such a good investment,
I
tion
is
based entirely on stock rather than on cash,
cent committed to the company.
way toward
A
large
be 100
they'll
per-
economic stake goes a long
motivating a director to really pay attention.
It
sends a
strong message to the shareholders that their interests are paramount.
Most people on boards don't want
to invest in their
they want a free ride. They want options; an option
can you lose on an option?
It
is
companies;
a free ride.
goes down, you don't exercise.
It
How goes
up, you exercise.
What kind
of contribution will the directors ever
have a vested interest got to
show
in the
make
if
they don't
company's financial success? They've
that they believe in the
company,
that they're willing to
stand behind their choices. I
understand the other
side:
on a board? You have nothing
Look
at
years and
If
you have nothing
at risk,
just
not be
to lose.
most boards today. Many directors have been
own
why in
place for
100 to 200 shares of stock. That's nothing!
And
yet
they get paid $50,000 to $100,000 a year, plus pensions, plus options.
Many
don't even exercise their options,
you look
at the
proxy and
it
shows
let
alone buy stock.
their holdings,
it
When
usually shows
only their options or restricted options. They very rarely have reached into their
own pockets
have they
lost?
America
this
to
buy shares.
If
Nothing. They got paid.
coming
year.
Any
the It
director
100 percent in stock doesn't believe
company goes
bust,
what
should be on every proxy
who
in the
isn't
willing to
company.
in
be paid
Boards of Directors, God Forgive Them
At our July
19, 1994,
meeting,
I
my
put
219
before the Scott
initiative
board. "Executives are buying stock, employees are buying stock," said.
"I
want you
be paid 100 percent
to
umented expenses able, but that's job.
to
If it
to get to the meeting,
If
it.
in stock. We'll
the stock goes up,
goes down, you take the
hit.
because
first
pay your doc-
seems reason-
you've done a great
all right,
Send a message
be a shareholder-value company. We're here
the shareholders,
that
I
to
that we're going
make money
and foremost. Show the world
for
that you're will-
ing to take a risk!"
To
their everlasting credit, they did, voting to cancel all director
compensation except stock equity. They then picked up
committee —the and so on — no longer existed. a matter
arrangements
stock op-
fees, pensions,
retainers,
In
corporate history.
of minutes,
we made
1
we didn't put it in writing, made it clear how expected new system would work. "Ladies and gentlemen," said, "I don't
Although this
checks
meeting's fees and handed them back. All the previous
for that
tions,
their
I
I
I
want you taking were not
this
restricted
eral counsel
if
stock and turning around and selling
by contract. But they did have
they were going to
sell.
And
if
to notify
it."
They
our gen-
they did, their actions
would be viewed as not being supportive and we would have asked
them
to leave.
So how does the concept work
sation
of directors receiving equity as
in action?
and
Scott Paper stopped paying directors their pensions told our
new
directors to
buy 1,000
shares.
We
1994, the day the
$53.25 (pre-split).
options.
then paid each Scott
rector 1,000 shares of stock annually, valued the
cember
compen-
first
year on July
We di-
19,
new compensation arrangement was approved, at By the time we merged with Kimberly-Clark in De-
1995, the value of the
first
year's compensation
had more than
doubled, increasing from $53,250 to $120,000 per director.
Our loved ers.
it
directors loved
it,
but more important, our shareholders
because the board members began thinking
They were no longer
meeting.
just
like
sharehold-
picking up a check at the end of a
Dunlapping the Corporation
220
you're a director of a corporation you believe
If
in,
you should
thirst
compensation. For instance, instead of getting $60,000, you
for equity
could get $100,000.
And nobody would
would be rewarded accordingly.
care because the shareholders
have no problem with directors or
I
executives making huge sums of money, as long as the shareholders do.
the shareholders don't, the executives shouldn't either.
If
thought paying directors
I
stock was the most natural thing in
in
the world to do, but the next day
As
my phone was ringing
turned out, only one other corporation
it
The
this,
2
Travelers. Travelers' outside
in
off the
hook.
America was doing
board members receive a guar-
anteed $75,000 worth of stock annually and no other compensation.
Our announcement drew a spectacular response. Harvard ness School Professor Stuart C. Gilson restructuring.
tire
3
Even someone
I
was
inspired to study our en-
never agree with, Sarah Teslik,
executive director of the Washington, DC-based Council of tional Investors, said
newsletter rectors to
"Let
titled,
be paid
in
We jump-started rights liant St.
we
'Em Eat Stock," supporting
the rationale for di-
stock equity instead of cash.
And
a revolution.
as shareholders
and shareholder-
advocates used Scott Paper as their mascot, Charles Elson, a
young associate professor
at Stetson University
me
to
be a
Elson
activists
spokesman
for
were a voice
in
were good and well-meaning, but they
the wilderness. Their intentions didn't have a
bril-
College of Law, in
"celebrity"
movement. Before me, he and the other
when
Institu-
did the right thing. She wrote an essay for her
Petersburg, Florida, asked
their
Busi-
champion.
became
involved in this issue during the late 1980s, a time
controversy erupted over the big paydays being handed out to
chief executives, whether they
produced
for their
companies or
not.
He wondered, "Where does that overpayment come from?" He studied the potential correlation between director stock ownership
and performance. Using Business Week's annual
paid, overpaid,
list
of the highest
and most reasonably compensated executives, Elson
compared companies where
the outside directors
had substantial
stock holdings to those where directors had few or no shares.
found that the more stock the outside directors held, the
was
that the
company was overpaying
its
He
less likely
it
CEO. And the converse was
Boards of Directors, God Forgive Them
also true: the less stock held, the
paying the chief executive. lar link
An
more
221
company was overstudy he made found a simi-
likely the
additional
between good corporate performance and substantial outside
director stock ownership. Elson explained his findings by suggesting that stock
ownership aligned the interests of the outside directors with
the shareholders, rather than
management.
Taking the next step, Elson applied the lesson to director compen-
He reasoned
sation.
why
that
if
directors received $30,000 a year in cash,
not give them the equivalent value in stock? Within a few years,
each director would have
a $100,000 stake in the company,
at least
which, his research showed, was the equity threshold that makes a
He published
difference in attitude.
ommendations Street Journal
in
the result of his study
two law reviews and the op-ed pages
of
and
rec-
The Wall
and The New York Times.
many
Elson raised
me
of the questions that have long perplexed
Why don't boards get rid of the chief executive time — and the CEO — is ripe? Why are chief executives al-
with regard to boards:
when
the
lowed
to
results?
go on, year
in
and year out producing woefully inadequate
And when boards do make
a change,
why
don't they go out
Why do Why don't
and get the toughest, smartest executive who can do the job? they get an executive
who
belongs to their country club?
they get the best possible person? disruptive.
dard,
That person
and they
You bring I've
don't
in
is
many
cases,
it's
it.
—
—and
like
was,
I
there will
at virtually
be contrasting
every company styles
Most boards don't want that because
people can use
trast that
change
want
in
going to hold them to a new, tougher stan-
an outsider
turned around
trasting results.
is
Why? Because
to
compare
and con-
it'll
be a con-
to the status quo.
Dramatic
a condemnation of the board
itself.
All of a
sudden
this
new person comes in and does all the things that should have been done for years. What the board should do is say that's the right thing to do and aren't we clever for doing it.
When change
Scott Paper
in director
was about
to tell the
compensation,
I
world about our dramatic
passed along Elson's Wall Street
Journal story about compensating directors in stock to our public lations
man, Pete Judice
of
Burson Marsteller.
When
re-
he contacted
Dunlapping the Corporation
222
Elson and mysteriously asked permission to quote him in a press
unnamed company, know what company
lease for an "I
don't
re-
Elson surprised Judice. is
it
going to be," the law professor
PR man, "but tell them their stock will get at least a point bump when they announce it." He was wrong. The stock jumped $2,125. "It could have been sheer coincidence," wrote Tampa Tribune business columnist Mickie Valente, "but there are likely many companies who would like to test told the
that theory."
Judice called Elson back the day after the announcement. "Would
you
we
like to
flew
have lunch with Al?" he asked. Elson quickly agreed, and
him
to Philadelphia.
me a proposal. "If you promoted director think we could make a lot of companies do
Over lunch, Elson offered compensation it,"
in stock,
he said. "When
I
I
wrote about
in
it
The Wall Street Journal,
from consultants, but no CEOs.
When
everybody wanted
it."
His strategy
was
against directors
stock ownership.
have no stock and
agreed that
Elson arranged for
me
burg, Florida, on February reporter,
it
tell
them
to start
at the Stetson
the switch,
to vote
demanding
Law campus
Foundation
in St. Peters-
He also coaxed the Journal's chief
1995.
2,
Joann
heard
would have a big impact.
to kick off the inaugural Nichols
Prominent Speakers Series
management
announced
encourage the powerful pension funds
to
who I
about
to talk
Scott
I
Lublin, to act as moderator for the
S.
question-and-answer session. Elson and Lublin didn't see eye-to-eye on the director compensation issue; she doubted most directors
cept stock in lieu of cash or
The two
of
Lublin
them had many
if
they did,
it
arguments on the
that this
was
it
seems
paying the board
like a in
good
subject.
the start of a revolution. it.
idea," she said,
be paid only
it
in stock, or to
shares. Because, he said,
it
was not a very good idea be required
may
"I
wonder
stock really will be that good of an
idea for the companies long-term? Paul Lego, the former
inghouse, said he thought
ac-
would change anything.
Q&A session, she asked me about
in principle
in practice
if
friendly
was unconvinced
However, during the "While
that,
would
to
own
CEO
of West-
for directors to
a certain
number
of
not always be the corporate interests
Boards of Directors, God Forgive Them
that are the directors' interests.
future
and the corporation's decisions
rectors' I
And you
don't
to
223
want the corporation's
be dictated solely by the
di-
pocketbook."
paused a moment
CEO who
Lego? The same
in
1992 announced he was taking a $1.5
company
million pay cut after his to receive
and considered the question. Paul
for effect
lost
a staggering $1.1 billion, only
monster stock option grants of 700,000 shares, worth four
times what he gave up? "Just for clarification,"
asked,
I
"is this
the
same
Paul Lego
who
all
but tanked Westinghouse?"
and the auditorium shook with
"Right," she said,
Toward the end
of February,
I
was
Chicago participating
in
Russell Reynolds Associates panel discussion Directors:
woman Deputy Smithburg, CEO
Solicitor
of
and coauthor
for the 21st If
there
in
a
on the topic "Boards of
The Next Generation." Also on the panel: Jewel LaFontant-
Mankarious, a lawyer with Hollub
Inc.,
laughter.
&
General of the United
Quaker
and
Oats;
and the
Coff in Chicago
Nell
first
William D.
States;
Minow, a principal of Lens Governance
of Watching the Watchers: Corporate
Century (Blackwell).
was ever another Al Dunlap
in the
business universe,
it
would probably be Minow. Without ever having met before, we clicked immediately. While LaFontant-Mankarious and Smithburg represented the staid, traditional notions of
operate,
Minow and
I
how a
corporation and
were the iconoclasts
at the
board should
its
opposite extreme,
each of us alternately challenging them. "How dare people go on boards and not hold any stock!" we said, over and over again.
What
I
remember
best about Minow's performance that day
her advice to anyone on, or about to rectors.
"I
want you
to write this
join,
a corporation's board of
We know two things about him. One
work. Another
He
red
flags!
When
a
is
I
CEO and
is:
He
is
out of
very good at selling himself. These should be
CEO
from Pebble Beach, that of the
di-
down," she told the audience. "Do
not hire BillAgee! is:
was
says he can run the is
a red
flag!
When
his wife in the lobby, that
is
company a
there
is
a red
flag!"
perfectly fine
life-size portrait
laughed along with everyone else when she said
unparalleled ability to land and sustain a string of
that.
CEO
Agee's
jobs
—
his
Dunlapping the Corporation
224
performance
at
Bendix
left
a great deal to be desired, he took
and then did serious damage
time
off,
turer
and bridge contractor Morrison Knudsen
own
favorite
Agee
first
to
of the behavior of
America following personal indiscretions
manufac-
—has been one of my
many prominence and became
examples
came
to light-rail transit
some
directors.
name in while he was CEO of Bena household
Mary Cunningham, a woman he hired as and then quickly promoted to vice president
dix. His relationship with
his executive assistant
made
front
page news around the country. She
he was forced out
when
his ill-considered takeover attempt
for strategic planning,
quit
first;
of Martin Marietta backfired
and a beaten-up Bendix was sold
to Al-
lied Corporation.
Agee and Cunningham divorced were married
in 1982,
amid
all
spouses and
their respective
the chaos around them.
When
banished from Allied (now AlliedSignal), they disappeared eral years before resurfacing at Morrison
The Morrison Knudsen
seemed
directors, all
bonded and enjoyed board meetings the
company's headquarters
their shareholders
the
company.
pany
jet
It
The CEO and
usually held
in Boise, Idaho,
might get a sense of
was reported
that
at the
wheel,
his directors
anywhere but near
a place where they and
how badly Agee was running
Agee and
his wife
used the com-
and the
for sightseeing trips to Yugoslavia, the Vatican,
French shrine
for sev-
Knudsen.
cozy with Agee
to fall asleep in the backseat.
he was
at Lourdes. After three years of living in Boise,
and Cunningham moved
to
Pebble Beach, California. But
it
Agee
was a
pe-
some of the directors apparently realized he was running the company via remote control from his golf course mansion. And even when they figured that out, the board didn't see anything wrong with it. It was not until the stock lost 58 percent of its value from 1992 to 1995 and the company was in dire straits, that riod of time before
Agee was shown
Minow and friends
I
the door.
bonded
after that panel discussion
and confidants ever
by Robert A.G. Monks
since.
in 1992.
It
and have been
Her company, Lens, was started invests in
underperforming com-
panies and makes their lives very difficult until they turn around. Of the seven
companies Lens invested
in
from 1992
to 1995
Roebuck & Company, American Express, Westinghouse
—Sears, Electric,
Boards of Directors, God Forgive Them
Eastman Kodak, Borden, Scott Paper, Stone
225
& Webster—all seven
re-
placed their CEOs. After the in
CEO
fifth
change,
which she referred
Minow wrote an
article for
Legal Times
Queen
to executive musical chairs as "the
of
Hearts School of Director Performance." "Off with their heads," she
tives.
dump floundering chief execuangry and we have to do something."
more boards
wrote, encouraging
"The shareholders are
to
Sometimes, she concluded, the company has always, the board has to be changed. directors
Her
camouflage the
boardroom
guerrilla
lieves that "the
real
board
strate credibility only
And by
to
be changed. But
replacing the CEO, the
problem.
tactics are alarmingly simple.
of a poorly performing
by choosing directors
record of making money, and
who
company can demon-
who
make a
will
Lens be-
full
have a proven
commitment
board membership, including a significant investment of
their
to
own
money."
Lens buys a couple of million
what the company has
fraction of
activism of of fixing
dollars'
out.
Monks and Minow, Lens
companies. That,
worth of shares
—a mere
But through the shareholder
creates visibility for
its
notions
generates credibility with the
in turn,
powerful institutional investor community. Besides making
money
for itself, Lens's mission includes advising large institutional share-
holders on
They
how
to
make
better use of their rights as shareholders.
believe, rightly, that institutional shareholders, as fiduciaries,
are obligated to provide support for
anybody who
is
willing to take
the initiative.
made the most money on Scott Paper. Lens's major contribution to Scott was made before arrived. It shone a bright light on problems with management and on products that needed to be corrected. It had put the company under a microscope and supported us when we did the things that were Of
all
the
companies Lens invested
in,
it
I
necessary.
O O O As a
result of
in stock,
I
was
my
high profile as an advocate of paying boards
invited to serve
on the National Association
of
Dunlapping the Corporation
226
(NACD) Blue Ribbon Commission on
Corporate Directors
Director
Compensation.
Twenty minutes meeting,
The
point!
my hand and
raised
I
nineteen-member commission's
into the
real issue
is
first
"You guys are missing the
said,
aligning the interests of the shareholders
and
the directors."
William W. Adams, former tried to cut "I
me
CEO
of
Armstrong World
Industries,
off.
disagree," he said. "There
is
no study
that
shows a direct
link."
agree," said Harvard Business School Professor Robert Sto-
"I
baugh, chairman of the commission. That's
when
I
introduced Professor Elson and his studies. He
passed out copies of his research linking board stock ownership, reasonable executive compensation and heightened corporate perfor-
mance and we
literally felt the
I'm not one to the biggest.
I
dynamics
compromise on
insisted directors
they must be required to buy
room change. issues, and this was one
of the
the big
be paid 100 percent
X number
of shares
board. Others protested and said, at most,
The
—
for
final report,
the
released June
stock and that
when
they go on a
should be a mixture.
1995, wasn't all
I
had hoped
commission endorsed compensating directors predomi-
—but
nantly in stock, not totally
stand ever taken by an It
19,
it
in
of
recommended
NACD
it
was
still
the most controversial
Blue Ribbon Commission.
the following "Best Practices":
Boards should: 1.
2.
Establish a process by
which directors can determine the com-
pensation program
a deliberative and objective way.
in
Set a substantial target for stock ownership by each director
and a time period during which 3.
