Mean Business: How I Save Bad Companies and Make Good Companies Great [Hardcover ed.] 0812928377, 9780812928372

Citation preview

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