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	<title>FORTUNE Features &#187; Fortune Classic</title>
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		<title>The toughest guy on Wall Street (Fortune 2006)</title>
		<link>http://features.blogs.fortune.cnn.com/2012/05/13/jamie-dimon-jpmorgan/</link>
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		<pubDate>Sun, 13 May 2012 13:20:46 +0000</pubDate>
		<dc:creator>meganbarnett</dc:creator>
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		<description><![CDATA[<p class="manual_auth">By Shawn Tully</p>
<p><em>Editor's note: Every Sunday, Fortune publishes a story from our magazine archives. This week we turn to a 2006 cover story about J.P. Morgan's brash new CEO, Jamie Dimon. For six years, Dimon grew J.P. Morgan into a banking powerhouse, and he emerged from the financial crisis unscathed while most of his bank CEO counterparts were shown the door. He's been known as one of Wall Street's <a href="http://features.blogs.fortune.cnn.com/2012/05/13/jamie-dimon-jpmorgan/">MORE</a><img alt="" border="0" src="http://stats.wordpress.com/b.gif?host=features.blogs.fortune.cnn.com&#038;blog=916416&#038;post=9207&#038;subd=fortunefeatures&#038;ref=&#038;feed=1" width="1" height="1" />]]></description>
			<content:encoded><![CDATA[<p class="manual_auth">By Shawn Tully</p>
<p><em>Editor's note: Every Sunday, Fortune publishes a story from <a href="http://features.blogs.fortune.cnn.com/tag/fortune-classic/">our magazine archives</a>. This week we turn to a 2006 cover story about J.P. Morgan's brash new CEO, Jamie Dimon. For six years, Dimon grew J.P. Morgan into a banking powerhouse, and he emerged from the financial crisis unscathed while most of his bank CEO counterparts were shown the door. He's been known as one of Wall Street's best risk managers -- until last week, when he disclosed a $2 billion trading loss. Dimon said the loss was caused by "errors," "sloppiness," and "bad judgment." Now Wall Street is judging its toughest guy.   </em></p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/05/jamie_dimon_2006_cover.jpg"><img class="alignright size-full wp-image-9209" title="jamie_dimon_2006_cover" src="http://fortunefeatures.files.wordpress.com/2012/05/jamie_dimon_2006_cover.jpg" alt="" width="240" height="327" /></a></p>
<p>FORTUNE -- Just about everyone who works on Wall Street has heard the stories about Jamie Dimon. The one about his shutting down the gyms and pulling the fresh flowers at J.P. Morgan Chase. (That story is true.) And the one about his grilling limo drivers parked in front of headquarters to find out who'd ordered the Lincolns, then screaming at the culprits for wasting money. (That one's apocryphal, but Dimon doesn't mind people repeating it, because fear helps him control costs.)</p>
<p>Here's one you haven't heard. Dimon became president of J.P. Morgan Chase in mid-2004 when it acquired Bank One, where he had been CEO. Soon after, he convened an emergency meeting and ripped into his new colleagues for "letting pay get totally out of hand." Among the examples that set him off: Regional bank managers at J.P. Morgan earned around $2 million--five times the $400,000 that comparable Bank One people made. Morgan's human resources chief was pocketing better than $5 million. Outraged, Dimon announced he was slashing comp for hundreds of staff positions by 20% to 50% over two years. "I'd tell people they were way overpaid," Dimon recalls, "and guess what? They already knew it." The kicker: Most of the managers stayed on despite the cuts.</p>
<p>A few months later, at a retirement party for J.P. Morgan CFO Dina Dublon, 52--whom Dimon was replacing with an ally from Bank One--Dimon stepped to the podium and praised her service to the company. Then he unleashed a biting one-liner: "But if you paid one dollar for Texas Commerce bank"--which J.P. Morgan acquired in 1987 for $1.2 billion--"you paid a dollar too much!" The room, studded with Texas Commerce alumni and executives who had championed the deal, went dead silent.</p>
<p>As these stories suggest, Jamie Dimon is not known for subtlety. He has shouted down a U.S. Congresswoman who was pushing Bank One to keep more jobs in Chicago, and told a roomful of J.P. Morgan internal auditors that a colleague "knows as much about accounting in her baby finger as all of you combined." He will lash out in meetings with trusted confidants--"That's the dumbest thing I've ever heard"--and expect them to come right back at him. ("If not, he won't respect you," says J.P. Morgan asset-management and private-bank chief Jes Staley.)</p>
<p><strong>MORE: <a href="http://finance.fortune.cnn.com/2012/05/11/jpmorgan-2-billion-just-start/">JPMorgan's trading debacle: Why $2 billion is just the start</a></strong></p>
<p>Yet far from hindering his career, this brash, iconoclastic manner has made Dimon the most watched, most discussed, most loved, and most feared banker in the world today. From Wall Street to the City of London, just mention "Jamie," and everyone knows you're talking about the rampaging rebel who's as loud as he is tight. He's much more than a cost cutter with a colorful personality, and his compulsive candor is just one of his highly effective management tools. Working alongside boss and mentor Sandy Weill, Dimon helped engineer 12 years of audacious mergers that turned an obscure Baltimore loan company called Commercial Credit into Citigroup, the world's largest financial services company. After being unexpectedly shoved aside by Weill, he re-emerged at a dysfunctional Bank One, turned it around, and sold it in the deal that made him, as of January, CEO of J.P. Morgan Chase, the third-largest financial corporation in the U.S. (2005 revenues: $55 billion), behind Citi and Bank of America.</p>
<p>Now he wants to perfect the model he and Weill created at Citigroup--and defeat the house he helped build. "It's all about having the best systems, the best people, the best products, the best risk controls," he says. "It's all about being the best, the best, the best." That's why investors, industry watchers, and fellow CEOs trade all those Jamie stories. They see him as the one figure with the skills and opportunity to prove once and for all whether the model of a one-stop-shop financial firm can live up to its promise. And they know that Jamie is just itching to expand his empire with at least one breathtaking deal.</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/05/jamie_dimon_spread.jpg"><img class="alignleft size-full wp-image-9210" title="jamie_dimon_spread" src="http://fortunefeatures.files.wordpress.com/2012/05/jamie_dimon_spread.jpg" alt="" width="360" height="244" /></a>It would be hard to find a company more in need of the Dimon treatment than J.P. Morgan. A hodgepodge of businesses from multiple mergers that were never fully integrated, the giant bank is burdened with a lazy culture and an underperforming stock ripe for reinvigoration. While J.P. Morgan ranks at or near the top in many key categories--second in retail deposits, credit card balances, and investment-banking fees; first in U.S. private-banking assets and cash-management revenues--growth has been tepid and profitability mediocre. J.P. Morgan's return on equity, a crucial yardstick for financial firms, is just 10%, well below that of its top rivals. No wonder the stock has barely moved in five years.</p>
<p>J.P. Morgan, of course, isn't the only financial conglomerate with an identity crisis these days. At Citi, the original incarnation of the do-it-all firm, CEO Charles Prince is struggling to overcome scandals and management turnover. "Financial conglomerates like J.P. Morgan are feeding grounds for smaller, more nimble and focused players," says Tom Brown, chief of hedge fund Second Curve Capital. "Shareholders of all the supermarkets would be better served if they were broken up." Some analysts are already getting impatient with Dimon. "He told us to expect big progress in 2005," says Meredith Whitney of CIBC. "Now we won't see major improvements until 2007." But many are betting that Dimon's rare combination of an analytical, Cartesian mind with a passionate, damn-the-social-graces style will end up rewriting the rules of the game. As Larry Bossidy, former Honeywell chairman and a J.P. Morgan director, puts it, "I don't use superlatives lightly, but he's the best guy I've ever seen in financial services."</p>
<p><strong>MORE: <a href="http://finance.fortune.cnn.com/2012/05/11/jpmorgan-losses-volcker-rule/?iid=SF_TS_Lead">JPMorgan's losses: No major victory for Volcker Rule</a></strong></p>
<p>"It's offensive to me to be called a cost cutter," says Dimon during one of a series of in-depth, exclusive interviews with FORTUNE. Striding about his eighth-floor Manhattan office, the stocky CEO, who took boxing lessons after being ousted from Citigroup, karate-chops the air and punches out sentences in staccato bursts that bear traces of his Queens upbringing. He grabs a pen and begins scribbling on an easel to illustrate how the bank's revamped computer systems work. He pulls out a dog-eared piece of paper that he carries in his breast pocket to jot notes to himself--the "people who owe me stuff" list, he calls it (a surprisingly low-tech tool for someone who considers himself an IT geek).</p>
<p>A huge operation "can get arrogant and full of hubris and lose focus, like the Roman Empire," says Dimon. To prevent J.P. Morgan from falling into that trap, he has imposed rigorous pay-for-performance metrics and requires managers to present exhaustive monthly reviews, then grills them on the data for hours at a time. "He jumps into the decision-making process," says Steve Black, co-head of investment banking. "If you just want to run your business on your own and report results, you won't like working for Jamie." To be sure he's getting the real story, Dimon buttonholes staffers in the elevators and calls suppliers out of the blue like a hyperactive gumshoe, collecting scraps of information he can throw back at executives. "In a big company, it's easy for people to b.s. you," he says. "A lot of them have been practicing for decades."</p>
<p>While Dimon's rudeness can be offputting, the sheer force of his passion and intensity can be irresistible. And that's been the story of his life. "He loves misbehaving in places where he's supposed to behave," says his wife, Judy Dimon, who met him when they were fellow students at Harvard Business School. She vividly remembers the first time she saw him, at an HBS watering hole called the Pub. "The room was a sea of Ivy Leaguers in pastel Lacoste shirts, all grinning, all trying to win each other over," she says. In the middle stood a Johnny Cash--style figure clad in black jeans, a black shirt, and black sunglasses. "He was sphinxlike, taking things in, not trying to be part of the group." She recalls being astounded by his gall when, in the midst of a party she threw after they'd been dating for a few weeks, Jamie gave her a blunt ultimatum: "I'm going home, and I want you to go with me." That she said yes--and that they've been living together ever since, for 26 years, and have three daughters, ages 16, 18, and 20--is testament to how endearing Dimon's rough edges can be.</p>
