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18.1 Al Dunlap
Albert J. Dunlap was born in Hoboken, New Jersey, on July 26, 1937. He has credited some of his accomplishments to having been raised poor. “My success has everything to do with being a poor kid who was always being put down. Making my own way in the world became a matter of self-respect for me, of a kid trying to prove he was worth something: You can’t just brush me off because I’m poor. I can do anything, and I can be as good as anybody. It was always about achievement for me, about self-respect and living up to potential. The money I’ve made is wonderful, but secondary.”[Footnote ]
Dunlap’s story, however, embellishes the truth. According to business author John Byrne, author of Chainsaw: The Notorious Career of Al Dunlap in the Era of Profit-at-Any-Price, “The personal side of Al Dunlap was mostly protected by himself. His carefully crafted image belied a dark and troubling side. Not only did he have a controlling personality and a constant need to be at the center of attention, he had a tremendous temper and an enormous ego.”
Dunlap painted a Horatio Alger portrait of himself, Byrne observed, “as a boy who grew up poor in the slums of Hoboken, New Jersey, the deprived son of a Woolworth’s store clerk and a dock worker who frequently was laid off from his job in the shipyards that sat in the shadow of New York City. He told associates a childhood story that had driven him throughout his life. The incident had happened when, Dunlap said, his family was crowded into a basement apartment under a beauty parlor in Hoboken. ‘He was playing with a friend whose mother came along and said, ‘Johnny, you can’t play with Al because he lives in the tenements,’ recalled a Dunlap colleague. ‘It was a defining moment in his life. That incident burned into his brain. He said ‘I’m going to show those folks that I’m better than them.’ It was his Rosebud.’”
Dunlap was an outstanding athlete at Hasbrouck Heights High School and a good student. He was by his own admission “intense and disciplined.” “Nobody had to tell me to study hard in school; I knew well what was expected of me if I was going to rise above the poverty into which I was born.” This dedication helped earn him an appointment to the U.S. Military Academy. “West Point is a great place to be from but a very difficult place to be,” Dunlap remembers. “Through my whole life, it has raised my stature. The end product of West Point is character. It builds men and women who take responsibility. . . . West Point teaches you how to lead, how to think, how to deal with adversity, how to take responsibility, how to detail your actions. It teaches you for military purposes, but its lessons can easily be applied to business.” Dunlap graduated in 1960 from the U.S. Military Academy, 537th out of his cadet class of 550, and entered military service.
Before reporting to duty at a nuclear missile base in Maryland, he met an 18-year-old redhead named Gwyn at a dance club in West Orange, New Jersey. They were married about a year later, but the marriage was rocky from the start and ended in divorce. According to the divorce complaint, the marriage was full of “wretchedness and misery.” Dunlap, his wife said, “demanded that she dye her hair blond even after the dye caused a rash and blisters on her scalp. He told her he liked the way it looked on a former girlfriend. Coming home from work, he would conduct military-like inspections of the house, ducking his head under the mattress of the bed and moving chairs away from the walls to see if he could find even a trace of dust. If he did, Dunlap went ballistic.” He allowed her $15 a week for all family food and would check the supermarket register tapes to see if she had spent all of the money as he wanted her to spend it. In November 1966 Gwyn was granted a divorce due to “extreme cruelty.” She claimed that she was so afraid of Dunlap that she didn’t request alimony and accepted only the $15 a week in child support that he offered for their son Troy, who was two at the time.
Dunlap Begins His Business Career at Kimberly-Clark and Sterling Pulp & Paper
After leaving the U.S. Army in 1963, at the age of 29, Dunlap was hired by Kimberly-Clark as a management trainee and soon thereafter rose in the managerial ranks. A few years later he accepted a job as general manager of one of Kimberly-Clark’s suppliers, Sterling Pulp & Paper in Eau Claire, Wisconsin. His new boss, Ely Meyer, introduced him to Judy Stringer, a teller at a drive-in window for the local bank. The two were married on March 30, 1968, and remain married to this day. Judy understands Al. “There are three things that are important in Al’s life: his business, his dogs [they have two German Shepherds], and his wife, in that order. Being third isn’t all that bad.”