Define the desirable
total
this target
value of
all
is
to
be met.
forms of director
compensation. 4.
Pay directors solely
in the
form of equity and cash
uity representing a substantial portion of the total
—with equp
to 100
Boards of Directors, God Forgive Them
percent; dismantle existing benefit programs ing
new
creat-
ones.
Adopt a policy
5.
and avoid
227
stating that a
tor or a director's firm to
company should
not hire a direc-
provide professional or financial ser-
vices to the corporation.
Disclose fully in the proxy statement the philosophy and pro-
6.
and the value
cess used in determining director compensation of all elements of compensation.
So, by the
end
and The Travelers were no
of 1995, Scott Paper
longer lone voices crying in the wind.
Campbell Soup Company adopted put them in
must dig
you
will
into
proxy.
your
If
you
own pocket and buy
be compensated annually
were eliminated. Now,
like
its
NACD
principles
and
Campbell Soup board today, you
join the
for
3,000 shares of stock, and
your work with
no cash. Pensions and medical benefits
stock, tors
its
of the
all
for
1
,200 shares of
independent direc-
stockholders, the Campbell
Soup
directors are at risk.
As
of early 1996, Texas Instruments, B.F. Goodrich, Digital Equip-
ment, Alexander
& Alexander Services,
Johnson
& Johnson,
Warner-
Lambert, Bell Atlantic, Brunswick, Armstrong World Industries, AMP, Asarco, IBM, and dozens of other corporations had adopted part or all
of the commission's
others
recommendations. At the very
—including ITT—were immediately emboldened
least,
many
drop
to
di-
rector pensions.
ENDNOTES 1
Technically, of course,
we
needed shareholder approval. their
couldn't implement
We
it
that quickly
because we
put phantom shares into a parallel account so
compensation thereafter was based on the stock's appreciation. Directors
weren't getting actual shares but the equivalent of the shares, and
we
subse-
quently put a plan in place to issue them shares. 2
We
put out a press release the next day, announcing this
new development
rector compensation. In support of our move, the release quoted
Spencer Stuart executive 25, 1991,
who brought me
to Scott
op-ed piece on director compensation
Tom
in di-
Neff, the
and who had written a March
for
The Wall Street Journal. Neff
Dunlapping the Corporation
228
counsels boards of directors and recruits outside directors, and he began talking
up compensation reform a few years ago. When we first met, he gave me a copy of his Journal article. Before me, his success had been limited to convincing two boards he served on in the early 1980s, Macmillan Publishing Company, and Lord Abbott Mutual Funds, their
compensation
Our
in
to at least provide the option for
board members
to take
stock rather than cash.
release also quoted Stetson University College of
Law
associate professor
who had written a more recent piece on the subject, "Executive Overcompensation A Board-based Solution," published in the Boston College Law Review in September 1993. Abbreviated versions ran in The New York named
Charles M. Elson,
—
Times (July 3
1993) and 77k? Wall Street Journal (September 27, 1993).
18,
"Scott Paper
Company," Report #N9-296-048, December
Stuart C. Gilson
and Research Associate Jeremy
Coli,
8,
1995,
by Professor
Harvard Business School.
Chapter
15
FEED A COMPANY,
STARVE A CDLTDRE Lesson: Seek out and free the good people. Give them the opportunity to flourish from within
Every corporation has a culture. act?
How do
they provide?
How do employees and
they deal with problems?
How are
What type
they compensated?
It's all
executives
of leadership
do
a matter of culture.
Value creation should be an important aspect of corporate culture.
Those who create value move ahead; those who impede left
it
should be
behind.
People isfied
who
create value have a
with what
is;
the belly. They're never sat-
they're always imagining
Some companies, however, utives
fire in
what could be.
define their culture by only hiring exec-
and managers from certain
such as Harvard and Princeton,
League schools
universities (Ivy for
example) or regions. They're
putting out a sign that people without a certain social pedigree
not apply. This sort of corporate in-breeding
same themes generated by
the
same type
of
reinforces cultural stagnation by hiring the the
same
training
and
roots.
They
all
—the
same
ideas, the
men and women
same type
need
—only
of people with
see business from the same per-
spective rather than being challenged by different ideas
and points
of
view and by people never satisfied with the status quo.
When
he
boy, you've
first
hired me, Sir James Goldsmith said, "You know, dear
made a good
you do well with
deal of
me you'll make
money on
the Lily-Tulip deal,
a great deal more money, but
it
and
if
won't
229
Dunlapping the Corporation
230
change you. you have a
how much you make from me, because
never matter
It'll
the belly."
fire in
O O The people who succeed are the ones who
above the
rise
common
denominator. At American Can, the vice chairman believed that fash-
and nylons would be a great business.
ion packaging for shirts
headed a group assigned Other Side of the Street
to study
Is
it.
I
titled
a Blind Alley."
They
our presentation, "The
concluded that fashion
It
packaging would be a bad move. Everybody at the
I
group went
in the
numb
thought of rejecting a notion belonging to the vice chairman. said,
you present
"If
we'll
this,
be
wouldn't put their names on the report! So
I
name was on
it
sitting in the
room, which went absolutely
when
Furthermore, they
fired!"
was
the only
one whose
gave the presentation. The vice chairman was
I
Everybody thought, "That's
he's fired."
it,
silent
when
Then
the vice chairman
I
was done.
spoke. "Al," he said, "I've been trying to get to the bottom of
Thank you
for
That's an
ecutive but
a great presentation."
example I
of a point in
my career when
took a position that was far out
best interests.
this.
I
bucked the prevailing
I
—and
culture,
wasn't a chief exin the
company's
and American Can was
company for allowing my journey outside the invisible lines. look for the same willingness to buck the conventional wisdom when choose people to trust as members of my inner circle. At Cavenham Forest Products, an upstart young executive named
a better
I
I
Russ Carson once challenged I
said, "Oh, Russ,
just
why
didn't
what he was waiting
written long before culture.
I
I
me on
you say
Newt White
He
to hear.
arrived, that
was impressed. When
and the CEO's
an important point. Skeptically,
I
this
before
I
got here?" That's
pulled out suggestions he had
were suppressed by the previous
left
the
company, Russ got
my
job
chair. is
another example; he refused to give
in to Scott's de-
caying culture. As senior vice president of Scott's Away-From-Home business, he
was successful under
himself from the parent
the old regime
company and
its
because he divorced
culture. His business did
its
Feed
own
a
Culture
make the transition from Scott's my own. He may not have needed me to
two senior executives
management
to
231
of only
previous
to
certainly gave
I
Company, Starve
whereas the consumer guys were dying. He was one
thing,
him, but
a
discover
him greater freedom than he had ever known
before.
At Lily-Tulip, the financial reports were always screwed up and
had a great deal ways I
of difficulty understanding them. But there
one analyst whose reports made a
this
him and he made sense, so
talked to
I
lot of
was
I
al-
sense, Russ Kersh.
promoted him. He has been
my right-hand man ever since, from the Goldsmith
days through Scott
Paper.
John Murtagh started firm in Toledo, Ohio. fore
and during
work on any
his legal career in 1976 with a private law
One
of their business, but
when another lawyer from
joined Lily-Tulip, he invited Murtagh to follow
During the
few weeks when
first
Owens-Illinois, be-
KKR. He, personally,
sale of Lily-Tulip to
its
was
of the firm's clients
I
was on
him
didn't
the firm
in 1981.
Murtagh was
the scene,
out in the field working on labor issues. Checking in with the office
by phone, he heard
his friends
and coworkers nervously
talk
about
the holy terror stalking the executive suite.
When fice
his field
work was completed, Murtagh returned
only to hear that the three-person legal department was being
downsized and he would be out of a
Murtagh
up a job interview the story, but
job.
a resourceful, easygoing
is
thing like being fired ruffle him.
it
who would
fella
He started packing
for the following
into a
meeting with
know why we wanted to see him. He sat down and began talking I
name," he
said, as
I
to him.
told
me
a
set
Lily-Tulip's director of pur-
myself.
He
didn't
But he looked at
me
funny.
and
addressed him.
because he been out of town. "Then
He ized
my
let
and
week. That should be the end of
chasing, Jack Dailey, the CFO, director of sales,
"That's not
never
his things
wasn't.
Murtagh was called
fore
to the of-
he was a junior attorney
We
who are you?"
in the legal
hadn't met beI
asked.
department.
I
real-
Murtagh was not the lawyer was expecting, the one was keep-
ing on, but
I
I
I
decided
to
keep him
talking.
I
liked his attitude
and
Dunlapping the Corporation
232
besides,
about
I
was impressed by what he had
this?"
"Wait a minute," he protested. fired.
Why all
"Ah,"
"What do you know
that?"
just got told that
"I
be too
hasty."
So
thinking about keeping you instead of your boss."
you want
be
I'll
I
told him, "We're
He
said,
"What do
know?"
to
The next
tomorrow
these questions, what difference does this make?"
said, laughing, "don't
I
to say.
know about
asked. "What do you
I
day, Lily-Tulip's
of people go,
infamous "Black Friday" when we
Murtagh stayed and
let
a
defied conventional wisdom,
I
lot fir-
ing his supervisor instead.
Russ and John didn't sink to the lowest
when change came
to
common
denominator
and they've been my leading
Lily-Tulip,
change agents ever since. Russ
is
tough, smart,
That doesn't
mean
just
nize loyalty in people
and
loyal.
I
keeping people
who speak
premium on
put a high
who
agree with me.
minds and
their
tell
loyalty. I
recog-
me when
they
think I'm doing something wrong. Russ will do that; so will John.
everybody
in a corporation
Dunlapped level
was doing these
in the first place.
with what
I
things, they'd never get
These two young
do and how do I
If
men found
a comfort
it.
O O In
my
first
week
managers, not front-line
at Scott Paper,
just the
management.
I
called a meeting of
executive vice presidents. I
made everybody
I
all
the senior
wanted
to
see
stand up and say what
they were going to do for the company.
One guy stood up and done "I
him.
don't care
want
to
what you have done,"
know what you
I
said,
making an example
are going to do for me,
future!"
He looked
at
me, dumbfounded.
"I'm not prepared to talk about that," he said.
"Then
sit
what he had already
company.
for the
"I
started talking about
down,"
I
said.
now and
of
in the
Feed
Needless to say,
pared
to literally say
Company, Starve
a
Culture
a
233
every meeting thereafter, everyone was pre-
at
what they were going
to
do
company.
to help the
man who had no answers stayed on and found the answers. Culture can also be defined in less obvious ways. We were a global
And
the
company, so Scott Paper executives often needed
to
halfway
fly
around the globe. But instead of going alone, they traveled
in groups.
Someone who was going to London never had to worry about being alone; there was always a superfluous entourage right behind. It made more important having
the lead dogs feel
up the use
of videoconferencing
their
whenever
The great corporations have a
pack
possible.)
rolling culture that
is
took over. They
the product side, they don't
don't care
make
assets profitably,
and
they're
like. All
not
if
hostile
the cuts, they're innovative
keep operations
what the structure looks
much
very
akin to a takeover mentality. They run their businesses as
new owners just
stepped
in tow. (I
that stand
still.
they want to do
hung up on
is
on
They
use the
self-preservation.
They're focused on the success of the company. Prior
managements
at
Scott
had the opportunity years
Why
didn't they
ture?
Why didn't they sell
make
Lily-Tulip,
and
do the same things we
did.
Diamond, Crown-Zellerbach, earlier to
the tough decisions?
Why
off assets that didn't
didn't they restruc-
fit?
Culture!
Each
was
of these
stifled,
sive.
companies had created a culture
in
which
initiative
not praised. Employees weren't encouraged to be aggres-
Management played
it
safe,
doing things the same way from year
And it was killing them. A company should build on tradition,
to year.
live is
on
tradition,
you die on
but try not to
But
tradition.
if
live
you build on
on
it. If
you
tradition,
it
a sturdy stepping-stone to the future. If
you have a great culture, nourish
a bad culture, don't just put a disease, I
it
will ultimately
have no desire
is
sustain
in remission; kill
come back
it,
it.
grow
it. If
you have
Otherwise, just like
to kill you.
to protect a culture, the corporate entity, or the in-
place management. portant
it
it,
I
don't think any of that's important. What's im-
deploying those assets
in the best possible fashion.
Build
Dunlapping (he Corporation
234
down operations where they should be shut down. Sell where and when necessary. A culture reflects the way things are; you have to change it to be the way you want it to be. Instead of continuing things the same way where you can
build. Shut
as they ever were,
I
set
up a
change, of accountability, of
different culture at Scott, a culture of profitability.
Under any good management scenario, employees who are not pable of what they've been doing should be
go should be people
who are
have not been effective. they got rid of so is
many
let
go. People
not performing a necessary function, or
and without
Critics within
will say, "Gee,
people." But your basic security in the world
own ability to produce, your own ability to make And if you're really good, people will want you.
your
tion.
ca-
who get let
a contribu-
O O O Some Drexel
more dysfunctional than
cultures are even
the years
I
spent working for Goldsmith,
Burnham Lambert, on behalf
of
to
for a
know: Would
Sir
miracle
—or
at least
others.
for the
famous carrier and
a white knight. They wanted
James consider buying Pan Am?
Jimmy, as pro-American as Europeans come, told me,
do
this, Al.
We ers &
We
During
received a call from
Pan Am's labor unions. The
unions had seen the writing on the wall
were looking
we
"I
want
to
must save Pan Am."
took a team
—composed of myself, Kersh, Don Burnett
of
Coop-
Lybrand, compensation and benefits attorney Chris Sues, and
mergers and acquisitions specialist Mark Davis, then of Salomon Brothers ing,
—and spent almost a month camped out
reviewing their situation.
When you walked Manhattan, rible;
it
in the
was just
We each had
our
lobby of the Pan
own
Am
fabulous. But the offices
carpets were torn up and badly stained.
body came
in
at the
Pan
Am Build-
field to investigate.
Building in midtown
and hallways were I
imagined
that
ter-
some-
every morning with a razor blade and cut up the rugs,
somebody else came along with electrical tape and taped the rugs, then somebody else came by and spilt coffee on them. Based on
Feed
what the corporate headquarters looked
a
Company, Starve
like,
a
Culture
235
you couldn't help but
worry about the condition of the planes.
When most
corporate cultures are in ruins,
outsider or to the naked eye. Pan
Our
first
isn't
it
apparent to an
Am was the exception.
meeting there was with Pan Am's chairman,
who
told us
how wonderful everything was. He introduced us to some key people and we asked for some space in which the five of us could work with due diligence. "We'll bring a couple of our said.
two
"What we need from you
is
own a
secretaries
little
and equipment,"
I
conference room and maybe
offices."
"We have some space on we'd take "Well,
the seventeenth floor," he said.
I
told
him
it.
can't just give
I
that floor might not like
he stammered. "The manager on
to you,"
it
it."
how we found out Pan Am no longer owned the famous Pan Building. It just owned the sign. His hesitation his inability to
That's
Am
—
—
assign us office space could have stopped the deal on the spot.
"Never mind," den, Arps. But
with The
New
I
I
said, "we'll
of Fin Fogg's offices at Skad-
know have an interview this afternoon Times and if this comes up, don't want you to be
want you
York
work out
to
I
I
surprised." I
took two steps toward the door and
We were news
pretty optimistic for the
started
depressing.
coming
in
this
special. In the end,
Everything
first
had the space.
two weeks, and then the bad
waves. Our research proved nothing short of
We had begun
Jimmy wanted
I
our task
full
of anticipation,
company and expecting Pan
we were
all in for
Am
parts
York's
we examined was wrong. We found employees reading
their jobs were.
were unaccounted
Kennedy
The Pan
name
be something
a crash landing.
books on the job instead of answering phones, whatever
to
knowing
We
issuing tickets, or
learned that $1 million a month in spare
for out of a
maintenance
facility at
New
Airport.
Am Building wasn't the only thing that was the airline's in
only. For all practical purposes,
it
had no
assets.
Everything
Dunlapping the Corporation
236
was
leased.
had a business making money
It
Miami, but that was a
in
building cleaning service. The Boston-New York-Washington shuttle
was making money, everything else
Pan
Am
was
had a
as
losing
flying to
ass.
its
England
foot.
Anyway, one
of the fellows
all
was
on our team
we wanted him to fly Pan ticket. Two hours later he re-
a weekend, and
for
Am. He went down to the lobby for a turned, ticketless. He couldn't get anyone were
West Germany. But
shuttle in
ticket office in the building's lobby; the rent
about $100 per square
was
was another
him a
to sell
on the phone, reading books, doing
ticket.
They
their nails, or just plain
disinterested. Upstairs, it
was
Pan Am's executives didn't know
terribly
to
use the
in the
conference room and somebody
room. But when he tried
rest
leave the conference room, the
knob came
stuck for thirty minutes. Nothing with the it
cost structure;
went down, there was no backup.
If it
One day we were working up
own
mismanaged. They had only one antiquated computer
center for the entire airline.
got
their
open
to
off in his
the door to
hand and we were
name "Pan Am"
attached to
worked very well anymore. There was
tives
terrible strife within
management, where senior execu-
were undercutting each other's
horrible union relations.
It
authority.