<p>Two weeks into Dimon's first year at Harvard, recalls classmate Steve Burke, now COO of Comcast, they were assigned a case about a troubled cranberry co-op. "We'd just arrived, so we were all intimidated by this godlike professor," says Burke. "The professor starts discussing the cranberry case, and Jamie says, 'I think you're wrong!' We were all amazed." Dimon walked to the blackboard and wrote out his solution. The imperious prof was forced to acknowledge, "You're right," and Dimon immediately became a hero to fellow students. He's had the same inspirational effect on the people who have worked for him over the years, many of whom have followed him from job to job. "Jamie's strength is that he's a leader, not a classic manager," says Charlie Scharf, who started with Dimon at Commercial Credit in the 1980s and is now head of retail banking at J.P. Morgan. "He can't help himself," adds Heidi Miller, chief of treasury and securities services at J.P. Morgan. "He can be a total pain, overdemanding, but you'd trust your life to him."</p>
<p><strong>MORE: <a href="http://finance.fortune.cnn.com/2012/05/11/jamie-dimon-jpmorgan/?iid=SF_TS_Lead">Jamie Dimon failed Crisis Management 101</a></strong></p>
<p>Dimon shuns the black-tie circuit and never sets foot on a golf course. He yanked Bank One's sponsorship of the Masters golf tournament because the country club hosting the event doesn't accept women members. His taste in food is basic; his favorite dish is a cheeseburger with fries. He flies home to Chicago every week to be with his wife and youngest daughter, who is in high school there. On Friday evenings he invariably takes the family to dinner at a neighborhood Italian restaurant and orders the same thing: a martini followed by the house salad and grilled chicken Parmesan.</p>
<p>Music is practically his sole hobby. Dimon, who's taking guitar lessons, surprised his aides by practicing chords on a recent flight to China. At home he relishes lying on the couch in his library in a sort of trance, with the stereo blasting a mélange of schmaltzy tunes that includes Sinatra's "My Way," "The Impossible Dream," "New York, New York," "What a Wonderful World," and Ray Charles's "America the Beautiful." He throws in "Ave Maria" for high art. (The family is so concerned about the blaring Americana that at the Park Avenue apartment they're renovating in Manhattan the interior walls are being lined with lead soundproofing.) Of course, you might call cost cutting a hobby too. At home, spying a not totally empty bottle of ketchup in the trash ignites an explosion. At one point Dimon was appalled to see that his daughters were using bushels of towels--so he imposed a strict quota of one a week. He's so frugal that, to the shock of family and friends, he continued to wear T-shirts with the Citigroup (<a href="http://money.cnn.com/quote/quote.html?symb=C">C</a>) logo long after Citi had fired him.</p>
<div id="attachment_9211" class="wp-caption alignright" style="width: 350px"><a href="http://fortunefeatures.files.wordpress.com/2012/05/sandy_weill_jamie_dimon.jpg"><img class="size-full wp-image-9211" title="sandy_weill_jamie_dimon" src="http://fortunefeatures.files.wordpress.com/2012/05/sandy_weill_jamie_dimon.jpg" alt="sandy_weill_jamie_dimon" width="340" height="245" /></a><p class="wp-caption-text">Sandy Weill with Jamie Dimon in 1983</p></div>
<p>IN 1982, armed with his Harvard MBA, Dimon hooked up with Sandy Weill, an old family friend, becoming his assistant at American Express. When Weill was forced out of his post as AmEx's (<a href="http://money.cnn.com/quote/quote.html?symb=AMX">AMX</a>) president soon thereafter, Dimon followed him into exile, spending more than a year in a suite in Manhattan's Seagram Building hatching plans to build a financial empire. During their long partnership, Weill was the strategist with the golden gut, Dimon the nuts-and-bolts operator who made the machine work. Citigroup was the culmination of their grand design. Yet Dimon grew increasingly frustrated at sharing power with other executives at Citi, and his natural combativeness got the best of him: He bickered with co-CEOs Weill and John Reed, among others, and in late 1998 found himself reliving the into-the-wilderness experience when Weill showed him the door.</p>
<p>As Weill and Dimon were building Citi, J.P. Morgan Chase (<a href="http://money.cnn.com/quote/quote.html?symb=JPM">JPM</a>) was being cobbled together in its own series of mega-mergers: The old Chemical Bank bought Texas Commerce in 1987, then gobbled up Manufacturers Hanover in 1991, Chase in 1996, and J.P. Morgan in 2000. But unlike at Citi, there was no sustained effort to merge operations or substantially cut costs, and shareholders suffered. William Harrison, who became CEO in 1999, eventually zeroed in on Dimon as the solution. In 2004 he agreed to buy Bank One. After becoming Bank One's CEO in 2000, Dimon had turned the sickly operation around by combining a crazy quilt of computer systems and imposing strict guidelines on a haphazard set of credit standards, almost doubling the market cap, to $58 billion.</p>
<p>For Dimon the merger represented a return to the big time--and a chance to face off against his old creation, Citi. As president, Dimon immediately set to work on a major makeover, attacking costs, consolidating systems, and instilling an aggressive sales culture. He filled key positions with trusted confidants, including Citi alumni Michael Cavanagh as CFO (replacing Dina Dublon), Charlie Scharf, and Heidi Miller. Harrison, who was scheduled to stay on as CEO through June 2006, quickly ceded day-to-day control. In October it was announced that Dimon would take the helm in January, six months ahead of schedule (Harrison remains chairman). The truth is, he has been in charge from the moment he walked in the door.</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/05/jamie_dimon_portrait.jpg"><img class="alignleft size-full wp-image-9212" title="jamie_dimon_portrait" src="http://fortunefeatures.files.wordpress.com/2012/05/jamie_dimon_portrait.jpg" alt="" width="240" height="347" /></a>Dimon's strategy for J.P. Morgan is deceptively simple: boost revenues at a healthy pace while keeping a lid on costs. "If the market is convinced you'll keep the cost line flat and that you have the disciplines to raise revenues faster than your competitors, your stock price can rise in double digits," says Dimon. "But you have to do both."</p>
<p><strong>MORE: <a href="http://finance.fortune.cnn.com/2012/05/07/sandy-weill-philanthropy/">Sandy Weill just wants to move on</a></strong></p>
<p>In pursuit of those goals, he doesn't get bogged down in a search for consensus or worry about hurt feelings. At a meeting early last year, Todd Maclin, head of J.P. Morgan's commercial bank, complained to Dimon that the investment bankers were hoarding hundreds of so-called middle- market firms--those with annual sales of $500 million to $2 billion--on their "prospects" list, keeping the commercial bankers from approaching them. Dimon dropped everything and convened the top executives of the investment bank. "Are you calling on this company?" he demanded. "How often? How much business are you doing with them?" When it became clear that many prospects were being neglected, Dimon started reassigning them to the commercial bank. "The room was filled with hollering and yelling," says Maclin. But Dimon was adamant. "You're protecting clients you don't do business with," he said.</p>
<p>That was only half the battle. Dimon wanted Maclin's crew to have strong incentives to steer business to the investment bank. Maclin and his investment-banking counterpart, Douglas Braunstein, worked out an arrangement: The commercial bank gets 25% to 50% of the fees from M&amp;A, debt, and equity deals involving their clients. The system is a success. Last year the investment bank sold almost $500 million in services to middle-market customers, twice as much as two years ago.</p>
<p>It's a prime example of how Dimon thinks a financial supermarket should work. Having a mix of businesses, he believes, has two advantages. It adds stability to earnings--consistent profits from branch banking, say, help smooth out swings in trading--and it should also lift sales, if you make sure that different divisions feed one another. Dimon has already revamped J.P. Morgan's retail-branch system to encourage greater selling of mortgages, credit cards, and other products. When he arrived, branch personnel got the same pay for pushing products as for dozing behind their desks; 50% of branch managers received bonuses of $8,000 to $18,000. Today, under the watchful eye of retail-banking head Scharf--who instituted a similar plan for Dimon at Bank One--the firm pays big bucks to stars and fires laggards. Branch managers are ranked based on how much they raise both profit and revenues; the top group gets bonuses as high as $65,000, and the lowest quintile zip. Salespeople in the branches can do even better, collecting "points" for selling credit cards, mortgages, and other products. Last year the biggest point-gatherer pocketed a $145,000 bonus. If you don't make your quota, you're out.</p>
<p>Dimon is bringing that kind of rigor to every corner of the firm. In the old J.P. Morgan, big units combined their results, so it was difficult for top management to figure out which ones were really making money. "Strong businesses were subsidizing weak ones, but the numbers didn't jump out at you," says CFO Cavanagh. "With the results mashed together, it was easy for managers to hide."</p>
<p>The hiding game is over. Right after the merger, Dimon split J.P. Morgan into six major profit centers--investment banking, retail, and cards are the three biggest--with dozens of units that must report like separate companies. Each month, division heads send Dimon 50-page books packed with data, from the ratio of overhead to sales on every product to BlackBerry bills per employee. Then Dimon goes over the reports in grueling sessions that last hours. "He'll ask, 'Why do we have three times as many HR people in Europe as in Asia?'" says private-banking chief Staley. "'Are we doing something better in Asia?'" Last year the exercise led Dimon to have the communications and marketing department replace expatriates with local hires in its overseas offices, saving more than $100,000 per post.</p>
<p>Transforming the bank's technology is another pillar of Dimon's plan. When he arrived, J.P. Morgan was saddled with mismatched computer systems inherited from Chase, Chemical, and Texas Commerce. Lots of expensive software and interfaces were needed for the different systems to talk to one another, making J.P. Morgan's costs per transaction among the highest in the industry. The computer confusion also hampered the bank's ability to market more products to existing customers. Sitting with a client, a branch banker couldn't call up much more than a checking history. Nothing popped up about whether the customer qualified for a mortgage or credit card.</p>
<p>On a Saturday in mid-February 2004, a month after the Bank One deal was announced, Dimon brought together the top IT people. He dazzled them with his grasp of protocols and software costs, then told the managers to choose a single platform in any area where multiple systems were in place. "If you don't do it in six weeks," he warned, "I'll make all the choices myself."</p>