His job at Sterling Paper gave Dunlap his first true managerial experience. And it came quickly. During his first 16 weeks, he was confronted with a flood, a fire, an explosion, and a strike—all of which occurred at a company that had already endured severe financial problems. “I addressed each disaster head-on,” he recalls. “None of them panicked me, which I attribute to my West Point training. It was the hand I was dealt, so I played it and put into place corrective measures, so that problems could be controlled and wouldn’t happen again.” At Sterling Dunlap, he developed his ideas about “restructuring and rightsizing.” When the company was sold to Gulf & Western, he took a position at American Can Company in its strategic planning group, where Dunlap and his executive team embarked on a mission to buy and sell companies.
During this time at American Can, he established a pattern of action and a reputation for:
(1) assuming executive positions at fledging companies;
(2) immediately embarking on fierce cost-cutting, restructuring, and downsizing programs;
(3) working to drive up the companies’ stock price; and
(4) quickly moving on as soon as the cost-cutting efforts had been initiated.
This notoriety earned him several nicknames: “Chainsaw,” “Rambo in Pinstripes,” “The Shredder,” and, as a result of his reign at Lily-Tulip, “Georgia’s Toughest Boss,” monikers that are aptly reinforced by his book Mean Business, published in 1996.
Dunlap at Lily-Tulip and with Goldsmith and Packer
Hired as CEO of Lily-Tulip Company in Toledo, Ohio, in 1983 and brought in by the leverage buyout company of Kohlberg, Kravis, and Roberts (KKR) to turn the company around, Dunlap started to live up to his nicknames his first day on the job. “I called a short meeting of the senior management. The company was in terrible trouble, and most of these managers were to blame. Looking around the room, I kept my remarks simple and pointed my index finger at the people I wanted to remain. ‘You two stay—the rest of you are fired. Good-bye.’” The next day was called “Black Friday,” referring to the considerable numbers of employees who were terminated. Soon thereafter the corporate headquarters were moved to Georgia to save costs; in the process, the headquarters staff was cut in half. Salaried staff was cut by 20 percent. The corporate jet was sold and several low-performing manufacturing plants were promptly unloaded. The results during Dunlap’s reign at Lily-Tulip until it was taken public by KKR—earning the investment banking firm a $120 million stock profit on its $30 million investment—are impressive.
Dunlap’s stint at Lily-Tulip was followed by about six years working with England’s hostile takeover specialist Sir James Goldsmith. Dunlap’s moral view of corporate restructuring was significantly shaped by Goldsmith’s philosophy of business. Goldsmith believed that a company’s past financial mistakes could be corrected by a CEO taking immediate and drastic actions to restore the company’s financial health. “Sir James,” Dunlap muses, “was a larger than life influence on me, an absolutely brilliant, dynamic, and gregarious man who fished me out of the corporate stream and made me what I am today.”
In 1991, Dunlap left Goldsmith to work with Australian billionaire Kerry Packer at Consolidated Press Holdings. Following that he returned to the United States in 1994, where a search committee at Scott Paper hired him as CEO. He assumed the job on April 19, 1994.
Dunlap at Scott Paper
Dunlap first broke into the headlines of the Wall Street Journal when he was at Scott Paper. Many on Wall Street loved him for his draconian, expense-slashing firings. At Scott he immediately reduced upper management by 70 percent, eliminated more than 11,200 jobs, and got rid of 35 percent of Scott’s total payroll. He sold off assets worth over $2 billion, eliminating another 6,000 employees from the Scott payroll. Yet, he claims he took these actions in a responsible way. “When December 31 [1994] came around, I was true to my word,” Dunlap reported. “The bloodletting ended and 20,000 people had secure jobs once again."
Dunlap’s impact on Scott was immediate and pervasive. “Even if you didn’t have face time with him, that guy affected your life and everyone knew it,” said a Scott Paper executive who had put in 26 years at the company. “Everyone talked about him. He put the fear of God into a lot of people. When he was in the building, people knew he was there. His presence was palpable.”
