Tough Times, Tough Bossesby
It wasn't exactly the graceful exit Tenneco Chairman James L. Ketelsen had in mind. In early August, Tenneco Inc.'s board gathered at Manhattan's Helmsley Park Lane Hotel to choose an eventual successor for Ketelsen, who had every intention of grooming his protege for a couple of years before heading off into retirement. After a months-long star search, Ketelsen thought he had finally found his man: Michael H. Walsh, the laser-sharp CEO of Union Pacific Corp.'s railroad subsidiary.
By the late summer board meeting, however, Tenneco's directors had other plans. During the gathering, Ketelsen was asked to leave the room for a while. When he returned, it was clear that the board had decided to offer Walsh immediate control of the Houston-based conglomerate, after he made it clear he wasn't interested in the No. 2 job. It was a stunning development. After all, the 60-year-old Ketelsen seemed in full command of the conglomerate he had headed for 13 years.
But with the recession creaming Tenneco's 1991 results after years of erratic earnings, the board decided it was time to push aside the proud chief. "Walsh came with a clean perspective," explains one director. "He wasn't weighed down by the politics of the past." Apparently not. Walsh, who is now president and picks up the CEO title in January, has already unveiled a $2 billion restructuring plan, cut the dividend by 50%, and wiped out 8,000 jobs.
'EMOTIONAL TIES.' Similar scenes of boardroom intrigue have been played out this year at such high-profile companies as Compaq, Goodyear, and Allied-Signal. As the sputtering U. S. economy continues to send corporate profits into a tailspin, many directors are casting a gimlet eye on the occupant of the corner office. And at companies where battered balance sheets or sagging sales call for a grueling period of belt-tightening and restructuring, some boards are skittish about taking a business-as-usual approach.
Obviously, the person who helped create the mess won't easily take to the idea of selling off cherished assets, shuttering plants, or throwing thousands of people out into the streets. "In many cases, the emotional ties of the career CEO are just too strong," says Ferdinand Nadherny, vice-chairman of Russell Reynolds Associates, the nation's largest executive-recruiting firm. "The guy would be firing close friends."
That's why boards this year at a number of large and troubled corporations have replaced longtime CEOs with shrewd, analytical outsiders. In other cases, they've filled the top slot with a maverick insider who isn't wedded to the established order.
Call them the tough managers for tough times. Tenneco's Walsh, for example, is a former U. S. Attorney in San Diego who won a reputation as a steely cost-cutter during stints at Cummins Engine Co. and Union Pacific. At the railroad, he eliminated layers of middle management and squeezed work-rule concessions out of the rail unions. Such managers can bring a more detached and clear-eyed approach to a company that has lost its way. "Boards nowadays are hunting around for a much more dispassionate view on their businesses, cost structure, and management team," says Tom Neff, president of the executive head-hunting firm SpencerStuart, which handled the Tenneco search.
These new bosses usually walk through the door armed with a mandate for radical change -- and they often need it. Indeed, BUSINESS WEEK's 1991 survey of chief executives at America's 1,000 most valuable corporations shows that the typical new CEO was installed at a company with higher-than-average sales and lower-than-average profits -- in other words, a large but troubled outfit. And some of the industries that showed the highest turnover were also among the most recession-plagued. More than 23% of CEOs were newcomers at companies that make cars, trucks, auto parts, and tires. New bosses emerged at nearly 21% of metals and mining companies, and at more than 19% of publishers and broadcasters.
The new chief often has a rare opportunity to unleash a cataclysm -- to restructure, slash employment, close plants, or sell businesses. Shareholders may be more willing to accept such moves -- even though they often mean hefty charges against earnings or big cuts in dividends -- because they believe there will be a payoff down the road. The board will back the new chief because he's doing what they hired him to do. And some employees who were frustrated by the ineffectual strategies of the old regime may even rally around a chief full of grand new notions -- if they survive his purges.