<p>The IT managers met the deadline. Now, for example, J.P. Morgan has just one system for credit cards. The new platform, called TSYS, has helped bring down the bank's annual cost of processing statements to $52 per customer from $80. That makes J.P. Morgan one of the most efficient operators in the industry. In the branches (all of which now carry the Chase brand), computers are now sales tools; the screens prompt bankers to offer customers every Chase product they qualify for but don't have, from home-equity loans to financial planning. One example of the new culture at work: Chase increased the number of credit card accounts opened in the branches by 55% in 2005.</p>
<p>In cleaning up the computer mess, Dimon displayed another tenet of his philosophy: Keep a firm grip on IT. Last year he canceled IBM's seven-year contract to manage J.P. Morgan's computer systems. IT isn't a sideline, he believes, but rather an essential skill the firm should totally control. "When you're outsourcing it's almost impossible to do the integration, because people don't care that much," he says. "We want patriots, not mercenaries." And of course, he also hates paying the markup for having outsiders do the work.</p>
<p>Cutting costs isn't just about saving money --for Dimon it means freeing up capital to seed new growth. Retail banking is a case in point. When Dimon arrived, the bank employed five people and spent some $750,000 per branch in back-office costs, compared with two employees and $250,000 at Bank One. Consolidating the computer systems helped cut that down--as did eliminating nearly 2,000 support jobs in New York City. Now Chase is approaching Bank One's efficiency. But Dimon has also spent heavily to upgrade dowdy branch facilities and to take on competition. Dimon and Scharf fired back at New York--area invaders like Bank of America and Wachovia, blitzing the Big Apple with fresh TV, radio, and billboard ads. Chase installed 270 ATMs in heavily trafficked Duane Reade drugstores, the first such arrangement by any bank with a big retailer in New York. Across the U.S., Chase hired 3,000 new salespeople. Despite the new spending on advertising, systems, and the opening of 150 new branches, Chase managed to raise operating earnings at the retail bank 8% in 2005, to $3.4 billion.</p>
<p>One area that Dimon has not yet tamed is J.P. Morgan's wildly inconsistent trading operation. By its nature, proprietary trading--where firms bet their own capital on the direction of stock prices or interest rates--is risky. J.P. Morgan's problem is that it both makes less money and suffers from far more volatility than rivals like Goldman Sachs and Morgan Stanley. And while J.P. Morgan's investment bank is raking in fee income (its take tops all rivals but Citi), the division lives and dies on trading. In the fourth quarter of 2005, for example, when the proprietary traders lost several hundred million dollars betting that both oil prices and interest rates would jump, profits at the investment bank slumped 29% from the previous quarter.</p>
<p>Still, Dimon embraces trading, for a simple reason: It's extremely profitable, despite the swings. So he's instituting stricter controls and spreading risks by diversifying beyond fixed-income and derivatives trading into energy and mortgage-backed securities--two fields where competitors were cleaning up. Last year J.P. Morgan hired a crack energy team from Morgan Stanley and recruited mortgage traders from all over Wall Street. Dimon is promising far smoother trading results in 2006. "We'll have less volatility, and we'll get paid more for the swings we do have," he says.</p>
<p>While Dimon would seem to be moving at lightning speed, things are actually going more slowly than he'd hoped. Getting J.P. Morgan's house in order has "probably taken longer than I thought," he says. "We had to increase spending in a lot of areas more than I initially said we would." Ultimately, he expects that spending to lead to greater profits and a higher stock price.</p>
<p>And a higher stock price is important, because even as Dimon lasers in on operations, dealmaking is never far from his mind. Harrison and board member Bob Lipp are out hunting for prospective partners. J.P. Morgan needs to expand its retail-branch footprint in California and Florida, the two big domestic markets from which it's absent. There are a number of banks Dimon could buy to fill those gaps, including SunTrust, Wachovia, and Washington Mutual. But his grand dream, according to those close to him, is to create a worldwide retail network that rivals Citigroup's--so he also wants to ride the growth wave of the future, Asia. An ideal merger partner would be HSBC, which boasts interests in retail networks spanning from Mumbai to Shanghai. It's that quest that gives added urgency to fixing J.P. Morgan's operational problems and boosting its stock price. It's only when you accomplish those things, says Dimon, that "you earn the right to do a deal."</p>
<p>An extraordinary reunion took place last summer. Citigroup CEO Chuck Prince invited a dozen current and former colleagues, including Sandy Weill and Dimon, to dinner. They gathered in a renovated mansion on the grounds of Citi's Greenwich, Conn., retreat, a place many of them had been coming to since the late 1980s when Commercial Credit bought it. Back then, the building was a ramshackle relic with leaky plumbing and worn furniture, decorated in a style they called "early frat house." For Dimon, the evening was a replay of good times--lavish dinners lubricated with rare wines from the mansion's hidden cellar--and bad: Seven years earlier, Weill had summoned Dimon to another building at the retreat to fire him. The mood was light, though, as the group joked and reminisced about the old days at the "frat house." "You finally fixed it up," Dimon said, admiring the sumptuous renovations. Of course, Dimon is deep into a renovation of his own. What was unspoken that evening is that he wants nothing more than to vanquish the very people with whom he was swapping memories. And that's one Jamie story that remains to be told.</p>
<p><em>Reporter associate: Eugenia Levenson</em></p>
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		<title>How top executives live (Fortune, 1955)</title>
		<link>http://features.blogs.fortune.cnn.com/2012/05/06/classic-top-500-executives/</link>
		<comments>http://features.blogs.fortune.cnn.com/2012/05/06/classic-top-500-executives/#comments</comments>
		<pubDate>Sun, 06 May 2012 13:00:37 +0000</pubDate>
		<dc:creator>Fortune Editors</dc:creator>
				<category><![CDATA[Fortune Classic]]></category>

		<guid isPermaLink="false">http://features.blogs.fortune.cnn.com/?p=9120</guid>
		<description><![CDATA[<p class="manual_auth">By Duncan Norton-Taylor</p>
<p><em>Editor's note: Every Sunday, Fortune publishes a story from our magazine archives. With the annual Fortune 500 list ready to be revealed tomorrow, turn this week to our inaugural Fortune 500 list, in July, 1955. General Motors topped the list that year, and writer Duncan Norton-Taylor took an inside look into the lives of America's top executives. What does the boss do with his spare hours--if any? How do <a href="http://features.blogs.fortune.cnn.com/2012/05/06/classic-top-500-executives/">MORE</a><img alt="" border="0" src="http://stats.wordpress.com/b.gif?host=features.blogs.fortune.cnn.com&#038;blog=916416&#038;post=9120&#038;subd=fortunefeatures&#038;ref=&#038;feed=1" width="1" height="1" />]]></description>
			<content:encoded><![CDATA[<p class="manual_auth">By Duncan Norton-Taylor</p>
<p><em>Editor's note: Every Sunday, Fortune publishes a story <a href="http://features.blogs.fortune.cnn.com/tag/fortune-classic/">from our magazine archives</a>. With the annual Fortune 500 list ready to be revealed tomorrow, turn this week to our inaugural Fortune 500 list, in July, 1955. General Motors topped the list that year, and writer Duncan Norton-Taylor took an inside look into the lives of America's top executives. What does the boss do with his spare hours--if any? How do vice presidents spend their money, and their time away from the office? Here, some glimpses into the private lives of executives in 1955 who earned more than $50,000.</em></p>
<div id="attachment_9122" class="wp-caption alignright" style="width: 350px"><a href="http://fortunefeatures.files.wordpress.com/2012/05/sibley_house.jpg"><img class="size-full wp-image-9122 " title="sibley_house" src="http://fortunefeatures.files.wordpress.com/2012/05/sibley_house.jpg" alt="" width="340" height="213" /></a><p class="wp-caption-text">John Sibley at home.</p></div>
<p>The American executive in his office is a familiar figure; he is, typically, decisive, somewhat aloof, and generally regarded by his employees with a certain awe. In the life he leads outside his office, however, he is a much less familiar character; the occasional pictures painted of him by fiction writers tend to be romantic, or even lurid, and with the possible exception of John Marquand's heroes, the fictional executive is rarely a man you have met. Yet millions of Americans diligently aspire to the life of a top executive, coveting his opportunities for pleasure while, actually, they have only the faintest notion of what his life is really like or of what he does when he goes home.</p>
<p>There are in the U.S. approximately 30,000 executives, with incomes of $50,000 or more. These men sit on the top-most rungs of the business ladder either as managers or as owners of their own businesses. Obviously there is no "average" executive among them (they are all singular men). But their lives do have certain common characteristics, and there is visible a kind of composite way of executive life.</p>
<p>The successful American executive, for example, gets up early--about 7:00 A.M.--eats a large breakfast, and rushes to his office by train or auto. It is not unusual for him, after spending from 9:00 A.M. until 6:00 P.M. in his office, to hurry home, eat dinner, and crawl into bed with a briefcase full of homework. He is constantly pressed for time, and a great deal of the time he spends in his office is extraneous to his business. He gets himself involved in all kinds of community work, either because he wants to or because he figures he has to for the sake of public relations.</p>
<p>If he is a top executive he lives on an economic scale not too different from that of the man on the next-lower income rung. He surrenders around 40 per cent of his salary to the Bureau of Internal Revenue (he may cough up as much as 75 per cent) but still manages to put a little of his income in stocks, bonds, life insurance. He owns two cars, and gets along with one or two servants. What time he has left from his work--on weekends and brief vacations--he spends exercising, preferably outdoors, and usually at golf. Next to golf, fishing is the most popular executive diversion.</p>
<p>He spends almost no time on politics. He entertains often because he must (i.e., for business reasons or on account of his wife) and, under much the same compulsion, he attends cultural events. He does little reading outside of newspapers, newsmagazines, reports, and trade papers. (For a notable exception, see "Texas Eastern's Naff," page 108.) He drinks, if he drinks at all, moderately and on a schedule. Alcoholism, it is clear, does not go with success and is to be found only among some executives' bored wives. Extramarital relations in the top American business world are not important enough to discuss.</p>
