On Aug. 27, while the late summer sun peacefully streamed into a conference room at 3M Co.'s St. Paul (Minn.) campus, the mood among executives was anything but placid. Dividing the gathered senior managers, about 12 in all, was a presentation to Wall Street analysts that CEO Livio D. DeSimone and others were scheduled to deliver the next day. Poor profits at home and growing Asian problems meant that DeSimone would have to offer impatient investors a restructuring plan. Managers wanted deep cuts of up to 10,000 jobs, some of those present say, but DeSimone was pushing a much more modest 4,500 layoffs.
With dismayed executives looking on, DeSimone started to rewrite in longhand the speech his chief financial officer had just prepared--softening it, some executives present say, and downplaying 3M's difficult straits. Frustrated by DeSimone's weak approach, some execs began asking whether their CEO would have backed any restructuring plan if he weren't facing the prospect of a roomful of unhappy analysts.
WORD OF MOUTH. Such restiveness in the management ranks is only one of the problems 3M's chief faces. Last summer, after some managers began sending anonymous letters to the 3M board, directors began investigating complaints about DeSimone's management style and performance. The campaign began, executives say, with dissatisfied researchers and scientists in divisions such as pharmaceuticals and telecommunications, who were angered by what they saw as DeSimone's lack of commitment to research. It soon spread to other divisions such as industrial tape and abrasives, where compensation worries were high. Then, in August, 3M's operating committee--made up of the 10 executives who report to DeSimone--brought in a Harvard Business School professor, David A. Garvin, to study management and strategy. Not long after, the board began discussing the 62-year-old's replacement.
Off the 3M campus, too, pressure is mounting steadily. Analysts and investors are angry that management has missed annual earnings projections for two years running. Sales, at $15 billion, are essentially flat, and net income dropped 44.6% in 1998, to $1.2 billion. The stock has lost a third of its value since 1997. And problems in overseas markets continue--this year, in Latin America and Europe. "We have been debating for a few months now whether 3M should even be considered a blue-chip stock anymore," says Jeffrey P. Davis, an investment strategist for State Street Global Advisors, holder of 4.9 million 3M shares. "It might be overstating it, but patience is waning."
It's a bruising fall from grace for 3M, once lauded as one of the best-run companies in America. Only a decade ago, 3M was a well-oiled innovation machine where an army of scientists and researchers churned out steady profits and new products ranging from mundane items, such as tapes and reflectors, to techier offerings, such as asthmatic inhalers and even dental crowns (table). But 17 years since its last blockbuster, Post-it Notes, 3M seems to have lost the magic that inspired case studies in business schools, imitators as illustrious as DuPont Co., and a starring role in Thomas J. Peters' famous book In Search of Excellence. DeSimone's problem: He hasn't been able to restart the growth machine.
In an interview with BUSINESS WEEK at 3M headquarters in late February, DeSimone downplayed any talk of internal strife. He insisted that the only point of contention among his managers at the August meeting was whether 3M should promise an 8% growth rebound in 1999 or 9% growth. "I'm conservative. I don't want to overpromise," he says. DeSimone adds that he rewrote the CFO's speech only because its author speaks English as a second language and says he didn't change any facts. As for the board and succession issues, he says only that normal succession planning is being done. With roughly 50% of sales from overseas and much of that from Asia, foreign currency and international turmoil, he says, are 3M's chief challenges.
But in interviews conducted over the past six months, 18 different current execs, former employees, and past and present board members say DeSimone's problems run much deeper. Internal and external critics believe the CEO's woes stem from his failure to fund important products for future growth, his inability to act boldly to cut costs, and an indecisiveness that has sapped morale. "The company knows there's a problem. Wall Street knows there's a problem. And the board knows there's a problem," says B. Alex Henderson, an analyst at Prudential Securities. "But nothing is happening."
When DeSimone stepped up to 3M's top job in 1991, no one could have expected his tenure to turn turbulent. Often described as personable, smart, and a master of detail, DeSimone, who speaks five languages fluently, made his mark building 3M's Brazilian business. When promoted to chief executive after 34 years at the company, he was hailed as the most knowledgeable operations officer ever to become CEO. Quickly acting on his first management challenge, a drop in earnings, DeSimone laid off through attrition 5% of the workforce. Of course, DeSimone still has supporters on the board and in management.
MISSED CHANCES? But since that first move, execs who have worked closely with DeSimone say he has had trouble making decisions. Prudential's Henderson blames 3M's slowness to deal with its high cost structure for some of its Asia problems. By contrast, Xerox Corp., which also has broad Asian exposure, has cut faster and with better results, says Henderson.