But what if the blood-and-guts bosses overdramatize the mess they have inherited to justify huge write-offs? Profits may get a nice boost in the next year or so -- but then what? There's always the danger that the cost-cutter is just a sort of corporate Terminator, a boss whose ideas don't extend much beyond delivering the body count. And while outsiders may do fine in a period of contraction, they probably won't know much about the companies' businesses and markets, insiders may not tell them what they need to know, and key personnel may jump ship. All the benefits of fierce management may turn out to be illusory if unaccompanied by ideas for growth.
LITTLE GAIN. Take the slash-and-burn strategy of former Firestone Tire & Rubber Co. CEO John J. Nevin, an outsider who was brought in from Zenith in 1979. During his radical restructuring of the tiremaker in the mid-1980s, Nevin sliced some 50,000 jobs, or about 50% of the work force, shuttered half of Firestone's North American tire plants, and sold off a half-dozen of the company's diversified businesses. Those moves stemmed the cash drains that once threatened the company.
But the pain didn't translate into steady gain. In 1988, Japan's Bridgestone Corp. acquired Firestone in a $2.6 billion deal. Admittedly, the deal was a windfall for shareholders. But Bridgestone/Firestone Inc. has since had to cope with the legacy of years of underinvestment. With the tiremaker in a severe slump, it's spending $1.5 billion to get the tiremaker's plants up to snuff.
Contrast that with the experience of another bear of a boss: Robert L. Crandall at AMR Corp., owner of American Airlines Inc. Since taking over as chief back in 1984, Crandall has transformed an industry also-ran into a global megacarrier. Crandall's relentless drive and fiery temper have earned him the nickname "Fang." But in an industry where labor costs typically eat up about a third of revenues, his toughness is an edge. In fact, during the early 1980s, he managed to get his unions to accept a two-tier wage system for newcomers and veterans -- now a common practice.
True, the recession and ongoing fare wars have made for some awful times industrywide. AMR has lost $115 million so far this year and expects to lose money in the fourth quarter, too. But Crandall's investments to build up American's fleet and expand into faster-growing foreign markets have positioned the airline for an earnings surge once better days return.
Take a spin through BUSINESS WEEK's 1991 Corporate Elite Directory, starting on page 185, and you'll see a startling array of new names now calling the shots at some premier corporations. In plenty of cases, the transfer of power was quite orderly and expected. But not so at some of our largest companies.
In late October, for example, Compaq Computer Corp.'s directors ousted Chief Executive Joseph R. "Rod" Canion, founder of the personal-computer powerhouse, replacing him with COO Eckhard Pfeiffer, who had built Compaq's paltry international business into a $1.8 billion operation. Goodyear Tire & Rubber Co. CEO Tom H. Barrett lasted only about two years before the company turned to Rubbermaid Inc.'s just-retired Chairman Stanley C. Gault. Similarly, USF&G Corp. Chairman Jack Moseley, whose property-casualty insurer has been in a severe slump, was nudged out in favor of Norman P. Blake Jr., a turnaround artist who had revived Chicago's Heller Financial Inc.
Meanwhile, both Tenneco's Ketelsen and Allied-Signal Inc.'s chairman, Edward L. Hennessy Jr., were replaced by more bottom-line-leaning managers -- Walsh at Tenneco and former GE Vice-Chairman Lawrence A. Bossidy at Allied. And the late Armand Hammer would probably not look too kindly upon his successor at Occidental Petroleum Corp., Ray R. Irani. After decades of hiring and firing proteges, Oxy's legendary founder died late last year. Irani, an ace chemist, has been trying to stamp out much of Hammer's sometimes-quirky legacy ever since.
Irani represents something of a trend among the new CEO class of 1991: the rise of the technocrat. Nearly 22% of the new bosses came up through engineering or technical career paths, compared with just over 15% of their more senior colleagues. The sharpest drop was among CEOs who rose through marketing or merchandising: just over 12% of the new class, down from more than 22% of the longer-tenured folk. And, in a sign of the increasing globalization of business, these new CEOs are roughly twice as likely as their longer-tenured brethren to have some overseas experience.Sadly, today's boss may need something more like nautical experience. "It's the lifeboat theory," explains USF&G's Blake. "The boat can't hold everyone, and not everyone is contributing to the boat's forward motion." Blake is throwing plenty of hands overboard. Earlier this year, he announced plans to cut 25% of the 12,300-member work force at the insurer, troubled by junk-bond investments and failed diversification efforts.