<p><strong>Gone with the income tax</strong></p>
<p>Twenty-five years have altered the executive way of life noticeably; in 1930 the average businessman had been buffeted by the economic storms but he had not yet been battered by the income tax. The executive still led a life ornamented by expensive adjuncts that other men could not begin to afford, a life attended by a formality that other men did not have time for. In Boston, which set the highest tone if not the fastest pace, the archetype of the high-salaried executive of 1930 arrived at his office in his chauffeur-driven Pierce-Arrow, uncompromisingly attired in dark suit and detachable stiff collar. For weekend lounging white flannels were <em>de rigueur</em>.</p>
<p>Today an executive, outside of Boston at least, may arrive at his office in tan shoes, sometimes in a tweed jacket with side vents. And he may well do his weekending in shorts--pink ones this year. Today's executive still pays plenty for his clothes, however; in New York, tailor-made suits at Twyeffort's will run $265; custom-made shoes, $80.</p>
<p>Among other things that have changed in the executive's life has been the ritual connected with city club life. Ceremony has all but vanished with the migration to the suburbs. Executives now use town clubs merely for lunching or having a fast drink at the end of the day before catching their commuting trains. The old, annual club dinner with its solemnities and reports, its printed menus, elaborate dishes, and long cigars, has deteriorated into a gobbling of commonplace steak by members numbed by martinis. The passing of formal club life has also meant the end of a good deal of stag conviviality. One Boston executive complains that he hasn't seen a poker game or crap game in the Union Club in ten years.</p>
<p>The executive's home today is likely to be unpretentious and relatively small--perhaps seven rooms and two and a half baths. (Servants are hard to come by and many a vice president's wife gets along with part-time help. So many have done so for so long, in fact, that they no longer complain much about it.) The executive who feels, as apparently Robert R. Young does, that to be completely happy he needs a forty-room "cottage" in Newport and a thirty-one-room oceanside villa in Palm Beach is a rare bird these days. The fact that Young paid only $38,000 for his Newport place, Fairholme, which cost Philadelphia banker John R. Drexel nearly a quarter of a million dollars to build in 1905, demonstrates the decline in the market for such outsize mansions.</p>
<p><strong>Forty feet, four people, $40,000</strong></p>
<div id="attachment_9123" class="wp-caption alignleft" style="width: 250px"><a href="http://fortunefeatures.files.wordpress.com/2012/05/james_conkling_evening.jpg"><img class="size-full wp-image-9123" title="james_conkling_evening" src="http://fortunefeatures.files.wordpress.com/2012/05/james_conkling_evening.jpg" alt="" width="240" height="350" /></a><p class="wp-caption-text">James Conkling</p></div>
<p>As executives' homes have dwindled in size, so have their parties. Frederick J. Thibold, catering manager at Sherry's in New York, can remember dances for 2,000 with a "sumptuous supper" twenty-five years ago. A big dance today is one for 400, and at some of these, Thibold confides in a whisper, Sherry's has served hot dogs and hamburgers. Today's executive entertains at his country club, or at small dinner parties at home. The New York executive who entertains at smart restaurants, where a dinner party for six may cost $125, usually does so on an expense account.</p>
<p>The large yacht has also foundered in the sea of progressive taxation. In 1930, Fred Fisher (Bodies), Walter Briggs, and Alfred P. Sloan cruised around in vessels 235 feet long; J. P. Morgan had just built his fourth Corsair (343 feet). Today, seventy-five feet is considered a lot of yacht. One of the biggest yachts launched in the past five years is the ninety-six-foot Rhonda III, built and owned by Ingalls Shipbuilding Corp., of Birmingham, Alabama. The Rhonda III cost half a million dollars to build, and the annual bill for keeping a crew aboard her, stocking her, and fueling her runs to around $130,000. As Chairman Robert I. Ingalls Jr. says, only corporations today can own even so comparatively modest a craft. The specifications of the boat that interests the great majority of seagoing executives today are "forty feet, four people, $40,000." In this tidy vessel the businessman of 1955 is quite happily sea-borne.</p>
<p><strong>Nobody likes to sit still</strong></p>
<p>But if some stateliness has gone out of the lives of successful businessmen, it has been replaced by a new scope. No executive, twenty-five years ago, could whisk himself and his golf clubs 1,000 miles away just for a weekend. Today a New York executive can play weekend golf regularly all through the winter in Florida or Bermuda, and follow the season north through Georgia and North Carolina. In 1930 the private plane was a dubious adventure, advertised chiefly as something for "sportsmen." Flying is still done by some as a sport; Stanly Donogh, a Sears, Roebuck division manager in Seattle, last winter took his wife on an 18,000-mile flight by small plane around South America. But for the most part the private plane, like the commercial airliner, is just a routine means of getting swiftly away from, and back to, the office.</p>
<p>The modern executive's leisure pursuits may be specialized or varied but his relaxation is usually concentrated, and, as might be expected, well organized. Ed Quinn, head of the Chrysler division of Chrysler Corp., for example, spends his weekends like thousands of other big and little businessmen, fishing--in his case for muskellunge off Grosse Pointe on Lake St. Clair. Quinn's thirty-foot, twin-engine boat is equipped not only for fishing but for any foreseeable emergency. Her gear includes special chromium brackets designed by Quinn to hold half a dozen trolling rods, an echo sounder, an electronic amplifier, and a ship-to-shore radiotelephone. The businesslike Quinn keeps a detailed record of the circumstances attending the boating of every muskellunge. Other executives, like Crawford Greenewalt, president of du Pont, take a lick at just about everything. Over the years Greenewalt has involved himself in a home machine shop, goggle fishing off his Bermuda home, tennis, the clarinet, classical recordings, the photography of birds, and the cultivation of orchids.</p>
<p>But what Quinn and Greenewalt and most other executives seem to have in common is a dislike for spending their time off in repose; sedentary diversions bore them.  A case in point is the Alabama broker who had the impulse to learn to play the piano. He did in fact master <em>0 Sole Mio</em> and <em>Carry</em> <em>Me Back to Old Virginny</em> before he thought to ask his teacher how many chords there were to learn. Told there must be several thousand, he abandoned the piano, deciding he preferred to concentrate on his fine tennis game; when it was raining he could spend his time keeping fit by exercising with his barbells.</p>
<p><strong>From the Pacific to the Warrior</strong></p>
<p>The differences in executives' lives--and despite the obvious generalizations they are numerous--stem principally from differences in financial status, personal inclinations, and geographic location. Those executives who own their businesses enjoy certain obvious advantages over salaried executives. Similarly, those who were fortunate enough to inherit wealth, or who enjoyed high incomes before incomes were whittled down by the federal income tax, may have an amount of capital that few younger executives can hope to accumulate. The lives of such men are likely to have considerable sweep and élan.</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/05/hayes_kitchen_living_room.jpg"><img class="alignleft size-full wp-image-9124" title="hayes_kitchen_living_room" src="http://fortunefeatures.files.wordpress.com/2012/05/hayes_kitchen_living_room.jpg" alt="" width="612" height="262" /></a>Take Richard S. Rheem, fifty-one, who is an entrepreneur (president of Rheem Manufacturing Co. of Richmond, California) and a son of the late William S. Rheem, president of Standard Oil of California. Rheem makes his home formally in two cities but spends most of his time in a blur of motion--he estimates that he never stays put anywhere longer than three weeks. One of his two residences is a luxurious apartment on East Sixty-sixth Street, New York, staffed by four servants; the other is a house on Vallejo Street in San Francisco, staffed by four more servants. He recently bought an estate, La Dolphine, in Hillsborough, California (down the peninsula from San Francisco), which was modeled after the Petit Trianon at Versailles, and which Rheem picked up for $150,000. He spends his vacations either in a cabin in the vastness of Montana, where he enjoys "the dimensions," or in the vastness of the Pacific, aboard his ninety-eight-foot ketch, the Morning Star. Rheem enjoys a life with sweep.</p>
<p>Jonathan W. Warner, thirty-seven, is an entrepreneur of more modest dimensions. Warner is executive vice president and operating boss of Gulf States Paper Corp., which was founded by his grandfather. In a $40-million plant alongside the Warrior River, in Alabama, Gulf States turned out five billion paper sacks last year, one-fifth of all the grocery bags sold in the U.S.</p>
<p>Boyish-looking Jack Warner lives in an unpretentious brick house on a 120-foot plot in Tuscaloosa, near the University of Alabama campus. He bought the house, which has five bedrooms, for $18,000 after World War II. He and his wife are enthusiastic collectors of antiques and their rooms are decorated with crystal chandeliers and filled with Chinese Chippendale furniture, lacquer chests, and Dresden china.</p>
<p>Warner's home is only fifteen minutes from his plant. This is pretty much the orbit of his life, although he does go to three conventions a year and takes a couple of weeks' vacation in Florida. His diversions are hunting and fishing on the Tombigbee River, swimming at the Tuscaloosa Country Club, and watching University of Alabama football and basketball games. He did back flips on a trampoline in his back yard until he got a crick in his neck recently; he now leaves that activity to the elder of his two small sons. Warner believes in healthy living and is now heading a drive to raise money for a new Tuscaloosa Y.M.C.A.</p>
<p>The Warners entertain by inviting a dozen friends to their house for drinks, which may have to be limited to two so that they can all rush off to the University Club before the dining room is closed. Warner is perfectly content to go on making paper bags, raising camellias, and collecting original Audubon prints. Especially, he wouldn't change places with any of "those fellows in New York who have two cocktails before lunch and then can't do anything the rest of the afternoon." From Warner's observation, "They're always going to psychiatrists, having nervous breakdowns, and spending most of their time on commuting trains."</p>
<p><strong>We don't get off the beam</strong></p>
