Karl's Kings of Industry

It's tempting to think of Karl von der Heyden as the Zelig of 20th century business. He served as chief financial officer of three large consumer products companies—PepsiCo (PEP), RJR Nabisco, and H.J. Heinz (HNZ)-and sat on 10 boards including the New York Stock Exchange (NYX), DreamWorks Animations (DWA) SKG, and Macy's (M). Along the way he worked for Tony O'Reilly, Lou Gerstner, Roger Enrico, and Henry Kravis, to name a few. The only problem with the Zelig comparison is that von der Heyden was no bystander. He was a strategist and counselor making crucial decisions at crucial moments. Or, as Enrico puts it, "Karl was my gift from God." Born in Berlin and educated at Duke University and the Wharton School, von der Heyden, 74, is now co-chairman of the American Academy in Berlin with Henry Kissinger. Earlier this month, a few days before von der Heyden was inducted into the Financial Executives International Hall of Fame, Norman Pearlstine, Bloomberg Businessweek chairman and president of the nonprofit American Academy in Berlin, sat with von der Heyden to discuss big brands and big personalities.

You were in charge of the financial strategy and performance of three major consumer products companies. When you were growing up in Germany, is that what you thought life was going to be about?
I actually wanted to be a journalist, if you can believe that. I had an uncle who was an entrepreneur. He didn't say I shouldn't do this. He said, "maybe you should consider being a business journalist." He then suggested that I do bank training, and once I got into business, I was hooked.

How did you end up at Duke?
I came in '57. My brother suggested I study in the U.S. because English is the most important language and, if you're in business, you have to think globally. He helped me get a scholarship to Duke. I enjoyed Wharton tremendously, too. It was intellectually challenging, but I had a great time.
Then I worked for Pitney Bowes (PBI) in Stamford, Conn. They were just going international: England, France, Germany. I set up the finance function in those countries. Eventually I became corporate comptroller. It was well run. They had a monopoly with the U.S. Post Office. They made a lot of money with these postage meters. What they failed to do is think strategically. They wanted to get into the copier business, the business of cash registers, and all kinds of other businesses. And they failed miserably in all of those. They were not thought through strategically. They're still around, but they haven't really evolved.

How did you get to PepsiCo?
A tennis buddy of mine was a headhunter, and he called one day and said PepsiCo is looking for a comptroller. Pepsi Cola had merged with Frito-Lay, and Don Kendall engineered this merger. It was a true merger of equals, which you rarely see. Nobody took over anybody. We had two of everything. What we didn't have was a corporate office. I was ushered into an office that was completely empty except for a phone and a desk. I was really the first comptroller they ever had at Pepsico. Then I was moved over to the Pepsi-Cola division as CFO.

You reported to John Sculley, who went on to become CEO of Apple (AAPL).
He was a very interesting guy, very nice and incredibly creative. He would come every Monday morning with a whole list of ideas that he had over the weekend, and he wanted every one of them to be implemented immediately. We all listened to him. And then after he left, we would decide which ones were really good ideas and which ones were not. As far as I can tell, John never followed up on any of these things. He was already on the next idea.

What was Don Kendall like as a CEO?
He had started as a syrup salesman. He knew all the bottlers personally, and if a bottler called, no matter how small, he would interrupt anything to take that call. He would always call back himself. That taught me a little bit about customer orientation, which this guy really had. And, of course, he got Nixon to steer Khrushchev to the kitchen and...

There was a Pepsi-Cola waiting for him.
Yes. That picture became world famous. It was arranged, but you couldn't predict whether Khrushchev would do it. Kendall was very fortunate. He was more opportunistic than strategic. Russia, for example, interested him. Pepsi became the first consumer product in the Soviet Union, and for many years was the only one.