'HI. BYE.' Blake also had managers walking the plank during his days at Heller, which was then primarily a secured lender to corporations. Soon after arriving at the financial-services firm in 1984, he sacked most of its top management. His new team shifted Heller's lending away from corporate customers, where it often competed against more powerful banks, and got into the leveraged-buyout game. Result: Heller moved from a loss of $181.9 million in 1984 to a $102 million profit in 1989. With LBOs now out of fashion, Heller's net slipped to $75 million last year.
Senior managers in the old regime don't always wait for the newcomer to start cleaning house, of course. Consider the goings-on at Compaq, where the new chief, Pfeiffer, 50, is jettisoning founder Canion's formula of pumping out premium-priced personal computers for mostly corporate clients. Soon after Canion, 46, was ousted as chief executive, five vice-presidents -- with duties ranging from manufacturing to product development -- took early retirement. Compaq officials deny the two events are related.
Still, Pfeiffer admits there has been plenty of turmoil. His penchant for tight fiscal management -- something he picked up in his years at Texas Instruments Inc. in the price-competitive semiconductor business -- ran counter to Canion's more casual approach. And the two clashed soon after Pfeiffer returned from his overseas stint. With price-discounting rivals such as Dell Computer Corp. stealing business, Pfeiffer and Compaq's co-founder and chairman, Benjamin M. Rosen, started to press in earnest for tighter spending controls about two months ago. But Canion balked at the notion of layoffs. "There was a definite difference of opinion between Mr. Canion and myself," says Pfeiffer.
So it would seem. Pfeiffer, with the blessing of Rosen, felt he deserved the brass ring at Compaq. And he had the board's ear. "Rod wasn't going fast enough to react to the computer market," says one board member. On Oct. 23, Compaq announced a third-quarter loss of $75 million and its first-ever round of layoffs, involving about 1,440 employees -- something Pfeiffer had sought for months. A day later, Canion was out. Not surprisingly, some industry wags have taken to referring to the determined Pfeiffer as Cassius.
Like many hard-guy bosses, Pfeiffer is moving fast to reshape his company to his own vision. On Nov. 5, Compaq announced a "marketing revolution" that includes slashing costs by out-sourcing some manufacturing and renegotiating supply contracts. He'll also aim at lower-priced segments of the PC market and expand into the home and educational markets.
Over at Tenneco, Walsh is also undoing much of his predecessor's work. Those Tenneco staffers accustomed to cushy perks under Ketelsen are in for a shock. Walsh plans to close the executive dining room. Going, too, will be one-third of corporate staff, as part of the broader layoffs already announced.
He also announced plans to sell $1 billion in assets at Tenneco, which has interests in natural-gas pipelines, shipbuilding, and farm equipment. That may include part or all of troubled J. I. Case. Thanks to Ketelsen's 1985 purchase of International Harvester's farm-equipment lines, Tenneco's Case unit now represents roughly one-third of sales. Walsh says he's analyzing the outfit. But what does a former lawyer know about tractors? Snaps Walsh: "When I was at Cummins, I didn't know a camshaft from a crankshaft. I learned."
He had better be a quick study. Because of the recession and an inventory glut, Case is expected to lose $560 million this year, according to Kidder, Peabody & Co. Throw in the restructuring charges, and Tenneco will probably post a $294 million loss this year, on $14.5 billion in sales.
Goodyear Chairman Stanley Gault is also under pressure to move fast. Goodyear is laboring under a $3.6 billion debt load, stemming largely from the company's 1986 fight with raider Sir James Goldsmith. Another woe is Goodyear's oil pipeline, which has been a money-loser since it opened in 1987. Finally, Goodyear's name-brand business has lost 20% of its U. S. replacement-tire business since 1986.