<p>The lives of executives do vary considerably according to where they make their living. In the Pacific Northwest, for example, a businessman can live very simply and pleasantly. As a Seattle minister observed, after noting that only 30 per cent of Seattle's population are affiliated with churches: "There are so many wonderful things to do outdoors."</p>
<p>It takes Horace W. McCurdy, president of the Puget Sound Bridge &amp; Dredging Co., less than half an hour to drive from his Seattle office to his mansion on Mercer Island by way of the Lake Washington Bridge, which his company built. Paul B. McKee, president of Pacific Power &amp; Light Co. in Portland, takes only twenty minutes to get to his home, located on seven and a half acres of farmland.</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/05/conkling_yard.jpg"><img class="alignright size-full wp-image-9125" title="conkling_yard" src="http://fortunefeatures.files.wordpress.com/2012/05/conkling_yard.jpg" alt="" /></a>There are few extremes of wealth in the Northwest. This fact in itself imposes a certain moderation on those who do have large incomes. Two years ago, at sixty, C.B. ("Bill") Stephenson, of Portland, was made president of the First National Bank, the largest banking chain in the Northwest, and he suddenly found himself projected into the $50,000-and-up class. It made no perceptible difference to Bill Stephenson, who changed his living habits scarcely at all. He bought a new Ford, which he still drives; Mrs. Stephenson drives a three-year-old Buick. The Stephensons were obliged to do a little more entertaining, but they stayed right on in their seven-room house, and continued to get along quite satisfactorily with a part-time cleaning woman.</p>
<p>Stephenson likes to putter around his flower beds, and on Saturday afternoon he may drift over to the Waverley Country Club with a set of rusty and nondescript clubs and play some rusty but not too nondescript golf. Last winter he took the longest vacation he had ever had: three and a half weeks in Hawaii. "Top executives here are not expected to get off the beam," he says, meaning they are not expected to emerge obtrusively from the background.</p>
<p>Clay Brown, also of Portland, is the fifty-two-year-old president of the M and M Wood Working Co., one of the biggest plywood manufacturers in the world. A onetime professional baseball player, Brown heads the newly organized Portland Beavers, but what with selling stock in the club and tending to his own business, he has scarcely had time to see his team play in a Coast League game. He hasn't taken a vacation in two years. He spends six days a week in his office and the seventh wandering anxiously around his plants.</p>
<p>He lives in an expensive apartment in the city, but "we don't buy any extra high-priced fancy stuff," he says. "Not with two youngsters in school and taxes what they are." On the subject of savings, "We've always made a habit of saving money," Brown states in the manner of a man who thinks any other policy folly.</p>
<p><strong>The urbane life</strong></p>
<p>San Francisco's business leaders are an unusually sophisticated group. They live graciously. They reside on Russian Hill or Pacific Heights, with a splendid view of the bay, or in the sunny suburbs surrounding San Francisco. J.D. Zellerbach buys a Van Gogh or a Cezanne at the drop of an auctioneer's hammer. Charles de Bretteville, president of Spreckels Sugar, lives a strenuously athletic life in the horsy suburb of Woodside on the peninsula. Henry J. Kaiser goes speedboating on Lake Tahoe, and Richard Rheem races off to Honolulu in his yacht. But the men in the upper brackets are also expected to underwrite the opera's annual losses and contribute to museums and other cultural enterprises and support the city's charities--all of which they do, handsomely and with urbanity.</p>
<p>The life of San Francisco's executives is illustrated by the activities of Jerd F. Sullivan, sixty-four-year-old president of the old and conservative Crocker First National Bank. Sullivan's numerous civic involvements include the Boy Scouts, the Salvation Army, serving as president of the Light Opera Association and the United Negro College Fund. A big, hearty man who once worked on a Nevada ranch, he paces himself carefully. He plays golf and bridge, but really prefers dominoes noontimes at the Pacific Union Club.</p>
<p>The Sullivans live on Russian Hill, have dinner with friends two or three evenings a week, and about once a month throw a large party in their old-fashioned pink house. On weekends they retire to a small house set in eighteen acres of orchards and wild land, fifty miles from the city, where the only company they have is their Weimaraner dog. Sullivan believes in "commuting to your recreation once a week instead of commuting to your work five times a week."</p>
<p><strong>The quiet Texans</strong></p>
<p>It is clear that flamboyant living is not characteristic of top U.S. businessmen; it is not even characteristic of Texans.</p>
<p>A few, like D. Harold Byrd, fifty-five-year-old president of Byrd-Frost, Inc. (oil), still do manage to give the scene some splashes of color. Byrd's parties may include 1,000 guests who disport themselves at his estate on the edge of Dallas, swimming and boating or pedaling around on water bicycles on his lake, or bowling or dancing in front of his band shell. Byrd pilots his own twin-engined airplane. He flies to Wyoming to hunt ("the deer are too small in Texas," he says with remarkable candor for a Texan) and flies to football games at the University of Texas. He has put up some $150,000 to finance students through the university. He has also given $15,000 to the college band.</p>
<p>James Keenan, vice president and general manager of Joske's home-furnishings store in Houston, is more typical of Texas' salaried executives, however. He likes to go home after work and spend the evening quietly with Mrs. Keenan and their children, read some magazines, and go to bed.</p>
<p>Fun, among most Texas executives, is family fun. A common practice is for a company president, on his way to New York in the company plane, to fill the empty seats with family and friends. The return trip may include a detour into Canada for some fishing.</p>
<p>D. A. Hulcy, chairman and president of the Lone Star Gas Co. in Dallas, has acquired a sensible attitude toward life, although he acquired it the hard way. About four years ago, at fifty-nine, Hulcy was finishing out terms as president of the U.S. Chamber of Commerce and as president of the American Gas Association. "I just couldn't find any leisure time. There was the regular day at the office, plus outside meetings. When I went home I carried a full briefcase. There were speeches to be written. I was on a treadmill and always about three jumps behind." Hulcy, meanwhile, had given up golf, fishing, hunting. His vacations were business trips, and about the only leisure he got "was an hour or so at dinner." Then he suffered a heart attack.</p>
<p>He recovered. But after that, a scared and chastened man, he put himself on a five-day-work schedule. He bought a cottage on Lake Whitney and spent almost every weekend there fishing. He now takes regular vacations. "I'm learning to relax," says Hulcy, who once thought he could only "thrive mentally on a diet of work and more work ... I was just a damn fool."</p>
<p><strong>Not fun, but interesting</strong></p>
<p>Hulcy's story might, but probably won't, be studied by executives like Wallace R. Persons, president of Emerson Electric Manufacturing Co., of St. Louis, who thinks that his life is little different from that of most executives in manufacturing companies. "Ninety per cent of them," he says, "are so fascinated by the game of business that they don't care very much about anything else." Persons is lean, tense, and forty-five; he has had his present job a little over a year.</p>
<p>He drives to work from suburban Ladue in a three-year-old Oldsmobile and is in his office by eight-thirty. Lunch for Persons is a matter of taking on food, like a bomber refueling in mid-air, while he goes on working. He gets home around six-thirty, "always with a few little things I want to think about." By nine he is in bed with the few little things; he finds bed is the only place where he can cope with "a problem requiring a thoughtful decision." Saturday afternoon he may bring a vice president home to go for a swim at the Bellerive Country Club and then talk business. About one-third of Persons' time is spent on business trips, during which his program is even more concentrated. He never takes his wife on such trips for the sensible reason that he doesn't want to have to fit his schedule to someone else's whims.</p>
<p>Persons' life differs in one important respect from the life that put Hulcy in a hospital: Persons spasmodically takes time off to play golf and hunt, occasionally rushes off on a vacation "to recharge."</p>
<p>"I wouldn't say it's <em>fun</em>," Persons says of his life. "But it's a schedule of consuming interest. My wife says I'll do it until I'm dead."</p>
<p><strong>The general's "New Guinea"</strong></p>
<p>Manifestly, sheer physical survival is a problem with many executives--staying at the top, that is, and not cracking under the strain. "What you ought to ask me," one New York executive said only half jokingly, "is not how I live but how I stay alive."</p>
<p>The South provides a commentary on the question of survival--and some interesting contrasts in executive living within its own geographical limits. Greenville, in the Mississippi Delta (population: 30,000), which has recently seen the arrival of big Alexander Smith, Inc. (carpets), still presents a kind of Old South idyl--with modern air conditioning.</p>
<p>Cotton brokers, planters, merchants, bankers, drift out of their offices for mid-morning coffee, drive home for lunch, and get home again for dinner well before the sun has disappeared behind the levee. Weekends they play golf, fish for bream and channel cat, or stalk the country's abundant game birds. They travel a lot for business and pleasure, but they are always glad to get back to Greenville to live.</p>
<p>Alexander Gallatin Paxton, fifty-eight, is the state's biggest cotton broker. He lives part of the time in a house in Greenville, part of the time in a luxurious lodge built among the willows beside an oxbow of the Mississippi River, where he keeps a speedboat and a Tennessee walking horse. Living practically simultaneously in two houses, eight miles apart, drives Mrs. Paxton crazy, she says. But she likes the town house and Paxton likes the lodge, and that's that.</p>
<p>Paxton's big side interest in life is soldiering. He commanded an artillery battery in 'World War I, stayed in the National Guard, and in World War II commanded the 33rd Division artillery in New Guinea and Luzon. He calls his lodge "New Guinea."</p>
<p>"One reason Mrs. Paxton and I have gotten along so well," he explains, "is that we each have our hobbies. I have my military and she has her Bible studies."</p>
<p>Times are changing in Greenville, but the pace hasn't changed much yet, and staying alive is no problem.</p>
<p><strong>"We get too damn tired"</strong></p>