And the company had move luggage from
took eight unions to
the street to the plane. I
Airport in at
Am
remember one time a Pan
New
him. Then he
York and
I
captain called in from Kennedy
could hear a marketing person screaming
slammed down
the phone.
"I
am
from these captains any more!" he raved. "He's have any passengers and
I
am
Here's the rest of the story: tion
and found
puter
No
that's
me
he doesn't
I
sent
someone
to
check on the
situa-
had been dropped from the com-
there were no passengers!
authority ruled
anywhere
in the
company; there were plenty
excuses and no responsibility, no pride provided. All this in a line in the world.
telling
not going to take that harassment!"
that the plane
why
not taking that crap
company
in the
service that Pan
that not long before
was
the No.
1
of
Am air-
Feed
It
showed
ment
that there isn't a
company
a
Company, Starve
Culture
a
237
world that bad manage-
in the
can't destroy.
Because Jimmy wanted so badly
we
saving the airline,
hear some kind of options
to
We would
outlined a rough plan.
Am
quarters out of the Pan
lay off 7,800
move
people, including 38 percent of management, and
for
the head-
Building in Manhattan and take
it
south
Miami. We'd also move maintenance to Miami, where the
to
weather was good year-round and we could cut better deals with the unions. Pan
Am had another problem:
body wanted to and concentrate
go.
We were
going to
It
was
dump
flying to places no-
little-traveled routes
Europe, South and Central America and
flights to
the Pacific.
Costs were grossly out of control, Pan tion
had no
and management was improperly spending
That's ical
Am
when
"Jimmy,"
I
air:
Pan
recommend is
no
we
spite
its
Sir
James take
thanked our
hosts,
nobody
international brand
later,
fixed
this,
but they are
and beat a hasty
retreat.
could have saved money, but once it
was
clear that the airline
we
was
Management We knew better. Pan Am, de-
there agreed with us.
didn't understand the business.
months
this on.
we could have
the pension liabilities,
tion original, wasn't
Six
No way we
Am
terminal. Needless to say,
said
Am had a negative net worth.
pulse."
We packed up our bags, There were ways Pan
med-
rest of the
said, "a year ago,
already bust, there
knew about
didn't have.
it
That blew the
liabilities of $1.2 billion.
equation out of the to
capital
Chris Sues discovered the airline had unfunded
and pension
were going
strategic direc-
name and remarkable
history as an avia-
even worth the attention of the bargain hunters.
Pan
Am was effectively out of business.
O O O In
save
a dying company, the steady hand of the old culture will not it.
Part of
my strategy
ture of the status
in
such a situation
quo and make sure
culture wasn't successful.
that
is
to paint a bleak pic-
everybody knows the old
Dunlapping the Corporation
238
Newt White
liked to
tell
my approach
people that
"was
to
pee
over the old culture and point out the issues and the reasons
it
all
was
not successful." That's shock therapy to get people to realize a need to
change.
play hardball, but
I
point: This
is
new environment and
a
In certain circumstances,
across
is
move
to
I
one
a
for
new way
of the quickest
me
will miss the
of doing business.
ways to get
that point
the corporate headquarters.
seventeen states and three countries during
I've lived in
ness career.
nobody working
my
busi-
have moved many corporate headquarters because that
way to change their culture. Moving sends a signal to employees that a new headquarters, in a new city, means a new way of doing business. By selling Scott Plaza in Philadelphia, we killed the last vestige of the old culture, which was pulling the company is
the ultimate
closer to an early grave.
Another bonus
to relocation: There's nothing like
where you're wanted and treated with I
moved
—which
that
life
was
was an easy place
—gave us an incentive
to us, the building
attractive, there
was no
state
Augusta, Georgia, because
days.
to
be able
to
that's
we had
Lily-Tulip
where
its
I
moved
a large plant there.
go from headquarters
The only reason
because
was a good fit, the income tax, and it
for recruiting quality people.
Here's an even better reason for relocating:
people
Boca Raton and
helped defray the cost of the move. Our Florida hosts
made reasonable concessions quality of
a place
beat out Atlanta, Dallas, Greenville,
South Carolina, and Charlotte, North Carolina
package
in
respect.
Scott Paper to Florida because the city of
Palm Beach County
being
Lily-Tulip to I
wanted my
to a plant in minutes, not
headquarters was ever
in
Toledo was
former parent company, Owens-Illinois,
was headquartered.
When
Lily-Tulip
many people moved with us from found some terrific people in Augusta to
relocated,
Toledo to Augusta.
We
also
replace the people
we
lost.
The move changed the company emotionally as people
who had
—
for the better.
When we were
in
bonded us
collectively survived a trial by fire
and grown stronger from the experience. closer.
It
It
also
made
us physically
Toledo, our people were scattered
all
over
Feed
the
When we moved
map.
to
a
Company, Starve
a
Culture
239
Augusta everybody pulled together.
It
created a camaraderie that could never have been as important and vibrant in Ohio.
O O O When
took over Diamond International for
I
management moved so
slowly
it
was
like
James
Sir
in 1987,
watching grass grow. Each
year they did as they had done the year before. The culture conditioned employees to always feel comfortable; they weren't forced to
was no
question everything they did or to act aggressively. There
sense of urgency.
The company's land operation was a sleepy
who had
well-intentioned people
market practices. Before
us,
little
company run by
not been exposed to aggressive
they hadn't used their purchasing mus-
hadn't streamlined their administration, hadn't updated their
cle,
equipment.
And
they weren't using the most profitable lumber mix.
Diamond was the house that matchsticks built, as a friend once put it. It was a quick fix, compared with other companies restrucI
tured.
It
went from a
loss to a $2 million positive
cash flow
in less
than a year.
We
threw out the old ways of doing things
—the stagnant decision
making, dull-witted strategies, and steady-as-she-goes-into-oblivion
management provement
mentality.
Improvement came from: a 10 percent im-
in productivity,
due largely
to
a
new
incentive system;
and a more
nearly $1 million in increased woodcutting efficiency; cost-efficient
and
profitable mixture of
We split Diamond ators
who
into
its
component
woods. parts
then prospered with them. In the companies
people rose to the occasion and did well I
and sold pieces
promoted a man named Art Larsen
and he caught on
to
my
we
for themselves.
to forest
manager
to oper-
kept,
Others for
some left.
Diamond,
tactics in a big way. Instead of just going
through the motions, he sought out higher and better uses
for land,
including real estate sales and recreational leases, and turned his foresters
from custodians into merchants. They looked
business, everything from
managing other people's lands
for outside
for a fee to
Dunlapping the Corporation
240
buying, selling, and brokering wood. They grew everything from blueberries to Christmas trees
and radio towers, searching
make money. Cash flow from Diamond lands increased way
ble
for
every possi-
to
fivefold. In 1985, the
California properties alone generated $3.8 million in operating cash
and
flow. In 1986, they hit $6.8 million,
in 1987, $14.7 million.
This
came even though the volume of wood being cut on the lands remained static. It was a simple result of better resource management, which occurred when we showed the culture there was a better way of both responsibly managing Diamond's lands and inincrease
creasing profitability.
The next step was assigning executive vice president
(who
later joined President Bill Clinton's
Phil Lader
Cabinet as director of the
Small Business Administration) to assess Diamond's land holdings. Sir
James had so much land between Diamond and Cavenham
almost 4 million acres with
at
one point
some 100 development plans
try.
We
tial
for residential or
—
and
for different sites
identified 165,000 acres that
convinced us that the
that Lader
had genuine
was
presented him
around the counreal estate poten-
commercial exploitation. But real estate business
I
iffy at
in the
best
end, he
and the
turns were too speculative. Instead of going into development
Lader expected
somebody
let
Based on
we would
—we decided
to
simply
sell
the land
re-
—as and
else take the risk.
this decision, Lader's job
evolved and he with
it.
Instead of
going into high development mode, he spent the next year as planner, evaluator,
and
strategist for selling the lands.
the late 1980s crash in the
American
the right decision at the right time. just plain luck,
in retrospect,
real estate industry,
it
given
was exactly
Through wisdom, providence, or
Jimmy and once again I
And
called the market right.
Lader marketed property to conservation groups and developers alike. "Get the fair it."
I
told
him
that
market value,"
if it
I
told him.
"I
don't care
was sufficiently important land
to
who
pays
be preserved
then there should be enough people in the private sector willing to
make charitable contributions equal to what a developer would pay. Many of the high bidders for Diamond lands were indeed major conservancies. Others might have argued that these groups should
Feed a Company, Starve
have gotten a discount, but said, "We're selling
this asset
I
now. What they do with
is
it
Culture
a
as
it
is
241
right
And in many cases, the use some very innovative fund-
their business."
environmental groups were able to raising devices.
We
We
shook the sleepiness out of Diamond's eyes.
off the
deadwood
literally cast
and
of a do-nothing forest products corporation
bolstered employees
who comprehended
a
new
culture that com-
bined preservation with capitalism.
o o o Scott's culture
was
time because too
many people were weighing
every step. Everybody ing
it
congenial. Too congenial. Decisions took
fairly
difficult to get
felt
a need to be involved
in
with opinions
in everything,
at
mak-
anything done quickly.
The old culture discouraged challenges.
If
Mary had an idea
for
changing or improving her business, Jerry didn't challenge her on merits because then she might
The review process was $300 million investment or $350 million
on a
do the same
to his proposal next
terribly flawed, leading to fiascoes in
third
a co-generation plant
in
coated paper machine
its
week.
such as the
Mobile, Alabama, for S.D.
Warren
in
Maine. Those expenditures should never have occurred. The old culture allowed $650 million to
money
to support further
moistened Scott
toilet
be spent, making
it
development of new products such as
pre-
paper.
was a consensus
organization, a culture where,
weren't invited to a meeting, they there or not. Their
names on
felt left
the copy
list
out
bates over nothing at
all.
No one
if
executives
—whether they belonged
were a sign of importance.
There was endless debate over substantial
and
impossible to find the
issues,
and equal
de-
ever raised a voice, cut off debate,
—go forward!" And when there was a could always be brought up again — there was never
said, "Here's the decision
decision,
it
clo-
sure on the issues. I
prefer a culture
where you can walk down the
hall, get
a deci-
and move on with business. At the old Scott, you had to write memos and touch base with different people so they were
sion made,
Dunlapping the Corporation
242
comfortable with even the most insignificant decision. friendly, collegial
environment that collapsed because
unfocused on
pletely
was a
This
reason for being: Making money.
its
115-year-old
through thick and
it
was a was comIt
company whose
traditions
thin. After a certain point,
had survived
management became
a cadre of proactive leaders and more one of sedentary care-
less
takers.
I
wanted
to totally
change
Scott's culture,
cepting mediocrity, blaming everyone else for getting by, to a responsible business that
was
I
the
first
outsider in
It
history to
its
problems and
just
overcame obstacles with a
high level of discipline and accountability. ciety.
its
from one of ac-
was
also
an inbred
so-
be given the corporate
reins.
That change was long overdue.
Even
a thriving company,
in
often takes the eyes of an outsider to
it
spot the obvious and bring business back to the correct path for the long journey ahead. is
It
up
easier for an outsider because an outsider doesn't get caught
in internal politics, doesn't get
get caught
up
in the traditions, doesn't
will think
and
in the culture.
you grow up
If
caught up
in a culture,
you
and
act.
ture expects you to think
act the
way
that cul-
But an outsider examines the cul-
"Why do you do things that way?" If best answer is, "That's the way it's always been done," that's no swer at all. Business is dynamic. If it doesn't change, it becomes solete. A new structure, combining key people from inside makes a
ture,
face,
and
says,
the
an-
obthe
organization, with special talent from outside, will give leadership direction to
all
of
its
employees see
If
iors,
people. their leadership exhibiting certain negative behav-
the rank-and-file will say,
company's money, then ing thousands of dollars
the
company 50
blow
it,
I
"If
they can be irresponsible or waste the
can do
it
on nothing,
too." will
If
they see executives spend-
employees
cents here, a dollar there?
If
really try
and save
they see the executives
they say, "What's the use?"
Leadership sets the cultural expectations and
pany be
truly cost-conscious
or herself with opulence?
if
Does
limits.
Can
the
com-
the chief executive surrounds himself that inform the shareholders that this
Feed
person
an appropriate guardian of
is
send the will
right
be no
message pay
raise in
year or
You must wipe out enough
new
You must
culture.
who
way.
It is
like
Change
a
243
Culture
Does
their career investment?
why job
layoffs are
it
new
coming?
be able
of the old culture to
establish a
a different mindset and
Company, Starve
and Judy Paycheck about why there
to Joe
this
a
culture with people
will operate in a different
to see the
who
have
and better
applying electric paddles to a corpse.
starts at the top.
If
you
sit
back and
relax, the old culture
will get you.
We restructured and downsized the Scott workforce within weeks of my arrival so wouldn't grow accustomed to or even familiar with I
the old
way
of operating.
It
message
also sent the
was no
that there
such thing as business as usual.
Our behavior set a tone sequence
of not being direct
than any consequence you
amid
the chaos
forcing our
commitment
to the
suffer
far greater
by virtue of being
direct. Yet,
we looked
We had
making
decisions. There
faster.
phy;
it's
can't
was
too harsh.
make
We had
a
ways
of rein-
differently,
spending
far less
became
crisper,
fewer people, which meant fewer people
cause people were given more
Some people
for
workforce that remained.
time in meetings. The decision-making processes
and
The con-
is
of layoffs,
We managed
clearer,
direct.
and not acting quickly
may
and confusion
Everybody changed.
be
of urgency. Act quickly,
training to
and upgrading
do and more
the shift.
of skills be-
responsibility.
They don't
like the
new
number of people who opted
philoso-
out,
people
who were used to a more paternalistic, socialist business environment. Many older companies have found themselves in the same boat as Scott Paper. They've become more welfare state than business enterprise. Scott
and
it
had the worst
of both worlds.
It
was
like
a welfare state
wasn't profitable.
O O O Other steps topping
my
list
of culture-shaking
improvements
in-
clude reassessing compensation plans, rewards, and recognition,
and refining the company's goals and
objectives.
Dunlapping the Corporation
244
If
people balk
that's the kiss of
at
something and
death
in
my
say,
"We've tried that before,"
book. They're a disease; cut them out.
Meanwhile, seek out and free the good people from the bureaucracy. Give
them the opportunity
Ironically,
most employees
to flourish
who
from within.
stayed with Scott Paper until the
Kimberly-Clark merger didn't want to go back into a potentially bureaucratic environment
where they wouldn't have an opportunity
to
be entrepreneurs, make decisions, and make things happen. For them
and me, all
ple
the
that
good
knew
under
was one
of the
things that
that they
most beautiful
came
never have again.
least
heralded
—of
out of the Scott restructuring. Our peo-
had autonomy and an
my management team
—and
ability to get things
that they didn't have before
done
and may
—
Chapter 16
IMPRESSING THE ANALYSTS Lesson: Every business has a message to sell.
Scott Paper
had an organized campaign
community
the tidal
the value
we were
wave
to impress
on the investment
changes enveloping the company and
of
creating. But the
plied in almost every situation in
methods we used could be ap-
which you need
to sell yourself, a
product, or a company. In the
paper business, as
in
many
every day by investment analysts forest products, retail,
industries,
who
what we do
is
judged
specialize in a certain field
commodities, or technology. They study a
company's annual and quarterly assess the current performance,
reports,
break down the numbers,
and make predictions on what the
future holds.
With time, some analysts grow apathetic
many companies,
complacent. So
and a smile a mile wide,
best
running dog-and-pony shows
—
their
in their jobs; others get
CEOs wearing
their
Sunday
flashing convoluted flip-charts it's
and
a wonder they get any work done
at all!
Brown Brothers Harriman & Co. won't soon forget put on for them at their New York offices on October 26,
But the folks the
show
I
at
1994.
That's the day paper industry analyst
McAuley
invited
me
to
address her firm. The very proper and uptight
old
money
ally
worked the room from back
firm
and manager Kathryn Felton
had a packed auditorium waiting to front, shaking
for
me, and
I
liter-
hands and saying, 245
Dunlapping the Corporation
246
"Hi, I'm Al
Dunlap and I'm here
McAuley says I'm not I
was
for assertiveness training!
assertive enough!"
some
quite animated that day, delighted to let
out of the firm's traditionally stuffed
me
Kathy
"the flamboyant Al Dunlap";
Kathy would always
shirts.
thought
I
of the starch
I'd
go
in
call
and show them
why. "It is
said.
you
very nice to be here with the blue blood of the blue bloods,"
know you
"I
will
are used to investing in stodgy old firms but
have an opportunity to invest
in
a real
company
—
if
I
now
you have
the courage." I
challenged their tolerance to the legal
they took
it
my
but
God
bless 'em,
all in stride.
The only moment rupted
limit,
of uncertainty
presentation on Scott's
was when someone rudely intercommitment to cost-cutting and
increasing shareholder value.
"What makes you think you can do
The room grew
"We
will
silent as
I
the
it?"
man
asked snidely.
paused and stared him down.
be successful because
I
say
we
will be,"
I
said plainly,
bringing an enthusiastic burst of applause and shouting.