It soon became clear that Dunlap was only interested in selling out, although at company meetings he spoke of building the company. By the end of 1994, the company was totally volume driven. “We’re talking about a whole new definition of short term,” said one executive. Dunlap slashed the company’s research and development budget by millions, and eliminated 60 percent of the staffers in R&D. He put off all major plant and equipment maintenance during 1995, a move that saved millions more. The millions of dollars he saved on those two cutbacks alone dropped straight to the bottom line. “What he did was borrow a year, maybe two, from the future,” said one executive. “At some point, you have to pay it back. If you wait too long, you’ll pay it back double because the plants will operate inefficiently and the machines will begin to break down. We strung it out as far as we could without getting into unsafe conditions.”
As a cost-saving measure, Dunlap forbade Scott’s managers from being involved in community activities because that would take away from business duties. He banned memberships in industry organizations because that allowed managers to network with competitors. Before moving Scott’s world headquarters to Boca Raton, Florida—just after buying a $1.8 million home there—Dunlap eliminated all corporate gifts to charities, even reneging on the final $50,000 payment of a $250,000 pledge to the Philadelphia Museum of Art.
Dunlap also scrapped a yearly event at which Scott met with its leading suppliers to improve relationships and get better prices for goods. Dunlap viewed the meeting as “nonsense,” a waste of time and money. The meeting dated from a major reengineering project, begun before Dunlap came on board, that had reduced the number of Scott’s suppliers from 20,000 to 1,000, saved more that $100 million in annual purchasing costs, and resulted in a 75 percent reduction in that department’s budget. “The numbers were showing up just as Dunlap came through the door,” said the former director of worldwide procurement. They contributed to some of the cost reduction results Dunlap later took credit for.
Scott’s published financial statements, however, were enhanced by accounting tricks. To push more products into the marketplace, the company’s consumer sales force gave huge discounts to its customers that worked like this: The goods were sold to the customers at standard prices. The customers did not receive a discount until after the goods were sold, at which point a large rebate was issued. When the initial sale was made, however, Scott recorded it on its books at the full standard price and a standard profit was posted. The discount was entered later, only after the customer applied for the rebate. That way, Scott could show dramatic increases in sales without immediate erosions in profit margins. Typically, such trade promotion discounts ran at 10 to 20 percent of revenue. To drive volume at Scott, especially in the final months before the company was sold, the discounts were doubled.
Dunlap pushed his employees relentlessly to produce. No factory shutdowns, even for maintenance. No training. No new hires. No purchases unless absolutely necessary. Employees worked unbelievable hours. That was the condition for those who stayed. Many others lost their jobs and were sent looking for new employment. The case of Emory Michael Cole is typical. Cole had worked at a Scott plant since 1958, following in his dad’s footsteps by joining Scott’s general labor pool for $1.72 an hour. On August 16, 1994, Cole was called in from his vacation and promptly fired. He was 58. “Loyalty didn’t matter anymore,” he said sadly. “They didn’t care if you were there thirty years or three weeks. My wife almost had a heart attack when I told her I was fired. I wanted to work four or five more years to get my full retirement, nearly $4,000 a month. It’s not fair. Dunlap worked less than two years at Scott and made $100 million. I was there when the paper machines were built.”
Yet the market responded well to Dunlap’s efforts. Scott’s stock price rose, from $38 the day Dunlap arrived to $89 a year later. During his 603 days as Scott Paper’s CEO, the company’s stock increased in total value by $6.5 billion, more than $10 million a day. On December 12, 1995, Scott Paper and Kimberly-Clark merged. Dunlap left as a wealthy man.
Having just completed his second year of the economic jihad at Scott Paper, Dunlap became a highly sought-after executive. Many companies were in need of a turnaround specialist. One was Sunbeam Corporation, a household brand appliance manufacturer that sold Mixmasters, automatic toasters, grills, electric fry pans, hair dryers, Oster products, and other consumer appliances.