<p>In Atlanta, however, the pace has changed a lot, and is creating a problem for businessmen. They like the prosperity but not all are sure they like the new speed of life.</p>
<p>Executives of an older generation, like sixty-seven-year-old John Sibley, can afford to jog along evenly; they have already been around the course. But an in-between generation is having some difficulty finding its gait. John O. Chiles, who is fifty-three, belongs to that generation. He is head of the Adams-Cates Co., one of the biggest real-estate firms in the Southeast.</p>
<p>The company, he reports with a troubled look, just finished the biggest quarter in its fifty years in business. Chiles has become a seven-fifteen riser. He has to entertain two or three nights a week; otherwise he likes to be in bed by nine o'clock. He thinks he and his friends are trying to do too much. Collapsing back in his desk chair on a Saturday morning, before going out and playing thirty-six holes of golf, Chiles comments on the new rush: "Nobody wants to quit, it gets in your blood, like dope. But we get too damn tired."</p>
<p>Mills B. Lane Jr., however, is young enough (forty-three) to have grown into his executive responsibilities as the boom was developing; he belongs to a new generation of southern businessmen. Lane is president of the Citizens &amp; Southern National Bank, biggest bank in the Southeast, with headquarters in Atlanta.</p>
<p>He is up at five-thirty, when he fixes himself some coffee before the cook arrives. "That's when I do my reflectin' and thinkin'." He gets to his office by seven-thirty, driving whichever of three cars he happens to jump into--a Corvette, a Cadillac, or a Chevrolet sedan; the Lanes' fourth car, a station wagon, is reserved for domestic chores. At eight-fifteen he holds a meeting of his staff and puts in a full, slam-bang day. "Hi-yuh, Billy boy," or "It's a wonderful world," he may be heard shouting into his telephone in his dignified inner office. He gets home anywhere between four-thirty and six. "Then I take a coupla knocks," he says, meaning a couple of highballs, "have dinner and fall into bed."</p>
<p>Once in a while he gets down to Florida or over to Savannah for a sortie along the coast in his small cruiser. Or he will spend his weekends just lounging around his backyard swimming pool. (Large backyard swimming pools have become a conventional feature of, many executives' homes. Lane's neighbor, Richard Rich, head of Rich's department store, gave up golf and completely rebuilt his off-hours life around a tennis court, a garden house, and a $12,000, fifty-foot swimming pool.)</p>
<p>Lane's life actually has some very earliest aspects. His daughter was a victim of cerebral palsy, a misfortune that turned Lane's and his wife's attention to work in that field. They started the Cerebral Palsy School Clinic of Atlanta, which cares for seventy-five afflicted girls, and which Mrs. Lane supervises. Lane's dream is to establish a large rehabilitation school in Atlanta for Georgia children, and he tirelessly runs money-raising campaigns for such work. His latest scheme was to order 18,000 sets of Menaboni bird plates, which Lane sells to anyone he can buttonhole for $25 a set (four dinner plates). He expects to make $100,000 for his philanthropy out of this project.</p>
<p><strong>Like the Silurian fish</strong></p>
<p>Adaptation is one explanation of how a lot of executives stay alive. As the fish in the Silurian rivers began to develop swim bladders in order to live in shoal waters, so American executives have developed certain compensating features. The process can be observed particularly in the big cities where conditions are the most trying. Executives have developed an insensitivity to noise, an uncanny time sense (needed in commuting), and an attunement to the city's terrifying rhythms. Instead of trying to escape the phenomenon of modern life they fling themselves at it. John C. Sharp's method of finding daily refreshment is an example. Sharp, fifty-four, is president of the Hotpoint division of General Electric and his office is in Chicago. At the end of the day he gets into his Ford, and eagerly plunges into the brawling stream of homebound traffic. Some thirty-five minutes later, when he turns into his driveway in Glen Ellyn, "I'm as relaxed," says Sharp, "as a wet noddle."</p>
<p>Sharp makes this analysis of the jittery executive: "If a man is nervous in his job it is probably because he can't handle it or he doesn't like it. In either instance it's the wrong job for him."</p>
<p><strong>Love that business</strong></p>
<p>In New York City, John Cunningham also flings himself at his environment. Cunningham, who is fifty-seven, leaves his home in Riverdale, New York, at eight-fifteen in his Cadillac Eldorado, and, according to his own description, drives "wildly" into the city, threads his way through the morning chaos of Madison Avenue, parks his car in a garage, and arrives at his advertising office (Cunningham &amp; Walsh) thoroughly stimulated.</p>
<p>Cunningham's life, which is one of continuous compulsions with occasional and expensive pleasure, mirrors the daily lives of thousands of other New York executives. Cunningham enjoys it. He plays hard--when he gets the chance--and works hard and doesn't have to worry about his health; he is a tough and conditioned city man.</p>
<p>He lives in a vast house built shortly after the turn of the century. As a boy growing up in Medford, Massachusetts, Cunningham, one of seven children, always had to share a room with a brother; one of the rewards of success, he feels, is to have plenty of large bedrooms. Since 1946 he has owned a house in Bermuda; he had another big house on Cape Cod, until Hurricane Carol demolished it. He also owns about two miles of Nantucket Island waterfront.</p>
<p>Not many men possess so many facilities for pleasure. The Cunninghams, who are childless, manage to enjoy their Bermuda home on Thanksgiving weekends. Otherwise they have stayed in the place once, and for only two weeks. Cunningham keeps a small schooner off Cape Cod, but he has never been aboard her for more than a weekend. He plays golf but only for business reasons ("too slow"). He does enjoy tennis. He once played duplicate bridge on both the Harvard and Union League clubs bridge teams. But he quit because once he got started he couldn't stop: he went on playing in his sleep.</p>
<p>Cunningham's adaptations have involved some atrophy. "What's tragic about me," he confides, "is that I have all this equipment and desire for play--but I love this other woman, this agency."</p>
<p>A possibly better adapted executive is Don Mitchell, chairman and president of Sylvania Electric Products Co., New York City. Indeed, Mitchell has apparently mastered most of the executive's problems.</p>
<p>He still lives in the eleven-room brick house in suburban Summit, New Jersey, that be bought in 1938 for $17,000.</p>
<p>Commuting to his office takes him a little over an hour, and he doesn't particularly enjoy it. But he has worked out the problem very nicely. If he can leave his office on upper Broadway at four-forty-five, he can avoid the subway rush and get into a club car at Hoboken on the Lackawanna's five-fifteen. In more dignified surroundings than the regular coaches, and impervious as he is to idle chatting, he can get some work done during the thirty-minute ride to Summit. If he has to stay in town for dinner or a meeting, as he does two or three times a week, he stays at the Savoy-Plaza.</p>
<p>Mitchell planned his life from its beginning. His first twenty-five years were to be spent in preparation (it may be presumed that he did not actually make this decision until sometime in his adolescence). The second twenty-five years were to be spent in providing financially for himself and his family. The next twenty-five years were to be spent in serving society. Since Mitchell became president of Sylvania at forty-one, nine years ago, he has covered phase two of his career well within his schedule. His salary today is $120,000, which, of course, does not count income from investments.</p>
<p>He has never overextended himself financially--a dangerous and foolish practice, he observes, of many young businessmen, who apparently think they can project themselves into a higher economic level by spending in such a way as to suggest they are already up there.</p>
<p><strong>One worry</strong></p>
<p>Now, at fifty, he already is in phase three, devoting more and more of his time to serving society. "My hobby," he says, "is the American Management Association." He also lends his energy to at least a dozen other organizations ranging from the Council for Economic Development to the Crusade for Freedom. His presence is required at luncheon meetings, Mitchell says, every business day in the week for three months in advance.</p>
<p>The Mitchells' social life he describes as "limited." "I get stimulation from business. "Mama," he says, referring to Mrs. Mitchell, "probably finds the life boring." But as he explains: "Her job is to bring up the children [there are three, two of them by now grown], and keep my health reasonably good."</p>
<p>His health appears to be excellent. His relaxation is gardening. The only thing that worries Mitchell is the thought of retirement. He reads--he has a library of some 2,000 biographies--but chiefly he reads "everything that's been printed about retirement." He believes he would have the inner resources to keep himself occupied; this is not what worries him. Mitchell explains it this way: he would be afraid, he says, that after he retired he might call up an old friend who was still active in business, and be told his friend was too busy to see him. "My ego would be hurt," he says with a fleeting smile. He plans to spend more time, after a few years, in foreign countries, at the offices of Sylvania's affiliates, and hopes thus to retire so gradually no one will notice, and no one will be too busy to see him when he calls.</p>
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		<title>GSA: Washington's Most Durable Mess (Fortune, 1955)</title>
		<link>http://features.blogs.fortune.cnn.com/2012/04/29/gsa/</link>
		<comments>http://features.blogs.fortune.cnn.com/2012/04/29/gsa/#comments</comments>
		<pubDate>Sun, 29 Apr 2012 13:00:40 +0000</pubDate>
		<dc:creator>Fortune Editors</dc:creator>
				<category><![CDATA[Fortune Classic]]></category>

		<guid isPermaLink="false">http://features.blogs.fortune.cnn.com/?p=9083</guid>
		<description><![CDATA[<p>By Herbert Solow</p>
<p><em>Editor's note: Every Sunday, Fortune publishes a story from our magazine archives. In light of the controversy surrounding the General Services Administration's spending habits and the recent Congressional hearings on the subject, we go back 56 years to August 1955, when Fortune reported the GSA "just as much of a mess today as it was in 1952." It's safe to say that not much has changed in the last <a href="http://features.blogs.fortune.cnn.com/2012/04/29/gsa/">MORE</a><img alt="" border="0" src="http://stats.wordpress.com/b.gif?host=features.blogs.fortune.cnn.com&#038;blog=916416&#038;post=9083&#038;subd=fortunefeatures&#038;ref=&#038;feed=1" width="1" height="1" />]]></description>
			<content:encoded><![CDATA[<p>By Herbert Solow</p>