Afterward,
I
was
in the
bathroom washing my hands,
talking to
Doug McCartney, head of the firm's domestic private banking group. glanced away long enough to notice that their paper towel receptacle said "Scott." started to smile and pulled out a paper towel. It was not a Scott product. Angry, pulled out all the paper towels. Then went into one of the stalls and immediately knew that, despite what the containers said, the toilet paper inside was also not ours. gathered up all of the illicit paper products, opened the bathI
I
I
I
I
room door and threw them into the hall. "I make toilet paper and you people buy lousy toilet paper!" roared. "For God's sake, look at the amount of money your shareholders have made on my stock, and you have this crummy toilet paper! I
I
want I
to
see you buying better
carried on that
paper."
toilet
way because
I
knew
that the
get attention in such a staid organization
was
one way
to
I
would
be outrageous.
McCartney was impressed. He went out and bought more shares.
Impressing the Analysts
But poor Kathy McAuley was mortified. Surrounded by tional salespeople
stared at
me
and
portfolio managers, she stood there
in disbelief. Later,
my
she laughed about
24?
institu-
and
just
performance,
but at the time she thought she'd be fired just for inviting me. Little
did she
stunt like that
Back
—
in the Lily-Tulip days,
Coopers
fice at
know how many times or how effective it was.
&
I
was
Lybrand, and his
at
my
in
career
Don
a meeting in
made
staff
had pulled a
I
Burnett's of-
the mistake of serving
coffee in Dixie cups.
am
"I
offended by your use of these cups!"
money does Dixie spend on your Dramatically,
pen
again.
It
me
firm annually?"
door and promised
at the
I
was running
Scott,
lunch meeting with the chairman of
was a box
of
to
would never hap-
it
didn't.
Another time, while for a
"How much
snapped the snaps on my briefcase and started
I
They stopped
leave.
said.
I
Kleenex
in the
next
went
I
First
room table. "How can have lunch with you?"
Windy
City
Chicago Bank. There
room and put I
to the
it
in the
center of the
dining
I
"It is
embarrassing that you think so
don't even stock our products! I
have always believed that
doesn't have the
good sense
you should make an
said, stricken
it.
If
of
little
Why don't you if
my
by
their betrayal.
business that you
use Scotties?!?"
someone wants your business but
to at least
issue of
me, you should support me. I
I
pretend to use your product,
The point
is
that
if
you are working
for
you are not supporting me, why should
support you?
o o o There has always been debate about the appropriateness of a proactive investor relations strategy.
Many people
feel publicly
traded cor-
porations should simply do their job and the results will be reflected in press releases
and annual and quarterly
up on
and the stock
those,
will
move
reports.
a waste of time.
will pick
accordingly. This school of
thought holds that having a chairman on the is
The analysts
street, talking to analysts,
Dunlapping the Corporation
248
And many chairmen
prefer
that
it
way
as well. They don't like being
asked a barrage of detailed questions by strangers and outsiders.
more often than
know
not, they don't
the answers, so
it's
And
embarrass-
ing.
CEO's role includes many
believe, however, that the
I
me, a proactive investor relationship strategy
is
among
things.
To
the highest of
priorities.
good management
Putting
ensuring a strong strategy,
in place,
spending capital wisely, and staying on top of operating are
all
important. But
whether
it
I
also think
communication
is
results
—these
equally important,
with employees, customers, the board, shareholders, or
is
community
the financial
at large. Investor relations
is
intended to con-
vey management's intent and management's belief about the future. Investors,
whether stockholders or lenders, can only make an informed
decision about the company's securities
when
they are well informed.
we do not communicate what we believe in and expect for the company, how can anyone truly make an informed decision about us? If we have plans for the future that we haven't shared, I'd say we are If
cheating the investors of an opportunity.
we
broadly what
We
are better off conveying
are trying to do rather than doing
Being proactive sends a signal that the
CEO
quietly.
it
is
concerned about
shareholder value and he or she will spend time with the people
own
the
company.
shareholder,
niques still
may
I
If
would
differ,
I
worked
certainly
a private
for tell
who
company with only one
that person what
is
going on. Tech-
depending on the number of shareholders, but we
have that obligation.
In dealing
with Wall Street,
we must be prepared
to
appear before
people during good times and bad. To be consistent, we must be there both times, not
just
when
it
suits us.
If
a
CEO or chairman
doesn't meet
with Wall Street for several months at a time, the financial community will lack
confidence
more inclined
to sell.
in
what
is
going on
in the
business and
become
That could affect the stock price.
management apparently saw things differently, preferring to stand in the spotlight when things were good, hide in the shadows when they weren't. Scott's previous
Impressing (he Analysts
When
took the Scott Paper job, Russ Kersh, John Murtagh, Basil
I
Anderson, and
I
read by the financial
We knew
it.
from our days
operation such as Goldsmith's, and
when
on to
we wanted I
from a private
vastly different
had absolutely zero confidence
cations department, which,
the spin
community and how best
at Lily-Tulip that the public rela-
company were
tions of a publicly held
We
how
spent considerable time discussing
our plans would be
handle
249
to
be ready.
communipress was
in Scott's internal
was
hired, told the
I
Australian!
—and
why
That's
many
in
keeping with our philosophy of outsourcing as
functions as possible
cations department
on one
settling
The
—we eliminated our in-house communi-
and interviewed outside public
of the world's biggest
was
firm's basic charter
specifically:
my ideas,
and
and implementation
plans,
company
relations firms,
Burson Marstellar. Paper and me,
to represent Scott
Scott story step by step, day by day, as failing
best,
we
strategy, telling the
transformed Scott from a
dynamic, reinvigorated powerhouse.
to a
Using Burson Marstellar as our agent,
I
made
myself available to the
media. Pete Judice managed our press contacts and personally
duced me
to the press, setting
up hundreds
of print, TV,
intro-
and radio
interviews. It
was a
high-risk strategy, to say the least.
I
put myself out on a
narrow ledge; we would either scale the heights or
and make a mess. licity
and the
from experience,
But,
attention that
I
community
objectives for Scott.
press
and gave him
terview, he diaries,
we disseminated
to the press
in
and
achieving our
instructed Judice to be aggressive with the
someone wanted an inmy secretary and set it up. No interme-
direct access to me.
had only
to earth
that favorable pub-
would be very helpful
alike I
knew
back
could bring to the company would be
powerful messengers. Information financial
I
fall
to call
no committees
to
If
weigh the impact or
to
debate what
I
should or shouldn't say. If
am and
I
was
traveling to
New
York,
I
would
going to be in the city next week. tell
the Scott story?"
call
Who
Judice and say, "Pete,
I
can we get together with
He would then arrange
interviews around
DunUpping
250
the Corporation
my business schedule I
lunch here, an office
for the trip, a breakfast or
we sometimes squeezed
three days,
visit there. In
in eight interviews.
never got tired of telling our story.
Besides dealing directly with the press,
also
I
made
presentations to the investment community. Typically,
accompanied by our CFO, Mike Masseth.
relations,
Basil Anderson,
would open by
I
all
questions, but
there
if
would be
I
and our director of
investor
talking general strategy,
lowed by either Basil or Mike discussing the hard numbers. tackled
frequent
was something
I
fol-
generally
I
know, Basil or
didn't
make more credible the broad strokes painted. If said, "Of course this company will continue growing," they would provide the specifics as to why we thought growth was possible in the Pacific or Europe, how we stacked up against competition, or, really specifically, why one of Scott's products would sucMike would jump
in.
I
ceed
vs.
A
was
Their role
to
I
one
& Gamble's.
of Procter
typical meeting
would be
sometimes did as many as four
forty-five
in
minutes to an hour, and
a day.
There were two different types of meetings. twenty or more,
I
I
believe,
were the dozens
I'd
I
I
prepared
for
got with our financial
organized
a desk or conference
at
to think of
and
prepared
diligently.
and challenged
every question someone might ask me. "Ask
ever fired for pressing in public.
I
investor relations people
will rankle
me,"
may embarrass me. And be tough
going
we
of small office meetings
a meeting with analysts,
something that you think that
offering a twenty-
and answer questions over breakfast or lunch.
When them
groups of
take questions. More effec-
and attended, where we would be seated table
In large
would stand and give a speech,
minute update on the company, then tive,
I
me
in private
They got
me up
I'd say.
"Ask
me
me something
No staff member was was prepared for rough
as hell."
so that
I
to speed,
knowing everything
I
should know.
We
targeted two types of analysts, the sell siders at the major bro-
kerage firms
—such as Linda
E.
Lieberman
at Bear,
Stearns
pany, George Adler at Smith Barney and Kathryn Felton
—
Brown Brothers Harriman & Company and The buy siders do essentially the same type of work as the
& Com-
McAuley
buy side
at
analysts.
the sellers but
Impressing the Analysts
make recommendations firms as
opposed
managers within
to the portfolio
making recommendations
to
their
go across
that
251
own
all dif-
ferent companies.
Our strategy
identified the key sell side analysts.
We wanted
to get
them sold on Scott by convincing them that value would be created.
Once
assured, they spread the
word more
effectively than
any story
in
The Wall Street Journal ever could.
We also targeted
certain institutions such as Lazard Freres, Fidelity
Oppenheimer Fund Management, Soros Fund Manage-
Investments,
ment, and Tiger Management, and met with their representatives.
The point was
tential investors as
some
we wanted to reach as broad an audience of popossible, some of whom we could reach directly,
that
indirectly.
We
looked
at ourselves geographically,
strongest. Financial institutions in
studying where
New York,
we were
example, owned
for
sig-
nificant quantities of Scott stock, but their counterparts in Boston
we chased
money
an investment manager
didn't,
so
owned
stock in the paper industry but not Scott,
a potential market.
the
We
in Boston.
were convinced
invest in our industry, they couldn't
If
that
if
we looked
at that as
they were prepared to
do better than
to invest with us.
O O O The day
after Scott's
McAuley published
June
3,
1994, annual meeting, analyst Kathy
the report that
first
referenced
my
intention to
focus "like a laser" on developing the right strategies to grow the
company.
One worked
of the ironies of
my
relationship with Kathy
for St. Regis Paper, a
company
that Sir
was
that she
once
James Goldsmith
raided in the mid-1980s, albeit unsuccessfully. But the Goldsmith raid
put the
company
in play,
and she always teased
that,
because of
that,
she had reason to dislike me.
During a private luncheon with her some time after
performance
at
Brown Brothers Harriman,
duction to her firm.
he had given
me
When was I
I
told
my command my intro-
Kathy about
hired by Sir James Goldsmith in 1986,
a large advance on
my future salary.
It
was
the single
Dunlapping the Corporation
252
biggest check that this
I
I
had ever received. But the check was drawn on a bank
had never heard
check
is
of.
not going to
dear boy, that
is
Jimmy and said, "Are you sure bounce?" And Jimmy laughed and said, "My So
I
went
to
where the blue bloods bank.
It
not going to
is
bounce." The bank was Brown Brothers Harriman.
Kathy had recommended Scott before
I
started there, but
had
pulled her recommendation in the late 1980s
when
started going through a big expansion program.
The stock dropped,
the
company
so she had a good track record in terms of correctly calling the company's fortunes, negative though they
may have been. About
months before my predecessor announced cided that Scott had probably
hit
bottom and was about due
improvement. At that point, she replaced her
six
his retirement, she de-
"Sell"
for
some
recommendation
with "Buy."
But
when
months passed between the resignation and any
several
hint of a successor, Kathy erally couldn't find
anybody
When my name was shook
their heads. "Al
effectively
A
grew nervous
that the
board of directors
willing to take over Scott.
finally
announced, she and everybody else
Who?" My name rang no
been overseas
bells
because
I
had
for the previous five years.
research check, however, showed that
many
of the
companies
had previously run were turned around with enormous benefits the shareholders
which
is
and were
left
became
to
then sold. That intrigued her.
trip
she couldn't wait to write her report. The train back to barely
I
down to Philadelphia for the shareholders' meetwhere we met for the first time. When the day was over,
She made the ing,
lit-
the station
when
New York had
she started scribbling. Overnight, Scott
a stock that she wanted to aggressively promote.
o o o Across town, Bear, Stearns analyst and managing director Linda
Lieberman's early endorsement of Scott Paper under lished a
tremendous amount
young career
in
high gear.
ing their quick profits
and
my
of industry credibility for her
aegis estab-
and put her
And while many people thought about getting out,
tak-
Lieberman continued saying,
Impressing the Analysts
253
Those who bought were handsomely rewarded, reinforcing
"Buy."
her reputation.
She deserves tremendous credit
chance on
edge
us,
for her
courage
in
taking a
making educated observations, and writing leading-
reports.
Linda
came
up
right
to
me
1994 annual meeting and was
at the
impossible to miss. She was wearing a bright red suit that a blind
man would to
have had trouble missing. No doubt about
it,
she wanted
be seen. More importantly, she also asked good questions.
im-
I
mediately liked her and thought she was very smart. At the end of the meeting, she wished
me well and said she would be watching us
very closely.
As events unfolded, she was frequently on tions, telling
the phone, asking ques-
us what she heard on the Street. She attended analyst
meetings and press briefings, becoming an absolute expert on Scott Paper. Through Linda, huge funds such as Soros, Tiger
and Brahman Capital invested heavily She held meetings
made huge sums
all
in us.
where potential
at Bear, Stearns
could meet me, and those vest
of
who
Management, investors
followed her admonitions to
money with
the way, interfacing with billions
Linda rode the Scott deal
us.
and
in-
billions of dollars
worth of
funds.
One day, in early January 1995, flew out to Scottsdale, Arizona, for a Goldman Sachs & Company investment conference. They talked I
about our stock but
it
what was happening "If
you want the
to Linda
was apparent
have a clue
at Scott.
real story,"
Lieberman
their analyst didn't
at
I
said, standing up,
"why don't you
talk
Bear Stearns?"
They were shocked and appalled. But
hell,
view of
I
told
dozens of people that
Scott, they
should
if
they wanted an objective
call Linda.
Lieberman, McAuley, and Smith Barney's George top-rate
and
for
Adler were
and followed the company better than anyone. They caused
hundreds clients
B.
of millions of dollars to
huge sums
of
be invested
in Scott
money. They gained prestige
themselves as analysts.
and made
for their
their
company
Dunlapping (he Corporation
254
"Linda,"
people
I
one
said
day, "you are doing a fabulous job.
at Bear, Stearns are taking
me
She assured
they were, but
good care I
wanted
hope the
I
of you."
to
be
sure.
I
went
to her
and impressed on her supervisors how much thought of her work. "Here is a young woman who think is fantastic," said. firm
I
I
made hundreds
"She has tainly
hope she
is
of millions of dollars for people
rassed by
my
and
I
cer-
well taken care of."
even wrote a follow-up
I
I
letter.
fawning, later said
it
Linda, although
somewhat embar-
didn't hurt.
O O O George Adler was an entirely different character from Lieberman
and McAuley.
A managing
around the paper industry
director of Smith Barney, he for forty years.
He was
had been
cynical; he
had
seen companies come, he had seen them go.
And while he made there,
I
positive forecasts for Scott during
don't think he really believed in the revolution until
my time we were
over the palace walls.
One day, much to our surprise and delight, he caught fire and became a real believer. And because he was such a tough guy, when he truly believed, that convinced many more people who had been on the fence. It was significant because Adler's audience, the retail trade or Adler asked very hard questions at the analyst conferences.
general public, was quite different from the institutional investors to
whom
Lieberman and McAuley spoke.
When
our stock
briefly lost his
shot
first
newfound
faith.
most mechanically lowered "Buy
2,"
rectly to for
up
like a rocket in
He played
it
mid-1994, Adler
by the numbers and
his rating of Scott
from a "Buy
which infuriated me. was so angry couldn't I
I
tell
him what thought I
of his action, so
call
al-
1" to
Adler
di-
Mike Masseth did
it
me.
"Al do!"
wants you
Mike
to
know
said, quoting
that that
me
ing for analysts
on June
the stupidest thing you could
precisely.
The next time saw Adler was I
was
at a
14, 1994.
New York Stock Exchange
meet-
Impressing the Analysts
"I'm sorry
you
feel the
way you
do," Adler said to me, "but
255
we have
a rating system I'm required to follow."
"Then you must change your rating system!"
I
said. "Or
you have
to
your earnings system."
raise
The whole
issue
was
was announced a year endorsed
when
forgotten later
the Kimberly-Clark
and Adler immediately and
merger heartily
it.
O O We
obviously enjoyed regular communications with the analysts
and the
portfolio managers.
We put out press releases to communicate
with the world at large, generating newspaper, magazine, newsletter,
and online
the analysts
discussion. Meanwhile,
were forming opinions, spreading
their views, interacting
Is
radio reports
managers and the press
with the portfolio
cause
TV and
and
articles,
we generated
it,
—
all this
taking place be-
creating very important results.
there a direct, instantaneous, causal relationship
lysts'
reports
and the stock
The relationship
is
more
price going
between ana-
up a point on any given day?
subtle than that, but essentially,
it
all re-
volves around communications. Analysts say to their firms, "These are our best ideas for where you should put your are compensated
if
money" and they
the investment transactions funnel through
their firms.