If there's anyone who can retread Goodyear, it's Gault, a detail-oriented manager with a strong focus on customer service and bottom-line results. "Every quarter, you've got to hit the number, no excuses," says a former colleague at Rubbermaid, where Gault strung together 41 record quarters of earnings growth.
TIGHT LID. But Gault, 65, is hardly a bean-counter. At Rubbermaid, he routinely visited each plant and often spent hours hanging around hardware stores watching consumers pick over the company's housewares. Once, he spotted a woman trying unsuccessfully to pry open the lid of a Rubbermaid microwaveable container and ordered up a design change as a result.
The problems and solutions at Goodyear aren't quite so simple. For now, Gault is working to pay down the company's debt load. He has already sold assets valued at about $100 million and has scheduled a $500 million equity offering for mid-November. More relief may be on the way, if major manufacturers can make recent price hikes of up to 8% on replacement tires stick. On another front, Gault has been personally trumpeting Goodyear's latest product innovation, the ground-hugging Aquatred, designed for wet roads, to dealers and the press.
At Allied-Signal, newcomer Bossidy, 56, has also hit the ground running. He logged 34 years at GE, so it's hardly surprising that he inherited GE Chairman John F. Welch Jr.'s lightning-quick decisiveness. And Bossidy has always been a ferocious competitor. As a pitcher for Colgate University, he led his team to the collegiate world series in 1955.
As Allied's new boss, Bossidy has been hurling fastballs since day one. A mere three months after showing up at the diversified manufacturer of aerospace components and auto parts, Bossidy announced a top-to-bottom restructuring that calls for eliminating 14% of salaried employees, or 5,000 workers, divesting eight businesses, and slashing the company's dividend by some 45%. He also plans to cull Allied's flock of 84 businesses down to proven cash-spinners. "It does help to come in from the cold and freshly appraise businesses," he says.
NO SHRINE. One who didn't come in from the cold is Occidental's Ray Irani. Over the years, Oxy founder Hammer brought in a stream of would-be successors, such as A. Robert Abboud, who came in from First Chicago Corp., only to send them packing a short time later. But Irani managed to thrive under the mercurial Hammer. The 56-year-old won Hammer's favor for his turnaround of Oxy's unprofitable chemical operations. After taking over in 1983, Irani trimmed overhead and fine-tuned the unit's plants so they ran more efficiently. In a year, the business was profitable again.
Hammer promoted Irani over 14 other vice-presidents as president and chief operating officer in 1984. The Lebanese-born Irani, whose father was a math professor at American University of Beirut, has plenty of smarts. At age 22, he earned a doctorate in chemistry at the University of Southern California.
Irani is hardly keeping Oxy as a shrine to its founder's memory. One month after Hammer's death, he launched a $5 billion restructuring to refocus Oxy on its core oil, gas, and chemical businesses. He also took a $2 billion charge that included the costs of exiting some of Hammer's more offbeat business ventures, such as Armand Hammer Productions, a movie company that specialized in films tracking the travels of -- you guessed it -- Armand Hammer. "He was a romantic who fell in love with the things he bought," says Irani. "I try to be practical about what we've got."
Practical, indeed. Irani has already managed to reduce Oxy's once-staggering debt by $2.6 billion, to a reasonable 55% of total capital, through asset sales and cost-cutting. With low energy prices smacking rivals, Oxy's operating earnings are up 13.4%, to nearly $1.1 billion, on sales of $7.5 billion, through the first nine months.
Still, it has been a reign of pain under Irani so far. Back in January, Irani told analysts and employees that 1,000 jobs would go from existing operations, even though he says he knew the number would be far higher. He has since slashed 1,600 -- and now says 2,350 in all will go by this January. What gives? "We had only been in a few weeks, and I didn't want to go out with a number that I wasn't comfortable with," he says.
If all this sounds a bit cold-blooded, you're right. But then again, managing in these turbulent economic times isn't for the meek. And until better days return, count on the sharp blade of the guillotine to be hanging over chief executives and employees alike.