<p><em>Editor's note: Every Sunday, Fortune publishes a story <a href="http://features.blogs.fortune.cnn.com/tag/fortune-classic/">from our magazine archives</a>. In light of the controversy surrounding the General Services Administration's spending habits and the recent Congressional hearings on the subject, we go back 56 years to August 1955, when Fortune reported the GSA "just as much of a mess today as it was in 1952." It's safe to say that not much has changed in the last half-century.</em></p>
<h2>The big General Services Administration has long needed a big cleanup. But GSA is still in the same sort of mess it was in when the Republicans took over. The main ingredients: favoritism, factionalism, sloppiness, and waste.</h2>
<p>Three years ago the Republican party asked a chance to "clean up the mess in Washington." One aspect of the mess was the giant General Services Administration, purchasing agent and property manager for much of the U.S. Government. GSA's 25,686 employees buy, sell, construct, rent, lease, maintain, design, research, mine, manufacture, transport, store, and otherwise "service" most federal agencies outside the Pentagon (and in some respects the military, too). GSA holds almost $9 billion in land, buildings, automobiles, clerical supplies, and other physical assets ($4 billion more than General Motors' assets). Its purchases in fiscal 1954 came to $1 billion. GSA is, in effect, a vast, diversified commercial-industrial corporation in the government, and its operations touch thousands of enterprises outside the government. And GSA is in just as much of a mess today as it was in 1952.</p>
<p>The irony of this situation is not confined to the fact that the Republicans campaigned against messes. The mess that Truman left behind in GSA was especially susceptible to a businessman's cleanup, and the Eisenhower Administration is full of businessmen. To enrich the irony, the very conception of GSA as a consolidated service agency was Republican in origin, for Public Law 152, which created GSA out of several older agencies in 1949, was adopted on the recommendation of the first Hoover Commission.</p>
<p>The GSA mess arises mainly from messy appointments. True, Truman's appointee as Administrator, Jess Larson, an Oklahoma politician, has given way to Eisenhower's, an Illinois politician named Edmund F. Mansure. But this has brought no benefit to GSA. Nor has there been any net improvement in the echelon just below the Administrator. In short, the Hoover idea of GSA has never had a fair test.</p>
<p>The new Administrator claims there have been improvements in GSA. Mr. Mansure personally examines travel requisitions of his Washington staff; he encourages removing clips from waste paper; to limit phone talks, he has put three-minute egg timers on subordinates' desks. There are weightier changes, too. Among them are a promising scheme for lease-purchase of federal office space, the contracting to private industry of some property-management services, and simplified accounting. It is, in short, hardly possible to employ 25,686 people in so diversified an operation as GSA and fail to produce islands of positive achievement.</p>
<p>The mainland of GSA is, nevertheless, the most durable mess in Washington. It would take a congressional investigation to light up the whole of it, but this article aims to illuminate a number of corners. The story involves great U.S. corporations and marginal operators; oriental swindlers and Caribbean grafters; Chicago politicians; Washington influence-peddlers and fixers; Republicans and Democrats, and, above all, timeserving bureaucrats who are neither Republicans nor Democrats, nor yet honest mavericks, but just job holders, glowing with contempt for the U.S. taxpayer. Happily, the cast also includes some honest, capable, GSA employees, men harried, half underground, and hoping for better days.</p>
<p>If better days are to come, they will come only when the White House decides to clean up GSA. As of mid-July, the White House was quietly looking into GSA. Should it look hard enough, GSA might have a new Administrator before this article appears. In that event, this article may serve as explanation of a long overdue reform -- and as a report on what a new Administrator would be up against.</p>
<p><strong>An expensive reputation</strong></p>
<div id="attachment_9087" class="wp-caption alignright" style="width: 310px"><a href="http://fortunefeatures.files.wordpress.com/2012/04/mansure_balmer.jpg"><img class="size-medium wp-image-9087" title="mansure_balmer" src="http://fortunefeatures.files.wordpress.com/2012/04/mansure_balmer.jpg?w=300&h=225" alt="" width="300" height="225" /></a><p class="wp-caption-text">Edmund F. Mansure and William J. Balmer</p></div>
<p>Fifty-four-year-old Ed Mansure, the first Republican Administrator of GSA, speaks of himself as a businessman. He says that he made "considerable money" in Chicago "and so I have a rather expensive reputation." Nobody has challenged his financial integrity. Superficially, Mansure seems to be a public-spirited citizen on a self-sacrificing tour of Washington duty, with plans for early return to his home state and an industrial career. But he has burned some bridges behind him. Two years before Mansure went to Washington in April, 1953, he had sold his business. Soon after his appointment to GSA, he disposed of his residence in plush, placid Libertyville near Chicago, home of Adlai Stevenson and of many Republican businessmen. Mansure is in politics wholeheartedly, and, if he can manage it, permanently.</p>
<p>Mansure actually was as much in politics as in business even before coming to Washington. True, he did preside over a $5-million-a-year upholstery and drapery-trim manufacturing enterprise inherited from his father. But from the time he graduated from Chicago's Kent College of Law, Mansure gave much time to the gamy politics of his native Cook County. He managed several local Republican campaigns and in 1937 became the party's state treasurer. He held posts on three state boards, to one of which he was appointed by Governor Stevenson, his neighbor across the road, and he was busy in the Illinois Manufacturers Association, Red Cross, the Chicago Crime Commission, and similar bodies. He backed Stassen for the presidency in 1948 and joined Chicago's Citizens for Eisenhower before the 1952 convention.</p>
<p>Mansure says that he puts merit above party ties, and he has, in fact, not fired a single one of GSA's holdover bureaucrats, either for cause (which abounds in GSA) or at pleasure (and he has this option in a number of important cases). Defining practical politics as "just back-scratching," he speaks with contempt of "civic do-gooders," characterizing their code as "hypocrisy."</p>
<p>Among Republican Mansure's cronies are "practical politicians" of both parties, including the no-do-gooder variety. He praises Jess Larson, his Democratic- predecessor as GSA boss. Larson was associated in an oil deal with the influence-peddler, Frank Nathan, one of the most memorable witnesses turned up by the King Committee investigation (1951-52) of income-tax scandals. But Mansure says that when he took GSA over, he sought out Larson for his views on personnel and operations. Soon after came the indignant resignation of GSA's Deputy Administrator Russell Forbes, a nationally recognized expert in public procurement and related matters, who had helped Hoover to conceive the GSA and who, after leaving GSA, was associated with the second Hoover Commission. Only one high-echelon GSA job has been given to a Republican since Mansure came in -- and that was at the instance of the White House.</p>
<p>"Ed Mansure," says a long-time Libertyville neighbor, whom Mansure cites as a character reference, "could easily get over his head in very shallow water." The explanation of the GSA mess is not so simple, however. For Mansure has the guidance of a highly experienced Chicago politician, the man who got him his job. This man is William J. Balmer of Chicago. In the words of a mutual acquaintance who has discussed GSA business with both men, Balmer has Mr. GSA in his pocket. Whenever Balmer walks in, Mr. GSA bows." Says Mansure: "Balmer is a king and holds court."</p>
<p><strong>The silver fox</strong></p>
<p>William J. Balmer, who got Mansure his job, is the boss of the 17th Ward Republican organization and vice chairman of the Cook County executive committee of the Republican party. In political clubrooms and in the Loop's Bismarck Hotel, where he can sometimes be run to earth, sixty-three-year-old Balmer is known, only in part because of his white hair, as the Silver Fox.</p>
<p>Balmer says he has been in politics "ever since I can remember." He managed "Big Bill" Thompson's second mayoralty campaign, was a commissioner in Big Bill's administration, perhaps the most corrupt in Chicago's fabulous history. During the war Balmer was much in Washington. Mansure says that at that time Balmer had "access to the White House." One of Balmer's main activities was wangling government orders to permit the production of civilian items barred by general regulations. Balmer says he believes in doing things for government employees who are helpful in getting contracts and who later "look at you, thinking 'he made all that dough out of me.'" He gets them hotel reservations, he says.</p>
<p>Mansure calls Balmer a "business consultant." Some others call him a trouble shooter, especially for people who, under Illinois law, must argue with an elected tax assessor about how much personal-property tax they shall pay. According to Mansure, Internal Revenue has investigated Balmer, "but has never found anything." "On finances, Balmer is one of the closest-mouthed persons I ever knew," says Mansure. "He has two accountants and he doesn't let one know what the other knows." He has been sued often by individuals, by a hotel, a bank, and the telephone company, for amounts from $30 to $5,500.</p>
<p>Mansure and Balmer have been acquainted since the Thirties, intimately acquainted since the 1950 county campaign. Mansure regards Balmer as a political genius. He once brought together Balmer and Edward Ryerson, a top Illinois businessman (Inland Steel), civic leader, and Republican stalwart. Says Mansure: "It was cat and dog." Mansure says that, for Ryerson, Balmer is "a moral question." But not for Mansure. "Without reservations," he says, "I admire Bill Balmer as a friend. I wish we had a dozen Bill Balmers in Chicago." Balmer often visits Mansure in Washington. Mansure's appointments to second-level GSA jobs are mostly Chicago Republicans close to Balmer.</p>
<p>Even before Mansure was publicly named for his job, it was being said in Chicago that henceforth Balmer would influence GSA contracting. And Mansure admits that Balmer has talked with him about GSA contracts. Among the instances that he says he can remember is the effort of a Moline, Illinois, architect to get a GSA contract for a Rock Island, Illinois, project, and the effort of a Milwaukee building-material manufacturer to sell his product to GSA.</p>
<p>Not all Balmer proteges get the deals they seek, but the Paint Products Corp. of Elgin, Illinois, is one that did. Through a friend, the company got in touch with Ed Moore, who is Balmer's partner in an insurance-brokerage business. Moore is chairman of the G.O.P.'s Cook County central committee. Through Moore and Balmer, Paint Products met John Skeen, director of the Chicago regional office of GSA. In the words of A. W. Johnson, president of Paint Products, the company "really got going through Mr. Balmer and Mr. Moore." They sold paint to GSA.</p>