Not every announcement set
off
a domino effect, nor
pected to. think we anticipated market when we announced a new venture in I
move
it
ex-
reaction well. For example,
China, where Scott would
spend $6 million today against long-term but not the kind of thing likely to
was
potential,
it
was
exciting
the stock price in the near
term. Likewise, individual asset sales such as S.D. Warren eration energy plant in
Alabama contributed more
and the co-gen-
to a cumulative,
snowball effect than a daily impact. The more important element of those sales
was
the
message they
sent:
businesses and focusing on consumers.
We
were getting out
of those
Dunlapping the Corporation
256
If
you come up with a brand new program, Wall Street won't give
your stock price a 100 percent credit give
it
some
credit,
increasingly earn
Having
this
its
able.
If
there
is
I
more and more
when
progress,
comes
believe there
I
is
company's stock price
to a
is
always someone account-
a reason.
the stock goes down,
If
Someone in my organization should know know somebody who does.
also a reason.
—or
pay great attention
anyone
will
it
credit.
it
the stock goes up, there
to the hourly
card to the shareholder. for
today. But the Street will
understanding of and relationship with Wall Street was
daily fluctuations,
reasons
it
and as the company demonstrates
important to me, because
and
for
ups and downs. That's
the
my report
down by an eighth, it's hard and somebody better know
the stock goes
If
to explain; but five points,
what's going on.
There
PE
a profit-to-earnings (PE) ratio on every stock and the
is
—the price per share divided by earnings per share the past — both the short and the long view of the for
twelve months
company.
If it
reflects
didn't,
have the same PE.
every company is
It
like
same
in the
industry would
a barometer, or like feeling for some-
body's pulse.
The stock
price drives me.
riod of time, but
you can't
flects the future, not just
trying to understand
if
You can
fool
it
fool the
market
for a short pe-
forever. Ultimately, Wall Street re-
what we do
today. Wall Street
is
always
what has been announced constitutes normal
earnings or good earnings. Can they be sustained? Will they grow? the analysts If
and brokers want
our stock price
falls,
I
to
know, so do
If
I.
can get upset about
it,
but the more prac-
we discover the reason new product that analysts beis that a competitor is bringing out a lieve will have an adverse impact on us. And if it is true, then we
tical
response
is
to find out
why. Sometimes
should react quickly and decisively. For example, Scott Paper
product
is
was introducing
likely to
sider doing the teract
it.
command
same
thing.
toilet
if
paper with perfume and that
a large market share,
Or at
a competitor of
least
we should
con-
have a strategy ready to coun-
Impressing the Analysts
What we shouldn't do
We
stock price.
is
change our strategy based on
will put in place
doesn't change unless there
we
find a better
way to implement
this hour's
and implement a strategy
something wrong with
is
or
enhance
it.
It
and apply
may be
competitor
The stock market's to inter-
is
it.
that there
is
that
or unless
it,
meandering contains information. Our job as managers pret
257
is
misinformation about the company, or that a
talking about us in a negative way. That happens.
o o o The job try and,
much
of sell side analysts
based on
to
do
financial research
like.
on an indus-
my case, they wanted as about who Al Dunlap was so
that, predict its future. In
information as they could develop
that they could try
be
is
and
What would
I
figure out
likely
do
what the Scott restructuring would
to turn the
company around? What was
my track record? Where was before? How successful was I? Our own shareholders were wondering the same things. The I
lysts
were scrambling
not Scott would be a
Because
I
rent dossier
had covered ble.
lic
advice as to whether or
good investment under my guidance.
had been
in Australia, there
was not a good and
cur-
on me, which created a mystique. The Australian press
me
aggressively, but their
And because
held, there
to offer their best-guess
ana-
work was not
easily accessi-
James Goldsmith's companies were
Sir
privately
were no publicly accessible shareholder reports and pub-
stock prices.
What
the analysts did hear from people
who knew me
was, "Fas-
ten your seat belts for the greatest roller-coaster ride of your
Analysts are the
first
line of
defense for shareholders, and most of
the ones covering Scott did an excellent job.
trenches, asked tough questions,
challenge
me
in their
life."
and used
They got
into the
their implicit right to
search for information the investors couldn't
possibly find out for themselves. I
did everything
I
could to make their jobs easy, following the same
script as at Lily-Tulip.
Change the names and everything
else
was
the
Dunlapping the Corporation
258
same.
I
was
who
totally accessible to the analysts
followed that com-
pany. They loved me, they loved the stock.
At one Lily-Tulip analysts meeting
had a great
"Lily-Tulip
aberration.
your people
Even before
said to me,
year as a public company, but
first
that,"
I
retorted, "go follow another
was an
it
when we took
that,
show promoting
was
where
in Boston,
we
Lily-Tulip public,
did a twenty-
One
the initial public offering.
had a
I
company and
tomorrow."
to sell their stock
three-city road
stops
someone
attended,
can't possibly continue this."
you believe
"If
tell
You
I
of the
honchos
private meeting with top
of Fidelity Investments, including Peter Lynch.
One man
said, "This
company has only
around and we're not sure
can
it
Why
last.
been turned
just recently
we buy
should
stock on
the public offering?" I
why
kept telling them
believed in
I
headway. By the end of the meeting, "Listen,"
to
I
my
grabbing
said,
I
And
with
The next
that,
I
coat to leave, "this
walked
when
when
way
they
knew
I
didn't give a
I
sweet success.
said,
to
back
it.
I
with you!"
me
went back
some
"We
can't
do
was
a corner,
in at
them. Apthat's
talk that the
execu-
and get a
taste of
of their stock
that"
—even though
any money and could have used the proceeds myself.
gument about
if
in.
insiders should sell I
hell
going
damn
don't give a
damn and walked,
Lily-Tulip public offering, there
and KKR
is
a gigantic share?
in for
me, the harder
at
them
they put their order
During the tives
who came
came
told
I
I
company
out.
tried every
but the harder they
frankly,
you don't buy the stock, the
day, guess
They said they
parently,
if
wasn't making any
I
was steaming mad.
be enormously successful and quite
you buy stock. And
but
it,
said that selling
We
I
didn't have
had a big
would be a serious mistake;
why should an outsider buy in? The same argument came up years later during
if
ar-
we, as
insiders, sold out,
Paper
in
Houston.
We
were there trying
to
about the pending Kimberly-Clark merger. to
be clever fellows and we
"What would you
sell
it
calm concerned I
said,
haven't sold a share."
at?"
somebody
a meeting for Scott
asked.
investors
"We are supposed
Impressing the Analysts
Til consider selling at $60 (post-split),"
We ended up just over Now the same people say
me
Everyone but
said.
$60 (post-split)
laughed. closed.
I
259
when
the merger
set too low a target!
I
o o o Mike Masseth's job as director of investor relations was saved because Basil Anderson spoke up
worked together before
oped a
arrived,
I
him
early on.
and
Basil told
built
up
me
real credibility with the analysts
Wall Street because he didn't try to gild the
what
ture of something other than
also an expert rest of
The two
of
them had
they had devel-
working relationship. Even through Scott's bad times,
solid
Mike had
for
it
lily;
and
investors
he didn't paint a
on
pic-
was. And, like Basil, Mike was
on the paper industry. He made
it
his job to
keep the
us informed about what the competition was doing.
somebody in Mike's position is one of providing balnews was bad in recent years, his job was getting word out that Scott was trying to do things to improve but without a lot of success. He got high marks from analysts for giving them the truth, and they could make their own calls based on that. His consistency, whether the news was good or bad, won him the respect of a tough bunch of critics. No doubt his handling of certain issues The
ance.
role of
When
the
helped temper response to Scott's often less-than-sterling perfor-
mance.
When
earnings didn't meet expectations, that was particu-
larly difficult to do.
When we met
with investment firms, the percentage of people
subsequently bought our stock ran close to 95 percent. got a chance to look
me
in the eye,
things to increase shareholder value,
as Mike
and
Basil
back
remember when
I
Neuberger & Berman. as
we
bell
left.
An hour
me
up,
it
was
Basil, Mike,
my
hear
like
and
I
it
—about
views on doing the
I
was a
all
ance. Neuberger
right
faith healer.
met early one morning with but they were noncommittal
the time of the market's opening
—Mike coincidentally had a meeting with a
through which
who
people
and see credible executives such
We felt went well, later
When
of Scott's stock trades
specialist of the firm
were followed and kept
& Berman was buying stock
in bal-
right before Mike's eyes.
Dunlapping the Corporation
260
Later,
we
on the
we were
discovered they were buying stock even as
getting
elevator.
That was almost uncanny because find out
who
and
actually buying
it
is
usually near impossible to
happens. In
this
particular instance, the stock specialist told Mike that Neuberger
and
is
Berman had been a
selling stock as
it
big buyer that morning.
O O On June of analysts
3,
1994, Scott stock
who
was
selling for
wrote glowing reports
48 V2. Did the multitude
in the
wake
of our
annual
shareholders meeting have an impact? Yes.
By June
14,
another significant day
in
my
terms of
relationships
with the financial community, our price had risen to 51 Vs. That was the day Scott sponsored a meeting with analysts, at the
New
York
Stock Exchange Board of Governors Boardroom, and held a dinner that evening for sell side analysts.
The Exchange was an unusual meeting don't often hold meetings there.
guests must go through
another message that I
hit
five
very inconvenient because
we meant
business. at that
meeting, including
my
boards of directors through stock equity
Scott actually did
—
because companies
sorts of security to get in, but that sent yet
on many touchy subjects
for incentivizing
tors
all
It's
site
it.
I
ideas
—before
also discussed setting time limits for direc-
years and out; keeping previous, failed
one-year restructuring plans; and
own our companies. Some of the sell side
how
CEOs
off the
board;
shareholders, not directors,
"Where have they
analysts later asked me,
been hiding you?" The dinner crowd was tougher because egos, even bigger wallets,
hand, they
made
pompous and I
surprised
and
perfect fodder for
sense of humor.
me because
I
On
have big the other
love tweaking the
imperial.
many
in the
group by revealing
reer at Kimberly-Clark as a
things nearly
little
sell side analysts
full circle
management
by taking charge of
that
I
trainee Scott.
had begun
my ca-
and had brought
Impressing tbe Analysts
I
had
just finished describing
Scott stock
one
—the
first
time
rumphed,
twin $2 million purchases of
many people
of the brokers challenged
"From some
my
my
of the things
I
261
there
had heard
of
it
—when
investment as unimpressive.
have read about you," he har-
understand you might be worth somewhere between
"I
$50 and $100 million.
Is
commitment on
this really a significant
your part?" don't
"I
know about
every dollar
it
I
significant.
is
has dug into his
him
said, barely letting
me and
significant to
is
brother, /think
who
you,"
I
every dollar
treat
"but
finish,
like
it
is
my
Can you show me another executive
own pocket and bought stock without any guar-
antees from the company?"
make
Analysts like that one test and provoke us to
have a bona fide level of commitment and belief doing. But they're
still
in
sure that
we
what we are
annoying!
O O O Linda Lieberman was
morning,
I
among
those at the
NYSE meeting. The next
attended a small breakfast meeting at Bear, Stearns,
at-
tended by Julian Robertson, an institutional money manager from
Management. Robertson, a
Tiger etly
through
thought
I
much
fine
Southern gentlemen, sat qui-
of the meeting, asked
had blown
it.
two questions, and
But the next day, he put
in his first big
left.
I
order
for Scott shares.
In
two weeks,
knew
already
I
breakfast with Tiger impressed
was a
And
player.
I
liked Linda, but organizing this
me and earned
her
my
respect. She
Bear, Stearns started trading massive
amounts
of
stock, accounting for perhaps 30 percent of Scott's trading volume.
The firm and
its
clients
The second time
I
made
a fortune with us.
visited Bear, Stearns,
maybe two months
later,
Linda set up a larger meeting with about twenty people. During the
course of
my
presentation,
I
warned
the analysts
they had better have Scott toilet paper in the rest
— did same morning— and they
went
in there
like
I
at
and brokers
Brown Brothers Harriman
didn't,
we were
that
rooms because
if
I
earlier the
not going to do any more
Dunlappmg
262
the Corporation
business together. Not only did they have Scott brands, Linda told
me
they always did. In
September
1994, our stock
was continuing
its
Linda wrote a report that mused, "What now?" In
upward move and
many ways,
she ac-
curately projected Scott's future in that document, revaluing the
whole company following the sale
company, she advised, or divest
exit strategy. Either sell the
by piece. Linda gave us a twelve-
So extraordinary was the report
"I
it
it
piece
eighteen-month window and set
to
an uncannily accurate target share price
fore
Warren and outlining an
of S.D.
of $105 (pre-split).
that Linda asked
me
to read
it
be-
was published.
want your feedback," she
you are comfortable with
said.
"It is
it."
She had nothing to worry about;
loved
I
can you always be ahead of the pack?"
Any other CEO
in the
not getting printed unless
I
and
it
asked
told her so.
"How
her.
world would have called her boss, Allen
"Ace" Greenberg, and threatened to never do business with Bear, Stearns again over such a presumptive report. Knowing Greenberg, for
whom
runs a
I
have the utmost respect,
first-class outfit
incentivize,
and be
and
I
who
didn't
places, but
to the right schools
were
earned her a
my
raise.
He
own: be tough,
fair.
—my kind of people.
go
it
his ideas correlate to
Being around Linda also introduced Bear, Stearns
bet
still
headed
me
people
to several other
Hungry, aggressive young
and
didn't
come from
at
kids,
the right
for the top.
O O O Scott Paper stock the time
had already appreciated 50 percent or more by
Bob Jermain took
it
seriously.
Jermain, a managing director of Soros Fund Management, didn't
buy
his
split),
first
but
shares until
still
did
OK
we
split
the stock.
He bought
in at
$35 (post-
because the stock topped $60 the day of the
Kimberly-Clark merger.
His interest
was another product
She had been wooing him
for
of
my
relationship with Linda.
some time when he
finally called Basil
Impressing the Analysts
Anderson and asked
had an amazing or didn't
for
a meeting with me. Basil warned him that
hit rate in
own much,
263
terms of people
who
didn't
own
we
the stock
substantially increasing their holdings after such
a meeting.
Laughing
—he thought
Basil
was joking
—Jermain came
to Philadel-
phia the next day.
way down on
All the
going to be a big
fat
despite the fact that
the train, Jermain fretted that his trip
was
waste of time. He had studied our stock and, it
had gone up
substantially,
it
appeared ex-
company has earned in earnings in the future. He
pensive on trailing earnings, the earnings a the past,
compared
against anticipated
had also met many
duced a whole Usually,
high-flying
managers who talked big and
pro-
lot less.
on Wall
brokerage firm will manufacture a great
Street, a
corporate fairy tale about anticipated earnings. Then the analysts
meet the company's management and hear that, "This could happen"
and "That might happen." What they heard from were going
do
to
in
me was what we
how we were
a specific time frame and
going to
doit.
"What
will
He was off
you do on the cost side?" Jermain asked.
surprised
how ready we were
for that question, ticking
our intention of selling big assets such as Scott Plaza and S.D.
Warren, and smaller prizes such as Scott Health Care and our share
Cabin Bluff Partnership, a hunting lodge, conference center
of the
and 38,000 acres Over lunch,
I
of timberlands in told Jermain
bought Scott stock out of
Canada.
about the two times
my own
I
had personally
pocket. That got his attention, as
did everyone else's, but what riveted him
was
it
the $10 million invest-
ment my senior executives had subsequently made. That just didn't happen in his experience. He was also turned on by the way we had restructured director compensation. If
we
half of
thought Jermain it
until a
few weeks
ing Scott stock in large
York.
He
didn't
left
want
lionaire financier
the meeting excited,
later.
That's
volume from
to
when he
the train
on
waste another minute!
George Soros, put the stock
we
didn't
told us his
know
the
he was buy-
way back to New
In fact, his boss, bil-
in his
own
account.
Dunlapping the Corporation
264
months
In the
to
come, we met with Jermain more than a
dozen times, establishing a
amassed more than 5 million shares
ally
(just
eventu-
under 5 percent of
and became one
of our outstanding shares)
all
He
friendly relationship.
tight,
of our largest
shareholders.
But not everyone was razzle-dazzled by their
me
first
encounter with
at Scott.
Another potential investor thought the company had a good pro-
gram when he
visited Scott before
was some good
there
And when was
stock then.
I
occasions, but he
A
stuff
still
I
came on
happen, but he didn't buy the
about
to
hired,
we
spent time together on several
wasn't convinced. So he didn't buy.
loud and boisterous guy with what
some might
on a fireworks show not unlike
personality, he put
He thought
the scene.
call
an abrasive
my own. He made
views known and asked penetrating questions. He came to the
his
1994 annual meeting, saw us at a couple of other forums, invited us
own
to his
enough This
but
office,
still
couldn't get himself quite comfortable
investment trigger.
to pull the
was one conservative
investor.
When
the stock hit the low
$60s (pre-split), he finally decided to buy. Don't cry for him, though;
he
still
doubled
When and
he
Basil
his
finally
money.
came on
because he had
board,
finally
it
was extremely
seen the
gratifying for
me
light.
There were other doubting Thomases, too.
Among
the analyst
community, there are always people who buy based on leadership.
When
they finally bought
others followed. There
is
always a lead
steer or two, certain influential Wall Streeters such as
George Soros
or
Warren
Buffett.