Dunlap at Sunbeam Corporation: The Honeymoon
Sunbeam Corporation was in trouble, having suffered major losses in 1995. Despite a strong bull market during the early 1990s, Sunbeam’s stock was down 52 percent, hovering at around $12 a share. Earnings were down 83 percent, sales down over 4 percent, administrative costs were up $50 million, and working capital was up almost $90 million. Two well-known mutual fund managers—Michael Steinhardt and Michael Price—who collectively owned about 42 percent of Sunbeam’s stock, persuaded Dunlap to become the company’s CEO. He took the job in July 1996. Within days of taking over the company, Dunlap promised a dramatic restructuring. He planned to rid Sunbeam of half of its 12,000 employees and 18 of its 26 plants.
Dunlap recounts, “In a matter of seven months, we accomplished $225 million in annual cost reductions. The number of factories was reduced from 26 to 8 worldwide. Warehouses were cut back from 61 to 18. The worldwide workforce of 12,000 was cut in half, half by the sale of operating units and the rest by layoffs.” Furthermore, the “six existing Sunbeam headquarters were consolidated into one. Headquarters staff was trimmed 60 percent, from 308 to 123. Other management and clerical staff was cut from 1,529 to 697. The first week, we lowered our audit fee by 50 percent and our insurance fee by 80 percent.”
Dunlap’s management style was communicated for all to take note of on his first day. He called a meeting of the senior management team. At precisely 9 a.m. on Monday, July 22, 1996, he marched into the room without introduction, without issuing a single greeting to any of the anxious men around the table. One executive arrived about a minute late.
“Who are you?” Dunlap shouted as the man gingerly tiptoed to his seat.
“I’m Spencer Volk, sir. I’m head of international business,” he said in a voice as smooth as a network television anchor’s.
“Why are you late?” barked Dunlap.
“I was in the men’s room,” Volk nearly whispered.
“When I say we have a meeting at 9 o’clock,” bellowed Dunlap, “it begins at 9! Gentlemen, look at your watches. Your lives will never be the same from this moment onward.” And then he continued.
“You guys are responsible for the demise of Sunbeam!” Dunlap roared, tossing his glasses on the table. “You are the ones who have played this political, bullshit game with Michael Price and Michael Steinhardt.” You are the guys responsible for this crap, and I’m here to tell you that things have changed. The old Sunbeam is over today. It’s over!”
“This is the best day of your life if you are good at what you do and willing to accept change,” continued Dunlap, through clenched teeth. “And it’s the worst day of your life if you’re not.”
Author John Byrne opens his book by recounting the following, somewhat typical, episode that took place a few months after Dunlap came on board:
Albert J. Dunlap, the mercurial chief executive of Sunbeam Corp., settled into his first-class seat aboard a Northwest Airlines Jet. The Detroit-bound plane had leveled to cruising altitude when Dunlap’s traveling companion, Donald R. Uzzi, flipped down his food tray and pulled a sheaf of financial documents out of his briefcase.
Uzzi, Sunbeam’s top operating executive, planned to make an unusual appeal to his boss on this wintry day in January 1997. He was going to ask Dunlap to reconsider a decision to close down a small factory in Bay Springs, Mississippi. The plant employed only 125 people, but Uzzi and his fellow executives believed it made no economic sense to lay off the skilled laborers at the facility.
Indeed, when the details of the decision crossed Uzzi’s desk, the long-time marketing executive wondered if Dunlap or his chief financial officer, Russell Kersh, were trying to test his financial competence. To save less than $200,000 a year in transportation costs, the company would have to spend up to $10 million to close the plant and consolidate it with another 40 miles away. The appliance maker wouldn’t see a payback on the closure for decades, if ever.
Uzzi quickly discovered that it wasn’t a prank. Dunlap understood that Wall Street handsomely rewarded companies that shuttered plants and laid off workers. The more people a company fired, the more Wall Street seemed to applaud, sending a company’s stock price higher and higher. When Uzzi tried to bring Dunlap’s attention to the financial document to make his appeal, Al rebuffed him. Dunlap already was livid that the mayor of Bay Springs had become an outspoken critic of him. He wanted to show that the mayor of a small backwoods town could not oppose him and win. Uzzi tried to bring up the subject several times during the flight, but it was a done deal. Dunlap had made his decision, and he was obviously sticking to it.
