The Revolution That Wasn't At Eastman Kodak

Attendees at a mid-March Eastman Kodak Co. dinner in Boston could be forgiven if they emerged confused about who was running the company. The host was Christopher J. Steffen, Kodak's highly touted new chief financial officer. A veteran of turnarounds at Chrysler Corp. and Honeywell Inc., Steffen in January had managed to boost Kodak's market capitalization by $2 billion just by joining the company.

In the flesh, the new CFO wowed his audience of big shareholders with bold promises to shake up the sleepy photography giant. But there was scant mention of Kodak Chairman Kay R. Whitmore. Steffen "was positioning it as his plan, not necessarily his and Whitmore's," says an investor who was there.

But back in the privacy of Kodak's Rochester (N. Y.) headquarters, Steffen was discovering that Whitmore had other ideas. "Chris wasn't the plan, he was part of the plan," Whitmore now says. The two men clashed repeatedly over the approach to be taken, as executives feverishly worked to ready a restructuring program for later this summer. Whitmore says the CFO's turnaround ideas focused only on restructuring Kodak's finances and didn't address larger strategic issues. "I was trying to match up his ideas about financial restructuring with business issues," says Whitmore. "It was clear we weren't agreeing on a lot of things."

So, on Apr. 27, after yet another contentious meeting, Steffen walked into Whitmore's office and resigned. Whitmore says that he and other top executives tried to dissuade him, but Steffen was adamant. "I would have done a lot to not let this happen," says Whitmore. "It is extremelydisappointing."

The abrupt end to Steffen's meteoric 11-week career at Kodak was given a big thumbs-down on Wall Street. Concerned that Steffen's departure means that Kodak isn't ready to embrace tough measures, investors pounded Kodak's stock down by 11%, to 47 1/4, on Apr. 28 (chart). "The conclusion you have to reach is that, without Chris Steffen, this management won't deliver," fumes B. Alex Henderson, an analyst at Prudential Securities Inc., who says that he pulled his "buy" recommendation on Kodak "within 30 seconds" of the resignation announcement.

EXPENSIVE BETS. The departure of the chairman's handpicked turnaround specialist turns up the heat on Whitmore to a scorching level. A Kodak veteran, Whitmore has been struggling to revamp the company since taking the helm in 1990. He has placed big, expensive bets on new technologies, such as photo-CD players, that have yet to pay off. Until early this year, Whitmore was given poor reviews by analysts and big shareholders. Among the complaints: Growth in Kodak's core photographic market had slowed in the mid-1980s. But Whitmore and other execs didn't hack away at Kodak's bloated cost structure and spent heavily on marketing in a failed attempt to stimulate growth.

A $1.6 billion restructuring in 1991, intended to eliminate excess costs, turned into a minor fiasco. The early-retirement program was so generous that nearly three times as many staffers retired as planned, and Kodak had to hire new bodies. What's more, Kodak's earnings didn't improve despite the restructuring. Last year, profits were $1.06 billion on revenues of $20.2 billion--only marginally ahead of the 1991 figure, before charges, and well below 1988's profits of $1.4 billion on $17 billion in sales. The board showed its displeasure by slashing Whitmore's bonus last year by 70%, to $140,000.

Under fire from shareholders and an increasingly restive board, Whitmore suddenly changed course early this year. The first sign came in January with the hiring of Steffen, the first senior outsider to join the insular company in two decades. Whitmore quickly followed up with vows to focus the company on building shareholder value. He decreed that top executives would have to buy large amounts of Kodak stock. And he pleased Wall Street by proclaiming that Kodak would no longer count on growth in photography. Investors loved it, and the stock soared.

Many Kodak insiders expected Steffen to have trouble adapting to Kodak's peculiar culture. Nurtured by more than a century of residence in Rochester, where managers have little chance to mix with counterparts from other companies, Kodak had become extraordinarily inbred. Many employees' lives revolved around company social events. Inside Kodak, consensus became the norm, confron-tation frowned upon. Into this entrenched culture stepped Steffen, who in his previous CFO role at Honeywell had chopped thousands of jobs, shed a big division, and cut millions in wasted spending. Given the huzzahs that greeted his arrival, perhaps he overestimated his power. He made no secret of his belief that Whitmore was under fire. "It tends to get management's attention when guys like GM's Bob Stempel or American Express' Jim Robinson are unemployed," he told BUSINESS WEEK in mid-January.

'VIBES.' Even before starting at the company, Steffen announced some specific targets for items such as Kodak's debt-to-total-capital ratio. The targets were new to Wall Street analysts, and they essentially committed the company to selling a major division. "I got some vibes that Steffen as CFO was taking on a larger-than-CFO role," says an institutional investor.

Although many shareholders are now after Whitmore's hide, most insiders and Kodak watchers believe the board will back Whitmore for now. Kodak may be troubled, but it's no basket case. Meanwhile, Whitmore plans to hire another outsider as CFO. The question is, after the Steffen debacle, who'd take the job?

As for Steffen, who has jumped from one company to another in his rise up the corporate ladder, his high-profile tenure at Kodak may actually enhance his career. The day he resigned, IBM's stock advanced 1 1/2 points on rumors that Steffen would become its new CFO. If the aggressive stance he took at Kodak is any indication, however, Steffen may be looking only for aCEO job.

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