When
in,
they act or
recommend something,
others
naturally follow.
A
small investor doesn't have access to the information or
sources Soros does. But because he has bought, so will the
Many people asked
us,
"Why should
I
little
re-
guy.
buy now? The stock has
al-
ready been run up."
We answered
that kind of question
programs, our strategy and what
What people wanted
to
by patiently explaining our
we planned
know was where
to
do
in
concrete terms.
the growth
would come
Impressing the Analysts
from.
we could
If
explain our strategies in terms of
and
their likely impact,
back
The way
put
I
it
computers and figure future cash
them was
live in
around, and people look
at
what a
tell
he
Word
is
for real."
his friends,
of
that
mouth
is
yet to
come, and
far.
community. Information gets
Buffett or Soros
is
buying or
convinced a herd of others.
was
"I
is
have done so
I
a tight-knit
When Soros bought Scott,
Jermain might
The best
this:
Mickey Mouse could have done what
ing.
go
light.
to
Financial people
products,
further cost reductions, analysts could
to their offices, take out their
flows in the brightest
new
265
just
down
sell-
A Bob
see Al Dunlap and
to
an important form
of advertising in
the investment community.
Brahman
called after Jermain visited with us.
should be looking
morrow OK?" is
at
your company. We'd love to
Literally
"We hear
visit
—tomorrow. These were people
with Al to
we
that
—
whom
is to-
time
money and they want to be able to make their investment decisions we went out of our way to be available and give people ac-
now. So cess, in
our offices or
theirs.
o o o Scott
was doing very well and
We had
panding.
getting better.
Our margins were
a return on equity of 20 percent,
we grew our sales
We
by 20 percent, and operating margins increased by 20 percent.
managed
tightly
amount
still
The company was generating a tremendous
of cash flow. Free cash flow,
spending
we
capital.
for
it
money
that
was
available for
growth, more than our immediate capital needs
—
had more assets on the market. To create value, we had
deploy those funds somehow. park
in
ex-
We
plus,
to re-
couldn't just generate cash
and
a bank.
So the next key
strategic question for Scott
was what
to
do with a
strong balance sheet or with the cash. The options included giving to the shareholders,
buying back stock or paying huge dividends.
Another direction would be redefined core business.
grow
it
A
to
make
acquisitions within our newly
was
third option
internally in related businesses.
I
to find
some way
didn't think there
to
were
Dunlapping the Corporation
266
enough opportunities back
it
back
can do with
this
looked
at
And while
money."
we looked
"1
that
can't
was
to giving
it
do better than you
possible,
we
felt
we
at acquisitions.
Champion, Kimberly-Clark,
River, as well as other
came down
it
something.
to the shareholders says,
could do better, so
We
So
that.
to the shareholders or acquiring
Giving
tive
do
for us to
Fort
Howard, and James
consumer product companies. Other prospec-
mergers didn't make sense because they combined dissimilar
businesses for the sake of bigness.
We
felt
that a
combination with Kimberly-Clark would be the best
because of the nature
we were strong
of their product line. Geographically,
where
they were weak. They were strong in the United States
but not in Europe, where
we had more
clout.
Kimberly was dying
in
Europe. Scott had a great European operation. Most of the analysts said this
was a godsend
for
Kimberly to get Europe squared away.
terms of products, Kimberly-Clark was strong
In
such as Huggies diapers, Kleenex sanitary pads,
facial tissues,
and Depends adult
bathroom
tissue
bathroom
tissue in
market
in the
diapers.
in
brand names
Kotex and Lightdays
They had reentered the
United States and were expanding
in
Europe.
Putting together Scott Paper the right thing to do.
and Kimberly-Clark was
The weaknesses
the strengths of the other.
We could
of
fully
strategically
one could be shored up with load up one truck instead of
having two half-empty on the road.
A
hostile takeover
appealed
trainee returning victorious
We would
to
my ego
—but
it
—the junior management
wasn't financially practical.
have had to pay a premium to their shareholders. Then
Kimberly-Clark would have had to be restructured to generate syn-
ergy for our paid.
It
own
shareholders and return the value of the
could have been done, but why?
forces as a pooling of interests,
If
we
no premiums had
the existing shareholders of both
premium
voluntarily joined to
be paid and
all
companies could benefit from
whatever synergies there were. This
was
definitely the best option.
Mark Davis
of
Salomon Brothers helped us think through
ferent strategic alternatives. Meanwhile, Dillon-Read
all
the dif-
was working with
Impressing the Analysts
we
Kimberly-Clark and plate a
merger
and see
at
everyone
if
is
would contem-
got a call that Kimberly-Clark
somewhere around market serious about
The
it.
price.
267
We
said, let's talk
contacts between the
first
companies were exploratory conversations conducted by Salomon Brothers and Dillon-Read.
At the very
first
face-to-face meeting of principals
and John Murtagh represented Scott
panies, Russ Kersh
They immediately recognized Kimberly-Clark's
and we moved forward quickly from cally
approved going
was
exchange
rate
in Atlanta.
interest as genuine,
Our board
which was
enthusiasti-
setting
an exchange
the guaranteed value at
which Scott
Paper shares would be exchanged
entire negotiation.
that point.
to the next step,
rate for the merger. This
Settling the
from the two com-
for
was
Kimberly-Clark shares.
moment
the only heated
in the
me
John and Russ had instructions from
that
And
Kimberly-Clark didn't meet our threshold, they were to walk out. they would have, too
—
if it
hadn't been raining.
The Kimberly-Clark side moved much slower than we had more people
and Russ
and they were
that point as they
that they couldn't say
powered
on major decisions. With
to consult
their instructions,
pany from
to
make a
if
saw
I
gave John
free to represent the
The problem
fit.
us,
did; they
in this
com-
case was
whether the Kimberly-Clark side wasn't em-
decision or
was engaging
in
show business as
part of the game.
Russ and John desperately wanted to do the deal, but KimberlyClark hadn't met
my
threshold price.
"Come on home, we are he wanted to give them more
I
not doing this deal." Russ objected; time. Besides, he said,
"It's
said,
raining. Let us at least stay until
it
stops
raining."
Nobody
will ever believe that
million from the merger,
go back
I
the
was willing
to building Scott.
the deal done.
I,
If
to
guy who stood
just
a
going to
get!"
I
said,
"It is
shareholders. Pack up."
was
the money,
I
had
was done. Everythan me it was a lot to
little bit,
body who was going to make a lot less them wanted to do the deal. Russ said,
—
make $100
walk away from the table and
the driving force
could have given
to
it
—
"Al,
look at what
we
are
not that; we've got to do even better by our
Dunlapping the Corporation
268
Before they could leave Atlanta, they got a call at the hotel from
who
the Kimberly-Clark people
They offered
to split the difference
.765 per Kimberly-Clark share
When
came down
it
vestigated
all
said, "Let's finish
what we
— making each Scott share worth
—and
said,
I
"Do
it!"
due diligence, Kimberly-Clark thoroughly
to
and
of our productivity
cost-efficiency claims.
they suspected things were overstated or done with
But
rors.
we
kept getting word back that they were
we said. They
tually did the things
of the production facilities
could be done.
own
assume they
I
organization
learned from the
and said some
things in our paper mills
some
started."
was
will try
No doubt
smoke and
mir-
we
amazed
that
way we
did certain
of the stuff
just
in-
we had done
ac-
in
beyond what they thought
and apply these lessons
in their
.
When we went public with the impending deal on July 17, 1995, suffered a moment of panic. What if Wall Street didn't understand the I
upside of the deal and rejected port,
I
dence It
would
lose support
in Scott
would be
would have
thing
I
killed
had worked
would have
lost
every
That was the
personally
Everyone
for.
win the market's sup-
failed to
and sixteen months
lost.
me
it? If it
bit of the
risk
—and my
still
I
of rebuilding confi-
faced
if
was wrong.
I
credibility
and every-
would have made money, but
I
goodwill.
Fortunately, any initial reluctance
on the Street was soon
forgotten.
7
Kimberly-Clark stock immediately shot up $4 /s. David G. Santry, a senior vice president at
holders, told The
Oppenheimer
New
York Times,
strategic point of view.
headline
Can
in
I
think
"It
it's
Capital,
one
of our major share-
makes
really
good sense from a
good
for the shareholders."
The Wall Street Journal about our deal was, "Stockholders
Benefit in a Merger, Even Without a Fat Takeover Premium."
Advertising
The
Age
wrote,
build from scratch"
"It
—a
frequently
word
of
makes more sense
encouragement
to
to
And
buy than
wary Kimberly-
Clark shareholders.
The merger was my
final gift to
our shareholders.
As the paperwork was being completed between our two companies and the deal ran through the regulatory gauntlet,
I
thought
when started my career with Kimberly-Clark as a $650a-month management trainee in New Milford, Connecticut. My first back
to 1963
I
Impressing the Analysts
pay
was $35 more a month. And now here was, thirty-two years and Kimberly-Clark was paying me $20 million not to compete
raise
later,
I
with them for the next five years! Twenty million not to do a
when
thing,
on
all
of that
of this great merger.
humorous
tle
me
they had paid
reflected
I
all this
It
damn
off.
and thought about myself as the architect
was almost overwhelming, and more than a
It
that this
money
my ass
$650 a month to work
little
trainee
came back
whole
big competitor, engineered this
me
269
thing,
lit-
as chairman of their
and they were paying
not to work.
shows the training program works.
o o o As
Bob Jermain did
well as
of Wall Street
buying Scott stock, he
in
$51 to $49, and then pushed tax-free
in
was severely
it. I
it
even further back
was put
off
community, "Kimberly-Clark
went up 168 percent lieve there
is still
recognizes
it,
There was
more growth
I
right;
percent.
pre-
is
I
repeatedly told the
buying a company that
just
twelve months. They obviously be-
potential.
I
believe once the market
be a premium."
disagreed then and
I
haven't I
I
should have held
changed my opin-
believed
it
was
took the market a while to understand
the right it.
I
was
with a 32 percent share price increase from the
announcement
When in
I
if it
we ended up
date of
because there was no
was a major shareholder and
thing to do, even
to earth, at $43.
hand-wringing and criticism that
out for a premium. ion today.
in the last
there will still
from
(post-split)
criticized.
Our stock had already been up 168 financial
down
exchange, a merger of equals. Everybody came
out on top. But Wall Street
mium
much
our merger with Kimberly-Clark. That kind of
skepticism immediately nudged Scott stock
was a
like
—was nonetheless skeptical about the true motivation
for the structure of
It
—
to closure.
Jermain phoned
me
to discuss the merger,
he referred to
it
a derogatory manner as a "take under," which he described as the
opposite of a takeover.
A
take under
was what happened when
stock traded lower than before a merger announcement.
the
Dunlapping [he Corporation
270
I
tried to reassure him.
"This
ready I
is
a natural progression,"
come
said, "of all the things that
I
have
al-
to fruition."
how
reviewed the synergy between Scott and Kimberly-Clark and
be derived from putting us together were
the cost savings that could
enormous. "Wall Street has no idea how large
this will be,"
I
said.
money underestimating me." Jermain was still wavering. What bothered him was that he had met Wayne R. Sanders, chairman of Kimberly-Clark. There was nothing "Many people have already
lost
wrong with Sanders, Jermain of time, Jermain
is
wasn't me. In a short period
just
had become accustomed
vestment and wasn't yet "I
he
said,
at
to the
I
said.
And
if
his in-
"He knows that he
company with a mindset deeply entrenched
holder value and cost-consciousness. right thing.
I
ease about slipping into bed with Sanders.
have had meetings with Sanders, too,"
taking over a
way handled
in share-
believe that he will
I
he doesn't, the shareholders
And am a shareholder." He only started coming around when keeping all of my money from the deal in
will
be
do
the
at his heels.
I
I
than $80 million, making
me one
ual shareholders. "I'm going to
do the
right thing
He was
pressed the point that
I
was
Kimberly-Clark stock, more
of Kimberly-Clark's largest individ-
be very active
by shareholders,"
I
said.
in telling their
"You can bet on
board
to
that."
not the only shareholder concerned about the plummeting
fortune of Scott stock after the announcement. But he decided not to sell.
And, more importantly, he convinced the people
works not
for
whom
he
to sell.
Now we both had a great deal
of
Jermain had only been with Soros
had been called
money and for six
into question as the
credibility
on the
line.
months, and his credibility
market originally interpreted
the merger news, but he stubbornly stuck by us. I
have no doubt that other brokers and analysts thought twice
about selling with us.
If
off their Scott stock,
wondering why Jermain had stuck
he believed the merger would work, many others no doubt
reconsidered the implications of the deal as well. Their premium then
came: the 32 percent run-up of the stock the merger.
after the
announcement
of
Chapter
17
FIGHTING WORDS Lesson: If everybody in the corporation was doing this, they'd never get Dunlapped in the first place.
Dunlap
(dun-lap) vt [after Albert
To turn a company around best; eliminate what is not the 1.
J.
Dunlap (1937-)] speed. 2. To focus on the 3. To protect and enhance share-
at lightning
best.
holder value.
Word has corridors
down from the board of directors to the executive and beyond. Your company will soon be Dunlapped. filtered
Are you a dead duck?
Thousands
of people
success in their
lives.
who
have been Dunlapped have had great
more were
Yet thousands
fired.
How
can you
avoid being a casualty? If
you go with the
flow, you'll ultimately
Long before you get Dunlapped, work as ner office tomorrow. Even right things. Don't
if
be afraid
if
I
drown
in the
undertow.
might move into the cor-
you're buried in office politics, do the to
be a maverick.
Differentiate yourself
from other people. State your views. Write memos. Put your opinions out there in living color. Don't just that
the next
you actually had these views, prove
Your ideas I
tell
will
never see the
light of
CEO who comes along
it.
day unless you communicate.
learned the importance of standing out from the crowd from
my own
first-hand, on-the-bottom-looking-up experience. After
years as a
management
trainee with Kimberly-Clark,
boss and said, "Kimberly-Clark and
I
I
went
are at the crossroads."
If
to
two
my
he was
271
Dunlapping the Corporation
272
my presumptive
offended by later,
behavior,
never heard about
I
a
it;
week
received a more substantive assignment.
I
And when you see change, don't run in the other direction. Don't be a spectator when it starts. Prove you have been or can be a catalyst for change, and you'll ultimately be part of the group running the corporation after
ing I
and not
come
been Dunlapped.
it's
fighting, not
you have spent your
making your voice heard,
company
into a
If
change and not interested
like in
life
acquiesc-
be gone.
you'll
an absolute whirlwind, demanding
excuses. I'm not like anybody you have
ever worked for in the past.
To exist and thrive around me, people must be willing ence and
relish
some people
change and challenges. Those two things But the reason for wanting to stay
off.
seeing the results of the change
Because
come fast
into
of the
new
—the change
speed with which
that
my job must be
reason. In a public forum,
I
listen to private
am
I
is
the benefit of
done,
I
definitely
form strong and
I
not intransigent.
don't like to
frighten
you helped make.
situations with preconceived ideas.
opinions about people. But
most always
to experi-
I
will listen to
be interrupted, but
I
will al-
counsel and consider ideas and options.
Learn the difference between being a "Yes" person and listening carefully is
made,
and picking a spot it's
for discussion.
And once
a final decision
time to stop talking and start implementing.
O O When an
believe you can
do the
wrong with walking job,
I
want
comes
Al Dunlap
to
someone's
of the team."
people have the guts and courage
Those whose jobs
make
yourself visible.
If
you
truly
job, ask for the opportunity. There's nothing
into
be part
in,
will
to
office It's
do
be eliminated
and
saying,
refreshing,
"I
can do
this
because so few
it.
in
a restructuring should
still
consider the outcome philosophically, and have enough confidence in
themselves to
A company
is
know
they will have opportunities
somewhere
else.
not your high school or college alma mater. Don't get
emotional about
it.
Fighting Words
Those ties
and
behind, meanwhile, will have broadened responsibili-
left
do more
will learn to
They
organization.
—and more quickly—
become
will
Fewer people
in the
newly lean
increasingly valuable as better
end up somewhere
trained employees, so they are not afraid to
spend
273
else.
be doing the same amount of work. You
will
will
time processing and more time implementing. There will be
less
more decisions made, more rapidly and by fewer people. The focus will
be on implementation.
Show no what
fear; anticipate, anticipate, anticipate,
When
times.
all
want
I
I
to discuss before
the answer or
and be prepared
where
to find
tell
I
When
I
at
ask a question,
me and
don't
a hurry. Be ahead of
in
it
you.
my
know know
pick up the phone and call you to
my time arguing. Be committed to the program. it's your own career you are really worried about,
office,
waste If
going to be enough motivation
then that's not
environment. You must be de-
in this
termined to work on behalf of an organization that needs your complete support.
remember
You must be concerned with the greater good and
that the shareholder
your performance
If
people
more
depend
I
king.
good and you have and
on, you'll stay
thrive,
the support of the
and you may be given
responsibility.
Finally, take pride in
lose sight of the
we
is
is
won't
last
end
what you do,
goal:
another day
in
where you work, but never
making money.
If
we
don't
make money,
in business.
O O O If
you
you are a good, will ever have.
Scott
and
under
my
loyal,
My
leadership.