If seemed apparent from the beginning that Dunlap’s goals, including doubling revenues, were unrealistic but he pursued them vigorously anyway. To double total revenues, Sunbeam had to perform five times better than its competitors. To boost operating margins to 20 percent in little more than a year, Sunbeam had to improve its profitability more than 12-fold. To generate $600 million in sales through new products by 1999, the company had to introduce new hit products continually.
Nevertheless, Dunlap refused to acknowledge either the difficulty or the impossibility of meeting these lofty goals. By means of sheer brutality, he began putting excruciating pressure on all of the executives who reported to him. These people, in turn, passed that intimidation down the line. It went beyond the ordinary pressure to do well in a corporation. People were told, explicitly and implicitly, that either they hit their numbers or another person would be found to do it for them. Thus, their livelihood depended on making numbers that people were not able to make.
At Sunbeam Dunlap created a culture of misery and an environment of moral ambiguity, a closed world that was indifferent to everything except the stock price. He did not lead by intellect or by vision, but by fear and intimidation. In that way he was not unlike the most infamous corporate leaders who used fear as a weapon, people like ITT’s Harold Geneen or Occidental Petroleum’s Armand Hammer. Unlike them, however, the expectations Dunlap imposed were more often than not irrational and unrealistic. “No matter what happened, Al was driving for more and more,” said manufacturing chief Ronald Newcomb.
Byrne observed that in Dunlap’s presence, knees trembled and stomachs churned. Underlings feared the torrential harangue that Dunlap could unleash at any moment. The pressure was beyond tough. It was barbarous. “There are tough people and then there are mean people,” explained a Sunbeam executive. “Tough people keep you up at night, worried about getting things done. Mean people make you piss in your pants. They scare the absolute shit out of you. They are violent. They beat on you. Al is a mean man.”
Dunlap’s executives believed that he didn’t care about their views of the details of the business. Oftentimes he would tell them that directly when they tried to explain a business situation to him. Everyone’s performance was compared unfavorably to the work of others at companies he previously ran under Sir James Goldsmith or some other executive. He hated hearing bad news. “Just go out and make it right” was his usual response. Bill Kirkpatrick, who worked with him at both Scott and Sunbeam, said, “You are there to listen. If you didn’t hit your numbers, he would tear all over you. The lines would be pat.” Dunlap’s face would turn florid red, and then the words would shoot out of his mouth like bullets.
Sunbeam’s sales force felt the same pressure. “It was like your job or your life,” explained a top salesman. “But it was a combination of the carrot and the stick. You were constantly reminded of the huge financial payoff if it worked.” By means of a system called “tasking,” executives were given numbers to make. “I don’t care what your plan was. I don’t care what you delivered last month,” Dunlap would say. “We are going to task you to this number. And, we don’t want any bullshit! Your life depends on hitting that number!” One executive recalled that “these numbers got to be so outrageous that they were ridiculous.”
The payoff would come in stock-option gains that would become available if the company was sold to another investor. These stock options were huge and plentiful. Soon after arriving at Sunbeam, Dunlap won approval to hand out options and restricted stock on as many as 16.5 million shares. He could give as many as 250,000 options to a single executive in one year. The top 250 to 300 executives and managers at Sunbeam all received options grants, typically twice the size of what they might get at other companies. General managers were given grants of 50,000 to 75,000 shares, and additional awards were routinely doled out when someone received a promotion or performed exceptionally good work. Later on Dunlap gave minimum grants of 100 stock options to every employee who had a year’s service under his or her belt.
Dunlap had advertised broadly that 1997 would be Sunbeam’s “turnaround year.” Secretly he fervently hoped that the company would be sold by the end of the year, just as had happened at Scott. But Sunbeam was not performing well. So Russ Kersh was asked to reach into his “ditty bag” of accounting tricks and make things look better.