Analysts and investors complain that DeSimone's caution has cost the company opportunities to develop its stronger ongoing businesses. In 1997, when 3M sold National Advertising Co., a billboard-ad business, the $1 billion price tag should have been used to fuel 3M's acquisition plans, they argue, particularly in pharmaceuticals, where rivals are picking up companies at a rapid clip, or to fund R&D, which has been flat recently.
Instead, the windfall was used to buy back shares--a move usually applauded on Wall Street because it keeps shareholder returns high in the near term. In this case, even investors weren't impressed. "That action, while it creates shareholder value, doesn't stir investor imagination," says State Street's Davis. "That's seen as a signal that they don't have any ideas." DeSimone defends the move, saying it helped ensure the dividend "had a neutral effect on our [core] business, and allowed us to keep our earnings per share."
Growing internal dissatisfaction came to a head with the letter-writing campaign to outside members of the board. While the writers were concerned about the direction of the restructuring plan, the letters also were meant to back a pending lawsuit against 3M. That suit, brought in Minnesota state court last spring by two of 3M's leading inventors, John Martens and Gerald Niles, charges that 3M does not pay top scientists on a par with its top managers as 3M has vowed in the past to do. This dual-ladder compensation system, with innovators and managers paid on a comparable basis, was copied widely in the 1970s. 3M disputes allegations of a breach of contract. That issue is currently being appealed. But scientists are concerned that under DeSimone and his predecessor, the first 3M CEOs in recent memory to come mainly from manufacturing, not product development, innovators have not been getting their due.
From this base, the campaign spread to other divisions, participants say. The goal was to force a shakeup of top management, including DeSimone. Among the issues outlined in the letters addressed to the board, copies of 11 of which have been obtained by BUSINESS WEEK: lack of leadership from DeSimone, failure to use productively the proceeds from businesses sold, and deteriorating corporate performance. Neither DeSimone nor 3M would comment on whether the board had received any letters or what might have been in them.
CLOSER LOOK. The board, with four former CEOs of other large corporations and one current executive among its ranks, was cautious about acting on the word of anonymous critics, says one director. But with a few individual managers willing to come forward, Rozanne L. Ridgway, a board member since 1989 and a former assistant U.S. Secretary of State, pushed for an airing of the management problems cited by the letter writers, say a board member and an outsider working with the board. "The board was deeply divided over what to do," says one director. But by October, according to former and current board members, Allen E. Murray, a retired CEO of Mobil Corp., and another longtime director, Edward A. Brennan, the former CEO of Sears, Roebuck & Co., began an inquiry.
Neither Brennan nor Murray responded to repeated requests for interviews, but people who were interviewed by them and five other current and former executives in a position to know say the pair talked to roughly a dozen of 3M's top leaders. The sessions, which took place the first week of October, lasted up to two hours each and were held on neutral territory--mainly Brennan's offices in Chicago, says a participant. According to sources, questions focused on the CEO's decision-making and growth strategy.
The board's conclusions remain confidential, but some executives worry unvarnished comments made to the two directors may have been relayed to DeSimone. That has added to the tension in the executive suite, says a manager close to 3M's top brass. DeSimone won't discuss those suspicions or acknowledge the inquiry at all.
Overall, he denies that there are serious problems at 3M. While he concedes that he has critics within the company, he declines to discuss the appointment of Brennan and Murray to interview his top aides. "There are certain times, like this one, when you have a poor year, that [criticism is] compounded," he says. But he believes experience will carry him through this rough patch. "You know, the average age of a 3M employee is 41.5 years," he says. "I've been at 3M longer than they've been alive."
ON DECK. According to those familiar with boardroom discussions, naming a successor has become the directors' top priority since the inquiries. Leading candidates, DeSimone says, include four executive vice-presidents heading operating units: John W. Benson, who runs health care; Raymond C. Richelsen, head of transportation, safety, and special materials; W. George Meredith, who oversees corporate services and suppliers; and Harold J. Wiens, chief of industrial and consumer markets.
DeSimone has 2 1/2 years left before reaching 3M's mandatory retirement age of 65, but many in the executive ranks expect him to leave sooner. Two 3M project managers say executives expect an announcement this May at the annual meeting. DeSimone disputes that he is negotiating his retirement but doesn't dismiss the possibility of moving to a nonexecutive chairmanship.
Corporate-governance expert John Nash, chief executive of the Center for Board Leadership, says that in light of the board's "extraordinarily unusual" interviews with managers, it's surprising the CEO has stayed on this long. Unfortunately for DeSimone, quite a few executives, analysts, and investors seem to agree.