How did you end up at Heinz?
What interested me in that case is that I could be CFO of the whole company, and I could join the board. [Chief executive officer Tony] O'Reilly had been there less than a year. We hit it off in the interviews. But we had a hiccup on the first day of the job. The comptroller of the company came to me and said, "I made a stupid mistake. I charged a lot of my personal expenses, including gambling at Las Vegas, to the company. It won't happen again." I said, "Well, I understand that, but you can't really work for me." He walked out and within two minutes I got a call from Tony O'Reilly to come to his office. He said, "I told him that he can redeem himself. What are you doing interfering with this?" And I said, "He can't work for me."

You said that the first day?
First day. He felt he had been overruled by somebody he had just hired. So there was silence for a while. Then the same guy's bad judgment showed up again, and he was fired. After that, it went fine.

You left for RJR in '89, when the barbarians stormed the gate. RJR is acquired by KKR, and Lou Gerstner comes in from American Express as CEO.
They had to track me down, I think, in Sweden. The headhunter begged me to at least meet with Lou Gerstner at his home in Greenwich, which I finally did, and even then I turned him down, because I had so many [stock] options at Heinz.

With O'Reilly, I was in his home in Pittsburgh all the time. We always had a drink and played rugby on his lawn. Gerstner is the total opposite. The only time I was in his home was when he tried to recruit me to RJR.

How good was Gerstner at conveying gratitude or respect?
Lou had an awkward time with it. He was really focused, and he didn't expect his top management group to be looking for warm and fuzzy things. It's sort of like how a good football coach expects pros to play. You had to be self-motivated. He was a great delegator [though]. When he found out that I had done a lot of work in Russia, he said, "Oh, great, I don't want to do that. You take that over." After that, I never heard about it. I just did it. I established a very good relationship with him. Our offices were next to each other. I could go in there and tell him, "Lou, you're full of s—t," and he would take it one-on-one. Not in a meeting, though. Usually the meetings were with divisional people, and so you kept your powder.

With Heinz you had shareholders and a board. Here you were owned by private equity. Do investment bankers really know how to run a business?
No, and the good news is that Henry Kravis and George Roberts knew they couldn't run a business. They told Lou that they needed somebody like him immediately. Otherwise, they kept corporate governance as if it were a public company. We had a board with outside board members. When it did go public again, it was not a big thing.

Are they thinking about the exit multiple from the day they take over?
I believe so. For them it's just numbers. They look at the exit before they even buy the company. I was later on a board of a private-equity-owned company as an outside director and I said, "We should have a strategic plan." They all nodded, and six months later the company was sold. I was so naïve. It's a totally different world.

There was initially a lot of justification for private equity, because they could find these poorly managed companies. By putting in good management and cutting expenses and having huge leverage, they could turn it and make a huge profit.

Was RJR your toughest challenge?
We almost went under at RJR because the junk bond market collapsed on us. When I came in, over 50 percent of the debt had to be refinanced within one year. And we couldn't refinance. Then the issue was the tobacco business. We started having trouble attracting good marketing people to the food side of the business, because they didn't want to work for a tobacco company. One of my early pushes was that we need to split the company and spin off Nabisco. Strategically, they shouldn't be together. I proposed that we spin off Nabisco, give it a normal debt structure, and keep the rest of the debt on the tobacco business, because they could afford it.

KKR interfered on this one?
They interfered. When RJR was bought, it went from a AA credit rating to junk. That created a lot of friction with bondholders, and the rating agencies also were totally surprised. They came back and said, "We can't really trust you guys." So the KKR guys, who had other companies to worry about and their image with the rating agencies, objected to spinning off the food business—not because it wasn't the right thing to do for RJR Nabisco, but because it wasn't the right thing to do for KKR.

One of the things that private equity likes to say is that it works so well because the interests of the owners and the company are in total alignment, whereas with publicly held companies you have pension funds, small investors, day traders, unions, and so forth. Does that resonate with you?
Early on, I thought so. There may have been some cases where there was real alignment. But in recent years, I've become disenchanted with the whole concept. The goal with these people is a financial return. That's the only goal. And we have seen a number of cases where they have so over-leveraged the businesses they acquired that the businesses basically have failed because of the debt. These are some proud companies that have been around for a long time. If being private is such a great thing, why are the private equity firms themselves going public?

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