To make Dunlap’s numbers, the company took some rather drastic measures. Of all the ploys it used, few were as controversial and daring as the “bill-and-hold” sales the company began making early in November 1996. Anxious to extend the selling season for its gas grills and boost sales in Dunlap’s “turnaround year,” the company hoped to convince retailers to buy grills nearly six months before they normally needed them. In exchange for major discounts, retailers agreed to purchase merchandise they would not physically receive until months later and would not pay for until six months after billing. In the meantime, the goods would be shipped out of the grill factory in Neosho, Missouri, to third-party warehouses—leased by Sunbeam—where they would be held until the customer was ready to take delivery.
Despite Dunlap’s later claims, bill-and-hold sales are not a standard industry practice. The Securities & Exchange Commission (SEC) has explicitly called such transactions “a departure from the general rule of revenue recognition.” The regulatory agency first issued guidelines on such sales in 1981, to Mattel Inc., the toy maker with a highly seasonal business. The SEC made clear at that time that the practice was not acceptable if a customer [such as Wal-Mart or Costco]—and not a supplier [Sunbeam in this case]—failed to have “a compelling business purpose” for it. Even then the agency demanded that a supplier had to meet a set of seven stringent “conditions” and consider six additional “factors” before it could book a bill-and-hold sale.
Among other things, buyers [that is Sunbeam’s customers], not sellers, had to request that the transaction be on a bill-and-hold basis, and customers had to make fixed commitments to purchase the goods, preferably in writing. The rules also obligated the seller to provide a fixed delivery schedule, and buyers had to assume the full risks of ownership. Even if a company met all seven conditions, however, the SEC maintained that the sale could still fail to meet the requirements for revenue recognition. That was because the agency required accountants and auditors to consider a series of other issues. Before approving a bill-and-hold transaction, for example, they had to consider whether normal billing and credit terms were modified, whether the buyer assumed the risk of losses if the goods declined in value, and the seller’s past experiences with such sales. Later it was determined that Sunbeam failed to meet these requirements on many of its sales. Nevertheless, at the time, Sunbeam’s auditors, Arthur Andersen, approved the practice and few people other than Sunbeam’s senior management knew about it. But soon the public would know.
On June 8, 1998, Barron’s ran an article by Jonathan R. Laing entitled “Dangerous Games: Checking Up on Chainsaw Al.” Its subheading read “Did Sunbeam Really Earn a Profit in ’97?” Laing reported that Sunbeam booked sales and profits before products were shipped and payment received from the retailers, that the company wrote down to zero some $90 million of its inventory in 1996, then sold the goods at 50 cents on the dollar, sometimes more, and put the money into net income in 1997 (this move alone accounted for as much as a third of Sunbeam’s 1997 income), and that the company prepaid everything it could in 1996, from advertising and packaging costs to insurance premiums and inventory expenses, so that it would not have to expense those costs in 1997 (adding $15 million to 1997 net income).
Members of Sunbeam’s board of directors read this article with alarm and hastily called a meeting. The Andersen partner in charge, Phillip Harlow, was invited to attend. During the meeting Harlow stood by his numbers and Andersen’s treatment of the company’s activities. Dunlap took charge of the meeting.
“Members of the audit committee, are you satisfied that you have done your job?” asked Dunlap in a loud voice. The committee members nodded.
“Partner from Arthur Anderson, are you satisfied that you’ve done your job?”
“Yes,” he said soberly.
“Do you stand by those numbers?
“Yes,” he said again.
“Is there anything that makes you uncomfortable?” Dunlap asked again.
Harlow attempted to bring up the bill-and-hold practice, but Dunlap interrupted him.
“Do you stand behind the published statements?” Dunlap barked. “Is bill-and-hold considered an acceptable practice in the industry?’
“Yes,” agreed Harlow, who had signed off on the company audit.
Following this exchange the board dismissed Dunlap and Kersh. The revelations at the meeting and Dunlap’s perceived attempts at a coverup were just too much. Having lost confidence in his leadership, the board agreed to fire Dunlap.