If
I
J.
will
be the best boss
Good people have done
brilliantly
you don't believe me, here's what the senior
Cavenham had moved on:
In recognition of A.
I
decisions created sixty-two millionaires at
fifteen at Lily-Tulip.
executives of
me after
motivated employee
Forest Industries put
Dunlap
.
.
on a plaque given
.
For leadership and contributions to Cavenham.
to
Dunlapping the Corporation
274
And
with appreciation for teaching us to challenge what
is
and
seek what can be; Demanding more of us than we thought possible; Providing us the freedom to perform and showing us that excellent performance today is the foundation for the highest achievements tomorrow.
to continually
That was presented after the company was merged with Hanson
PLC and no longer had any I
I
cause people
achieve. it's
to
achieve more than they ever thought they could
The process
worth
it.
control of these people.
is
painful.
Sometimes,
it's
ugly.
But
in the
end,
ACKNOWLEDGMENTS Mean Business caused me to examine not only the elements of what makes a successful business, but what makes a successful individual. In my book, it comes down to one word: family. My wife,
Writing
been a
Judy, has
loving, supportive partner
and friend across three
continents and four decades on one of the most thrilling rollercoaster
The family also includes my son,
rides imaginable.
beloved dogs and constant companions, I
only wish
A
Brit
me my
with us
far
beyond
self-respect.
business career as varied and global as mine could not go
saw
at
family.
Two men
in partic-
a very young age and provided unheard-of opportunities.
great friend Sir
Along the way,
whose
I
talents
James Goldsmith taught
upon
almost 15 years.
and
will forever
be
And
things no business
in his debt.
helped develop. Russ Kersh was a junior accountant
met, but
associate
I
me
in
have followed their example and chosen young peo-
I
when we for
for-
and became my mentors. Ely Meyer believed
potential
school education ever could.
ple
still
—
ward without an equally devoted business ular
and Cadet.
and Mildred Dunlap, were
parents, Al
what they created. They gave me something
to see
wealth
my
and our
Troy,
I
saw a
fire
and
intelligence in
He became my
friend. Attorney
him
that
I
have relied
alter ego, a trusted business
John Murtagh was already sending out
resumes the day we met by accident. But instead of
firing
him,
I
sent his
boss packing. John's legal and personal counsel have been invaluable to
me. He, Russ, and
formed an unbeatable
I
trio.
Another outstanding lawyer has played an important part I
in
my life.
wouldn't dream of making a career move without consulting Howard
Kristol,
my
friend
and confidante. Another close
has proven himself a
brilliant
adviser,
Mark
Davis,
investment banker and trusted friend.
Several former business associates gave freely of their time in the
preparations of tiations,
We
Mean
Business, reconstructing events, detailing nego-
and providing documentation
are grateful to so
many
to
my
co-author and myself.
of them, including Basil Anderson; Bill
275
Acknowledgments
276
Andres; Charles Elson; Chris Sues; Bob Jermain; Dave Harris; Dick colosi;
Ni-
Dick King; Dixon Boardman; Don Burnett; Doug McCartney;
Evan Rees; Fin Fogg; G. Chris Andersen; Gary Roubos; George Adler; Jack Dailey; James Packer; John
Fort;
John Nash; John Nee; Kathy
McAuley; Linda Lieberman; Loretta Roccanova;
Madame
Gilberte E.
Beaux; Marguerite Hamilton; Mike Masseth; Nell Minow; Neville Miles;
Tom
Newt White; Paolo
Hardy; and
Iseman;
Neff.
book took me
Writing a
business
Tom
my
agent,
Andrew
Mahaney; and especially arating ride.
and
I
into
one
had not yet conquered.
I
think
I
told
Russ Carson;
Forlin; Pete Judice; Phil Lader;
I'd like to
my
Wylie;
my
of the few corners of the
co-author,
them wouldn't write I
my
thank
friend, Fred
Times Books, John
editor at
Bob Andelman, for an exhila book unless it was the best
it is.
Albert
J.
Dunlap
Boca Raton,
May There are several people whose contributions
I'd
24, 1996
who
put
in
by
Tricia Martin
Professionally,
I
recommended me
I
am grateful
hours of transcription
am grateful
to
John Mahaney of Times Books, who
for this project
and then shepherded me through
my
agent, Joel Fishman of the
Bedford Book Works, has proven himself one tough I
also deeply appreciate the unstinting support
and Judy Dunlap, one Finally,
I
wife, Mimi,
Business.
and early editing by Vicki Krueger.
most challenging moments. And
its
for the long
took a very
Mean
personal interest in the accuracy and quality found in the production side,
Florida
also like to acknowl-
edge, starting with Russ Kersh and Basil Anderson,
On
paper
of the
s.o.b.
this
friend.
and friendship
most fascinating couples
could not have survived
and
I
of Al
have ever met.
year without the love of
who endured my many absences and
my
long hours with
good humor and understanding.
Bob Andelman St.
Petersburg, Florida
May
24, 1996
INDEX
Anderson, Basil
accountability:
and
of consultants, 154
of
employees and
and for
staff,
187-88
L.,
10-11
investor relations, 36, 250,
259
on management team,
objectives, 39
for results, 74, 97, 146
in Scott
Adams, William W., 226
183-84, 249
Andres,
Adler, George, 16-17, 250, 253,
Anglo Group PLC, 201-3
Bill,
178,215
ANI, 77-80
254-55 Agee, William, 223-24
Asia, Scott Paper
E.,
24, 25
93-94,
Aspinall, John, 84, 132
American Can Company, 120-23 charitable giving
decision making
Gamma
in, 19, 92,
255
Alford, Lee, 85
Allen, Robert
in, in,
200
new products
of,
asset sales: of ANI, 77 of BAT,
41
Project"
matrix management
in,
in,
122-23
120-21
121-22, 230
Performance Plastics division, 121-23, 157-58 analysts,
35-36,
Paper meetings, 14-15,
Adidas America, 37
"The
33,
40
product development, 146
206
and competition, 74-75 and core business, 69-73, 81 of
CPH, 80
of Lily-Tulip, 66
product
245-70
lines,
74-76
of Scott Paper, 11, 14, 15, 17,21,
250-51
buy
side,
and
investor relations, 247-51
and
leadership, 264
and
Lily-Tulip,
69-73,89, 148, 170,255,
263
and
vertical integration, 74
AT&T, 24-25
258
and publicly held companies,
Axa-Midi, 205
170
and Scott Paper, 245-47, 249-65 sell side, 250,
251,257-59, 260
and shareholders, 257 and stock tight-knit
prices,
of,
BAT
Industries, 83, 107,
Bear, Stearns
255-56
community
Bannister, Roger, xiv-xv
202-6
& Company,
16, 250,
252-53, 254, 261
265
Beaux, Gilberte
E.,
203, 205, 215
277
Index
278
board of
207-28
directors,
best practices
Cavenham
226-27
of,
Forest Industries, 230
as Crown-Zellerbach, 83-85
and CEOs, 180,210,221,225
Dunlap honored
committees
and Hanson, 33
213
of,
compensation
of, 20,
213-14,
217-28
headquarters
of,
layoffs in, 85,
86
85
as corpocrats, 207-10
management team
and earnings gap, 8-9
timberland assets
members
on, 210, 212
in,
216-17
of, 86, 87, 88,
and unions, 86 CEOs, 177-92
of Scott Paper, 8-9, 16, 17, 20,
and boards
40,195,207-10,212-16,
of directors, 180, 210,
221,225
compensation
219
and consultants, 156
as target, 8
as corporate
limits for,
and
212
177-80
of, 22,
as shareholders, 193, 201, 219
term
33
240
professionals on, 210, 211-12 roles of,
273-74
by,
elitists,
196
investor relations, 248
Bozell Worldwide, 18
role of, 200, 248
Brahman
as shareholders, 193, 196
Capital, 253, 265
Brazil, Scott
Paper
in,
see also leadership;
19
management
Brody, John, 16
"Chainsaw," 17,23,81, 132
Brown Brothers Harriman &
charitable contributions, 62,
Company, 17,245-47,250, 251-52
Buchanan, Buffett,
Pat,
China, Scott Paper
23
and action plan,
interests,
and
158-59
Lily-Tulip,
Clayton,
162-64
and Pan Am, 234 working relationship with,
165-66 see also consultants is
L.
Eugene, 125
Coca-Cola, 196
161
and Goldsmith
in, 19, 92, 93,
255
Warren, 264
Burnett, C. Don, 155-66
"business
197-201
Chase Manhattan Bank, 72
simple," 39-40, 69, 95
Computer Sciences Corporation, 56-57 Consolidated Press Holdings
(CPH),
80-81, 133-36
37,
asset sales
in,
relationships
80
examined
in,
66-68, 134-35 consultants, 153-66
Calgon, 52-53
accountability
Carson, Russ, 85, 87-88, 230
age and experience
of,
154 of,
161-62
Index
leadership, 242-43
and buzzwords, 166
and
and CEOs, 156
management and,
and
and outsourcing, 58
credibility, 153
and decision making, 153-54 and
Lily-Tulip,
158-59
32, 101-3,
Pan
Am and, 234-37
and
relocation,
230-32
long-term relationship with, 156
rising above,
in Scott Paper, 11, 12,
164-65
roles of, 156, 160,
and Scott Paper, 153-55, 183 and
159-60
staff,
Don
Continental Group, 190
&
Lybrand, 155-58
and American Can, 157-58 and cost
and
242
tradition,
value creation and, 229 corporate headquarters, see
see also Burnett, C.
Coopers
headquarters corporate cost, see
sales
jets,
penny-pinching
Holdings
and Crown-Zellerbach, 163
Crocker, Jack
roles of, 156
Crown-Zellerbach,
restructuring, 174-75
core business, 69-89 of
ofANI,
77,
and asset
45-46,
13,
as
190
in,
Cavenham, 85
as conglomerate, 83-84
79
sales, 69-73, 81
of BAT, 204
headquarters
of, 84,
restructuring
of,
capital invested in, 99
and conglomerations, 82-84 of
215
J.,
83-88, 129 benefits
American Can, 121
128
of,
CPH, see Consolidated Press
cutting, 160
and Scott
232-34,
241-43
160-61
of,
234
238-39
and management, 160 reports
279
162
85-87, 130, 163,
189
timberland assets
CPH, 80
of,
84-85, 86,
163
and merger, 81 and outsourcing, 55-59 and Rule
of 55, 59
231
of Scott Paper, 11, 16, 17, 20, 21,
corporate culture, 229-44
200
charitable giving
in,
and competition,
101
Diamond
International,
239-41 in
Davis, Mark, 71-72, 215, 234, 266
Diamond
70-73, 82, 103
of
Dailey, Jack, 50-51, 65-66, 164-65,
a dying company, 237-38
International,
Dillon-Read, 266-67
Disney-ABC merger, 81 Disney Corporation, 196 D-I
squared, 121
Dixie-Toga, 19
Duncan,
Ian,
84
239-41
280
Index
Dunlap, Albert (father), 108, 109
Eisner, Michael, 196
Dunlap, Albert
Elson, Charles M., 220-22, 228n
J.:
and achievement,
107, 108,
career strategy
115
of,
210
of,
benefits
107-9
compensation
of,
20-23, 26, 116,
competency
110
of,
critics of,
22-23, 26, 132-33
marriage
of,
of, 17, 23, 81,
noncompete agreement
of,
38-39
and consultants, 159-60
132-33
of, 20,
161
85-86
of,
empowerment
119
of,
challenges from, 76-77
compensation
competitiveness
187-88
of,
188-92
to,
can-do attitude
177-78
nicknames
staff:
accountability
and challenge, 110-11 childhood
employees and
273 firing of, 8, 11, 24, 85, 172-75; see
21,269
also layoffs
plaque inscribed
273-74
to,
stock purchased by, 20, 21, 23,
182-83,261,263
jointness and, 16
motivation
of,
productivity
as teenager, 109-0
187-88
of, 85,
98-99, 171,
183
at West Point, 110-11
right-sized, 40, 41,42, risk taking by,
Dunlap, Mildred (mother), 109
separation packages
as shareholders, 198
family, 109
Dunlapping the corporation,
sharing
advice to readers on, 271-72
42-43
and
suppliers, 50
temporary, 58-59
245-70 207-28
of directors,
CEOs, 177-92
in unions, 16,
86
entrepreneurs:
and research and development,
consultants, 153-66
corporate culture, 229-44 fighting words,
of,
as stakeholders, 196-98
137-274
boards
for,
191-92
Dunlap, to (verb), 31,271
analysts,
45
50-51
Dunlap, Judy Stringer, 119, 120
Dunlap
243-44,
of, 42,
271-74
and
startups, 82
Equitable Assurance Company,
marketing, 139-51
ownership, 193-206 real jobs, real cuts,
98
167-75
The, 205 Eskenazi, Gerald, 84
Europe:
Eastman Chemical Company, 197
consolidation
Eichenwald, Kurt, 60
eastern, 149
in,
94
Index
local competition in, 95
needs
local product
Scott Paper
in, 9,
at Scott Paper, 19, 26,
10,92-97,
91-97, 141
142-51
149
in,
"Scott the
World Over," 142-43,
150
149-50, 166
European Economic Community,
see also strategy Goizueta, Roberto, 196
93 executives, see CEOs;
management
Goldman Sachs & Company, Goldsmith,
Fidelity Investments, 251,
258
Sir
James, 129-32, 177,
251-52
Field, Ted, 84
and Anglo Group, 201-3
focus:
background
and BAT
of business plan, 16, 251
development
plans, 96, 103, 168
Fort
John
Industries, 83, 107,
business empire
of,
129-30, 188
and Cavenham, 85-86, 240 charitable giving by, 200
Fogg, Fin, 203
Fort,
130-31
of,
202-6
objectives, 40
in three-year
Forlin, Paolo,
71,
253
Exley, Chuck, 25
on
and consultants, 162-64
10,92-93,95
F. Ill,
208,215,216
Howard Paper Company, 36
and corpocrats, 208 and Crown-Zellerbach, 45-46,
four-point program, 13-14, 15-16
83-86, 129, 130
and Diamond
core business, 69-89
management team, 31-43
International,
239-40
penny-pinching, 45-68
and GOSL,
strategy, 91-103
as hostile -take over specialist,
36,
42
129-30
Freres, Albert, 84
influence on Dunlap Gates,
Bill,
takeover panel
General Oriental Securities Limited Acquisition Corporation, 85 Gilson, Stuart
GOSL Acquisition
of,
203-4
Corporation, 36,
42 Grace, W.R., and Company, 82
C, 220
global strategy, 91-100
economies
of, 131,
229-30
196
General Electric, 81, 196
Greenberg, Allen "Ace," 262
of scale in, 94, 95
expatriates vs. nationals
92-93 joint
281
ventures
in,
Hamilton, Marguerite, 42-43
Hanson in, 93,
149
local competition in, 95
Industries, 33
Harf, Peter,
215,216
Harris, Dave, 84, 85
282
Index
Harris Corporation, 197
and Pan Am, 234
headhunter, roles
and Scott/Kimberly-Clark
of,
34
merger, 267
headquarters: of
Cavenham, 85
and Scott Paper,
and wet wipes, 75
of Crown-Zellerbach, 84, 162 of Lily-Tulip, 128, of
159,238-39
Pan Am, 235
of Scott Paper,
249
33, 40, 58,
Kimberly-Clark:
and Dunlap's compensation, 7, 17,
46, 238,
263
Heidrick and Struggles, 129
21
12-14
Dunlap's early career
in,
management
program
Hercules, chemical supplier, 53
of,
training
1
112
merger with,
20, 21,22, 23,
Ideon Group, 59-60
26-27,41, 192,255,258-59,
incentives:
265-70
benefits,
money,
noncompete agreement
188-92
179, 183-84, 188
and performance,
21,269
183, 188, 190,
Kmetz, Andrew, 109-10
Kohlberg Kravis Roberts
239 India, Scott
Paper
in, 19, 92,
Indonesia, Scott Paper
in,
with, 20,
international business, see global
Co.
(KKR):
93
93
&
and leveraged buyouts, and
125, 129
125-29,231,
Lily-Tulip, 63,
258
strategy inventories:
Kristol,
Howard, 216
consignment, 55 consolidation and, 164 cutting
of, 46,
Lader, Phil, 42, 240
LaFontant-Mankarious, Jewel, 223
144
investment community, see analysts
Larsen, Art, 239-40 laser,
business plan
as, 16
Latin America, Scott Paper
Jermain, Bob, 262-65, 269-70
Jerome, Karen, 42-43 Judice, Pete, 221-22, 249 J.
Walter Thompson, 18
in, 19,
92 layoffs,
167-75
atANI, 77 at
AT&T,
at
Cavenham,
24, 25
85,
86
Kahn, Paul, 59-61
and
Kersh, Russ, 36-37, 201-3
cost per person of, 175, 192
and BAT
Industries, 202, 203
Lily-Tulip, 47,
and empathy, 174 and executive compensation,
and GOSL, 42 and
cost-cutting, 46, 86
232
23-24
21,
Index
at Lily-Tulip, 127,
128,232
Lily-Tulip
management team, 169
of
and
philosophical consideration
of,
and consultants, 158-59
272
debt reduction
restructuring, 167-68
debt-to-equity ratio
at Scott Paper, 8, 11, 14, 15, 17,
headquarters
191-92
andKKR,
empowerment,
42,
status quo, 39,
54-55
facilities of,
Owens-Illinois, 62-64,
126-27, 231-32, 238 private ownership of, 127
analysts, 264
as art form, 102
public offering
core competency
and corporate
in,
148
culture,
criticism, 24,
242-43
25-26, 32
custodianship, 13
four rules
relocation
of, 36,
for,
staff utilization in, for,
31,45, 69, 91
64-66
222-23
Lublin,
Lynch, Peter, 258
8
Joann
S.,
132-33, 169
seven-point plan
for,
32-33,
38-43
McAuley, Kathryn Felton,
McCann-Erickson, 18
and
McCartney, Doug, 246
vision for future, 102
see also CEOs; J.
management
Richard
Jr.,
215
McDonald's, and
and "business
Lens
and change,
225
Lieberman, Linda 252-53, 261
E.,
16-17, 250,
Lily-Tulip, 62,
63
management, 31-43
Lego, Paul, 222 Inc., 223,
17,
245-47, 250, 251-52, 253
and unions, 172-74
Leaman,
128
Loomis, Carol, 25
and
for,
in,
47-48, 62-64
and innovation, 101-3 loyalty,
159
shareholder equity
suppliers
258
of, 128,
Lochridge, Richard, 215
failure of, 8
respect
63
65-66, 128, 159
and
leadership:
vs.
62,
126-27
of,
manufacturing
and unions, 171-74, 192
and
128,232
and McDonald's,
management
Lazard Freres, 251
and
125-29,231,258
63,
layoffs in, 127,
243-44, 273
and
126
of,
of, 128, 159,
and investment community, 258
191-92
and separation packages,
staff
66
of,
238-39
21,23,46, 169-75, 190,
and
Company, 125-29
acquisitions, 41
asset sales of, 66
permanent, 175
and
283
is
simple," 39-40
169, 170-71,
compensation
of, 21,
177-79, 180-81
242-43
23-24,
284
Index
management
marketing, 139-51
(cont 'd)
competency
38-39
of,
core competency
consensus, 43, 241
international, 19
and consultants, 160
lessons
and corporate
product strategy
culture, 32, 101-3,
234
inner circle
of,
190
for,
32-37
matrix, 120-21
17
responsibility, 43,
and
risk,
195-96
101-3
216-17
development, 42-43
and
staff size, 40, 41,
stock options
to,
46
180-81
stock purchased by, 20, 181,
takeover targets, 190
Minow,
99-100
114-16
Nell,
223-25
Molenaar, Andrew, 161
Molnlycke AB, 75
money:
as objective, 199,242,273
spending someone
171
else's,
195-201
three-year plans from, 96,
Monks, Robert A.G., 224, 225
103
see also CEOs; leadership
manufacturing, cost
manufacturing
of,
99
facilities:
American Can, 122
expansion
Ely,
in, 19,
as motivation, 179, 183-84, 188
263
185, 193,
of
249-50, 255
Microsoft, 196
staff
8,
in,
by, 17, 81, 132
skepticism from, 169
Meyer,
and
as target,
nicknames used
Mexico, Scott Paper
as spine, 31
in
259-60
publicity
and
roles of,
150
criticism from, 23, 26
59-61,80, 195 of,
for,
D., 16, 250, 254,
media:
objectives, 38
relocation
18-19,
139-51
universal themes
and leveraged buyouts, 127-28
for,
146
3, 4, 11,
World Over," 142-43,
Masseth, Michael
layoffs of, 169
perks
141
150
ivory-tower, 113-14
and
20, 26,
"Scott the
for,
of,
Scott Paper and,
43,88, 102, 153, 195,243
golden parachutes
148
151
of,
reorganization
decision making by, 40, 41-42,
in,
of,
99
and headquarters, 159 of Lily-Tulip, 65-66, 128, 159 of Scott Paper, 19,26
Morrison Knudsen, 224
Mukai, Wesley, 162 Mullaney, Mike, 22
Murtagh, John, 33, 37, 40, 58
and
Lily-Tulip,
64-66, 231-32
and Scott/Kimberly-Clark merger, 267
and Scott Paper, 249
index
National Association of Corporate
(NACD), 225-26
Directors
285
Owens-Illinois, 62-64, 126-27,
231-32,238
NCR, 24-25 Nee, John, 39, 56, 183-84 Neff,
Tom,
Neuberger
5, 34,
&
Packer, Sir Frank, 66
227-28n
Packer, James, 68, 80, 133-34,
Berman, 259-60
135-36, 203
Nichols Foundation Prominent
Packer, Kerry, 177,200
and ANI, 77-80
Speakers, 222
and BAT
Nicolosi, Dick:
Industries, 107, 203
133-36
and consultants, 165-66
and CPH, 66-68,
and Consumer
and Crown-Zellerbach, 84
Division, 40,
73-74, 140-41
and
health
local product needs, 149
on management team,
33, 34
and Scott Paper marketing,
3, 4,
141-42, 145
18,
of,
80,
134
Pan Am, 234-37 penny-pinching, 45-68
and
charity, 62,
and company
197-201
relationships,
62-64
and wet wipes, 75-76, 147-48
and consultants, 160
Nobbe, Ben, 112-14
and executive
perks, 59-61, 80,
195
objectives:
and accountability, 39
and outsourcing, 55-59
and consultants, 153
and
focus on, 40
relationships
and moving
and
target,
Oppenheimer
Capital, 268
Oppenheimer Fund Management, 251 outsourcing, 55-59
competition
for,
58
98-99
examined
and Rule
of 55, 59
and saving
vs. losing jobs, 46,
and
staff utilization,
and
suppliers,
86
64-66
47-55
Pepsico Foods, 143 Procter
& Gamble,
92
and corporate
culture, 58
Pudumjee Agro
and corporate
secrets, 56
purchasing, see suppliers
human
in,
66-68
38
simplicity, 39
productivity,
Industries Ltd., 19
resources work, 56
MIS, 56-57
"Rambo
payroll functions, 55
Redding, Paul, 79
pension administration, 57
Rees, Evan, 77-79
and temps, 58-59
Reich, Robert, 22
transportation, 57
research and development, 97-98
in Pinstripes," 23,
132-33
286
Index
Scott Paper
restructuring:
Company, 3-12
of ANI, 77-80
advertising
and change, 54-55
asset sales of, 11, 14, 15, 17,21,
of Crown-Zellerbach, 85-87, 130,
Away-From-Home
163, 189
18, 34, 40,
1-12, 14-16,
166
26,35,42, 164-65, 170-75,
benefits
of Scott Paper, 9,
short-
1
board
243
and long-term plans
148, 150
69-73,89, 148, 170,255,263
and long-term impact, 175
190,
for, 18, 140,
division, 9-10,
73-74, 97, 147,
190-91
in,
of directors of, 8-9, 16, 17,
20,40, 195,207-10,212-16,
for,
168-69
219
of Sterling, 119
bottom
and unions, 170
brands
line at,
17-18,26
of, 11, 12, 18,
139-40,
142-46, 148, 149-51
Roberts, George, 129, 130
10-11
Robertson, Julian, 261
bureaucracy
Rothschild, Elie de, 84
charitable contributions from,
Rothschild, Lord Jacob, 83, 107,
62,
198-99
co-generation power plant
203 Rothschild Investment Trust, 83-84
Roubos, Gary,
5, 6,
and consultants, 153-55, 183
Consumer Regis Paper Company, 190, 251
Salomon Brothers, 71-73, 266-67
Wayne
R., 22,
as
core business
shotgun,
11,88-89, 170
12,
13-27, 238
Scott, Walt, 157
40, 41,
first
days
in,
7-8,
14-16,232-33
European Consumer Division
Schleck, Roth, 115
and Clarence,
in,
241-42 Dunlap's
26
Scott, Irvin
of,
decision making
16, 17
quick turnaround strategy,
of, 11, 12,
232-34,241-43
13-14,
for,
debt
for,
17,20,
21,70-75,82, 103
program
shock therapy
of, 11, 16,
corporate culture
15-16 vs.
73-74,
consumer products company,
Sappi, Ltd., 72, 89
with laser
of, 40,
91-92, 99, 140, 196
saving companies: four-point
Division
97, 140-41, 147
270
Santry, David G., 268
vs.
in, 154,
183-87
Rule of 55, 59
Sanders,
of,
72-73, 89, 148, 255
compensation system
178, 212, 215,
216
St.
of, 7,
4
9-10 excellence
in, 9,
10
of,
Index
executive perks
headquarters
shareholder value
61
at,
of, 7, 17, 46,
shock therapy
263 international business of, 9-10,
19,26,91-97, 141, 142-51,
in, 20, 21, 23,
26-27,99-100,
238,
13-23, 26-27
for,
shopping tour and, 3-4 stock prices
255
245-47, 249-65
21,22,23,26-27,41, 255, 258-59,
stock
in, 15,
192,
for,
technology
49-52, 54-55
20/20/20 strategy
in,
16, 56,
191-92
Scranton, William W.
capital investments
management team manufacturing
32-36
in,
11, 18-19,
89
72,
year-end 1993 figures, 14-15
4, 70,
144
in,
42
activist, 212, 220,
outsourcing
in,
55-59
and
analysts, 257
and
benefits, 189
industry, 9, 11,91
product innovation relocation
of,
in,
96-97
8-9, 13-16
research and development
employees
196
as,
198
177-79
11-12, 14-16,
responsibility to, 193-96
and return on investments,
243
restructuring "plans"
of, 11, 32,
167-68
risks of,
9,
197,201
of Scott Paper, 15-16, 20, 180,
of 55, 59
search committee shareholders
as, 193,
and executive compensation, of, 9,
26,35,42, 164-65, 170-75,
and Rule
CEOs
225
directors as, 193,201,219 in,
97-98 restructuring
93
and conglomerates, 82
33
for, 6,
19,
shareholders, 193-206
millionaires
and paper
148
Shanghai Paper Company,
20,26,139-51
and market share,
in,
262, 263
and Sappi,
26 3, 4,
122
sale of, 15, 17,70-72,215,255,
facilities of, 19,
and marketing,
Ill,
S.D. Warren:
12
17-18
in,
170-74, 192
World Over," 142-43, 150
"Scott the
in, 8, 9,
92
Scott Paper (Shanghai) Limited, 19
21,23,46, 169-75, 190,
leadership
147
in, 12, 142,
and unions,
265-70
layoffs from, 8, 11, 14, 15, 17,
190,
17-18, 196,
262
split of,
suppliers
and Kimberly-Clark merger, 20,
remedies
178, 180
260-61,262
and investment community,
leanness
287
of,
181 for,
5
15-16, 180, 181
and
selling the
215
company, 201,
15
288
Index
shareholders (cont 'd)
and stock value
stock shares: as board compensation, 20,
256
prices,
99-100, 177-78, 180, 187,
Shea
Bill,
& Gould,
189
PE
17, 250, 253,
Smithburg, William
254-55
262, 270
Bill, 84,
Spencer Stuart
commodity paper producer vs. consumer products
85
Inc., 5,
company, 91-92
34
consolidation
stakeholders, 196-201
& Paper,
career strategy
in,
1
14-20
of,
99-100
economies
of scale in, 94, 95
global, see global strategy
and growth over
119
new money,
Stobaugh, Robert, 226
for
stock options, 21,42, 178, 179,
product, 141
and
180-82, 218
and
profitability,
and
186-87
sales,
for shortin strategy,
257
96
and long-term
and stock
255-56
20/20/20, 92
at Scott Paper, 15, 17-18, 196,
Stringer, Joe
prices,
and
257
Virginia,
Stringer, Judy, see Dunlap,
260-61,262 21,
256
results,
100-103
investor relations, 248,
and shareholder value,
96
97-98
stock prices:
and changes
103
research and development,
stock grants,
181-82, 184-87 strike price,
time, 96
investor relations, 247-51
116-17
vs. restricted
94-95
employee productivity, 98-99
115
disasters in, 116
restructuring
in,
shareholder value,
for creating
status quo, undesirability of, 8
and
186-87
91-103
business, 148
of
see employees and staff
in,
194
career, 115
Southern Company, The, 72
union
risk,
strategy,
Soros Fund Management, 251, 253,
Sterling Pulp
256
ratio on,
strike price of, 185,
Soros, George, 263, 264
of, 20,
193,263
and performance, 220-21 and
223
D.,
Solano, Pete, 163
staff,
182-83,261,263
181, 185,
Sloan, Allan, 126
Spencer,
23,
of, 20, 21,
management's purchase
189
Smith Barney,
Dunlap's purchases
198,215,256
193, 195-96,
Shea,
217-23
21,23, 26-27,
for, 8, 20,
Stringer
1
19
Judy
Index
Stronski, Vic,
and GOSL, 42
leadership
Sues, Chris, 184, 188-89, 190, 234
and plant
suppliers:
and
172-74
closing, 66
restructuring, 170
and Scott Paper,
backup, 53
"common denominator" for,
of,
289
16, 56,
170-74,
192
strategy
and separation packages, 192
49
116-17
competition among, 48
and
Sterling,
consignment
and
strikes, 170, 172
consolidation
inventories with, 55 of, 50,
51
United Paper workers International,
contracts with, 47-48, 50-51,
16,
173
53-54 examining relationships with, 62-64
Valassis Inserts, 218
Valente, Mickie, 222
fraternization with, 50, 52
vendors, see suppliers
principles for dealing with,
49-52
Welch, Jack, 196-97
procurement
vs.
replenishment
Westinghouse-CBS merger, 81
from, 51
Symington,
Westergaard, John, 60
West
Fife, 19
Point, U.S. Military at,
Teslik, Sarah,
220
White,
Threadneedle Investment
Management Company, 22 Tiger
Management,
251, 253, 261
Travelers Insurance, The, 220
turnaround,
vs.
company,
saving the 12,
26
20/20/20 strategy, 92
unions:
and Cavenham, 86 and
layoffs,
171-74, 192
Academy
110-11, 117, 199 P.
Newton,
33,
34-35,
230-31
and Away-From-Home
division,
40, 73-74, 166
and compensation
plan, 183-84
Wilson, Harold, 129 Witt, Art, 127
W.R. Grace and Company, 82
(continued from front flap)
his
views on
why
too
many
executives think of
and his provocaon management and leadership. His "Four Simple Rules" how to evaluate and choose
themselves as corporate
royalty,
tive ideas
—
a
management team,
get the lowest costs, focus
—can
the business, and develop a real strategy
be used to great
effect
and
profit
by any manager.
About the Authors
Dunlap
Albert
J.
in
Hoboken,
New Jersey,
the son of a union steward.
He gradu-
grew up
ated from West Point and after completing his
began a thirty-five-year career in business that took him to seventeen states, Europe, and Australia. He has held important positions at many companies, including Sterling Pulp and Paper, American Can, Lily Tulip, Diamond International, Crown-Zellerbach, Consolidated Press Holdings of Australia, and Scott Paper. He lives in Boca Raton, Florida, with his military service
wife, Judy.
Bob andelman
writes the popular Mr.
Media column distributed by Universal Press Syndicate.
He
is
a five-time Florida
Magazine
Association award winner for investigative reporting and
is
a contributor to both Business
Week and Newsweek. He Florida,
lives in St. Petersburg,
with his wife, Mimi.
Jacket design by Fernando Galeano
Front jacket photo by Brian Smith/Outline
Back jacket photos by Charles Harrington/ Cornell University
New York, N.Y. 10022 http://www.randomhouse.com/
Times Books,
Printed in U.S.A.
10/96
©1996 Random House,
29617 02500'
Inc.
Praise for
HI
MEAN ;
If
you think the dead
Mean
Business. Al
titive
can't
come back
Dunlap took a
company and turned
to
life,
read
non-compe-
sleepy,
into a world-class
it
performer. He not only shook up an entire
company
but an entire industry as well. Dunlap
corporate
is
America's ultimate change agent.
— Alan
Greenberg,
c.
chairman of the
board of the Bear Stearns Companies,
Inc.,
and author
of Memos from the Chairman
Al Dunlap has sparked a revolution
corporate scene.
He
is
on the American
the nation's leading
cate of shareholder rights. And,
CEO advo-
more importantly, he
has turned traditional managerial theory on
its
head
by demonstrating that you can entrepreneurialize the large-scale public corporation."
— Charles
e
University College
Lively,
funny and provocative. No one
about Al Dunlap
—
you either love
on of Law
ls
,
professor of law, Stetson
feels neutral
his ideas
about run-
ning a business or hate them. Read Mean Business and find out
what
he's
— Ronald and
l
Al
all
about."
Perelman,
chairman of Revlon
New World Communications Group
Dunlap has shown time and time again
inject
new
life
Mean
Business distills the invaluable ideas he has developed
and successfully implemented.
—from those
— Joseph Slate,
to
and renewed purpose into companies
that have lost their way.
business
how
It
just starting
Flom,
Meagher & Flom
provides important lessons which everyone in
out to the most senior executives
— could
benefit."
Skadden, Arps, ISBN 0-8129-2837-7 5 2 5
78081
2
II
928372
I