<p><strong>"A byproduct"</strong></p>
<p>With a nice sense of timing, Balmer &amp; Moore registered in Illinois as insurance brokers in May, 1954. Mansure had just set in motion a process that was to make available a good piece of insurance brokerage. For a projected $40-million overseas construction job, there was to be chosen a subcontractor who would have to buy a workmen's compensation policy. Now, thanks to Mansure, two-thirds of the brokerage fee is to go to Balmer &amp; Moore. The contractor, hired ninety days after Balmer &amp; Moore became registered brokers, is Snare-Merritt, now expanding the capacity of GSA's Nicaro nickel plant in Cuba. After all premiums are paid, the Nicaro commission of Balmer &amp; Moore will be about $44,000. (The other one-third is to go to a Cuban broker who is actually to do the technical work on the policy.)</p>
<p>Mansure admits that Balmer discussed Nicaro insurance with him. And Balmer sent to Mansure one Erwin Shafer, a Balmer &amp; Moore employee, whom Mansure in turn sent to his Nicaro operating officer. Later the agent revisited Mansure, finally telling him that "things" looked "pretty good." So they were. "Insurance," Mansure says, "is a byproduct of politics."</p>
<p>Balmer has also been interested in government surplus. For one set of surplus deals, a group of men including Balmer are now defendants in federal court in Chicago in a $400,000 fraud suit. The statute of limitations has run on criminal prosecution, but a civil action was brought last December by the Justice Department. In 1946, according to the complaint, the defendants induced veterans to permit use of their names so that Balmer and the others could fraudulently purchase unused trucks and other then scarce and much-sought items. Some of the defendants' agents, according to the U.S. attorney, were ex-convicts, one a counterfeiter. And when some of the veterans wanted to pull out of the scheme, they were threatened with violence.</p>
<p><strong>"A shame"</strong></p>
<p>At the moment the case is pending, and Balmer is trying to negotiate a cheap settlement. Balmer says that the alleged facts were known to the government when the Democrats were in power. As he sees it, the Democrats' failure to act shows that the present prosecution is political. He blames Senator Everett Dirksen of Illinois, an old opponent, for the action begun by U.S. Attorney Robert Tieken. But Tieken is an Ike appointee drawn by Attorney General Brownell from a top Chicago law firm -- Winston, Black &amp; Towner.</p>
<p>Balmer's friend Mansure has interested himself in the case. He echoes Balmer's arguments and has asked the prosecutor not to press the suit, which he has characterized as "a shame."</p>
<p>Of Mansure's friend and sponsor Balmer, more later. Let us now take a look at some GSA operations with which, so far as FORTUNE knows, Balmer has no connection. None of these involves a spectacular sum of money. Taken together, however, they suggest the scope of the GSA mission and of the GSA mess.</p>
<p><strong>From Laramie to Thailand</strong></p>
<p>1. In March, 1954, GSA began to dispose of a surplus experimental alumina plant built during the war at Laramie, Wyoming, at a cost of almost $5 million. The procedure has been protracted over sixteen weary months. The initial range of bidding was set inordinately low by poor business tactics. GSA at first called for bids and got three. It took none. Later, after ten weeks of negotiating exclusively with Monolith Portland Midwest Co. of Los Angeles, California, GSA contemplated selling to them for $1,110,000. When GSA informed one of the other original bidders, Ideal Cement Co. of Denver, that its bid was to be rejected, Ideal raised to $1,200,000. GSA decided to take this bid. Then a congressional subcommittee under Democrat Jack Brooks of Texas investigated, and last spring it asked Mansure to call for new bids. Reluctantly he did so; Ideal offered $1,373,000, and apparently will get the property. But whatever happens, it is clear that GSA can get at least $173,000 more for the plant than it was ready to take before Brooks's committee acted.</p>
<p>2. The Brooks Committee is also looking into GSA's handling of a piece of land near Seattle, Washington, which was condemned by the government during World War II. According to GSA, it had a verbal understanding with the former owners to sell back to them. In June, 1954, Standard Oil of California asked GSA's permission to prospect on this land for oil. GSA refused. The reason given for denying the taxpayers a possible windfall is a high point in bureaucratic willfulness: to allow oil prospecting might disturb GSA's appraisal of the land!</p>
<p>3. In January, 1954, just before the Democrats took over the House, a Republican subcommittee issued a little-noticed report about four GSA tungsten developmental contracts given to mining companies in Thailand. Written in Larson's time, three contracts were still operational under Mansure. After the market price of tungsten began a sharp decline, the Thai contractors delivered ore that they had bought from lower-cost operators, rather than ore mined by themselves. This fraud ran over $1 million, and the committee headed by Representative Charles Brownson, Republican, of Indiana, condemned the "improper" administering and policing, as well as the "ambiguous language" of the contracts.</p>
<p>4. There was a $360,000 loss of critical stockpile material in an unsafe warehouse that burned up in May, 1953. With several sets of GSA inspectors at cross-purposes, the material was destroyed just as some of the inspectors had predicted it would be. In GSA there is internal argument over the blame, but the neglect is admitted.</p>
<p><strong>Slow and sloppy</strong></p>
<p>Now let us consider some broad criticisms, originating in other parts of the government.</p>
<p>1. Government agencies required to make certain purchases through GSA complain of slow service. In fact, the gap between GSA's receipt of an order for goods supposedly in stock and the date of delivery to the customer agency averages two weeks -- three times what GSA calls its "norm." GSA has never got around to performing for the Veterans Administration the procurement services that are part of its legal mission.</p>
<p>2. Although GSA is supposed to handle real property disposal, President Eisenhower felt compelled in December, 1953, to create a special Surplus Real Property Disposal Project, attached to the Budget Bureau, to stimulate and accelerate GSA's disposal work. But that work continues to drag. Until a few months ago, the Washington office of GSA did not even possess a full list of GSA's disposable real estate.</p>
<p>3. The inventory records of the critical-materials stockpile are not entrusted to GSA's Emergency Procurement Service, the stockpile operator, but to the Comptroller of GSA. Commissioner A. J. Walsh of EPS says he has trouble getting information he needs for operating purposes. He also says that the Comptroller's record-keeping staff is grossly inflated. In any case, nobody really knows what is in the $4.9-billion stockpile, as distinguished from what some invoices say is there, and Congress has called for a checkup.</p>
<p>4. Bidding procedures are often strange, as in the Laramie alumina case. At a recent House committee hearing, Representative Porter Hardy Jr., Democrat, of Virginia, proposed studying GSA's "general practice of submitting invitations for bids which are not invitations for bids, but are merely invitations to become eligible to negotiate." Others have also criticized these procedures.</p>
<p>5. When the second Hoover Commission and its task forces studied GSA, they praised its records management job, but found fault with almost every other operation they examined. Here are a few Hoover complaints: "Instead of creating one centralized, coordinated traffic organization ... GSA superimposed upon the already confused situation still another traffic agency .. . Those regulations on real property management which have been issued by GSA are not applied by other Executive agencies ... There has been no adequate inventory of the stockpile ... GSA does not provide adequate centralized direction and control in the management of government-owned and leased real property used by Executive agencies ... The potential economies and efficiencies &hellip; have not been realized."</p>
<p><strong>The nickel fiasco</strong></p>
<p>Perhaps GSA's messiest single mess is Nicaro nickel. Nicaro is a U.S. Government-owned nickel refinery built in the Cuban jungle during World War II, and shut down in 1947. Previous FORTUNE articles (April and June, 1952; June, 1953) have told how the reactivation of the Nicaro plant was botched by GSA in Jess Larson's time. For political reasons, it may be recalled, Larson chose as manager of the plant a Dutch company, Billiton, totally inexperienced in nickel production. The purpose was to please Robert Butler, then Ambassador to Cuba, a notable Democratic fundraiser. Butler, in turn, was anxious to please some Cubans (including a notorious grafter) who wanted to elbow their way into the Nicaro project. This elbowing Billiton was willing to accept, but otherwise Billiton did so badly with Nicaro that Larson was compelled to force them out. Thereupon the National Lead Co. took control, the Cubans remaining as junior partners with increased influence.</p>
<p>So much for Nicaro in Larson's day. Mansure's record is no better -- and he is responsible for all major decisions on Nicaro.</p>
<p>Production has never reached the level called for in the manager's contract with GSA. Even with nickel at a record price level, GSA -- the Hoover Commission has noted--loses money at Nicaro. Efficiency, as measured by unit costs and the rate of metal recovery, has lately declined. A promised byproduct, cobalt, has never been produced.</p>
<p>What is more, the whole arrangement is probably illegal. For Congress, as GSA's General Counsel, Maxwell Elliott, has told Mansure, gave GSA no authority to run a nickel plant beyond a trial period that ended more than two years ago. Mansure says Nicaro's legal status "is in a friendly tangle."</p>
<p>Despite all this, GSA began almost three years ago to prepare to expand Nicaro by 75 per cent at a minimum cost of $40 million, thus boosting the direct investment of the government in the risky nickel business to a total that may approach $100 million. The excuse is the severe nickel shortage.</p>
<p>The expansion has been wretchedly bungled. It was not undertaken directly by GSA through operating subcontractors, but by National Lead as a supervisory contractor for GSA. National Lead then let subcontracts to the operating architect-engineer and the operating constructor. In order to supervise its supervisor, GSA has retained a metallurgical-engineering consultant, Singmaster &amp; Breyer, at a monthly fee of $3,500.</p>
<p><strong>Expanding the fiasco</strong></p>
<p>The company that actually does the building is a fifty-fifty partnership known as Snare-Merritt Co. Mansure explains that he felt "there should be two constructors for this big job." Actually, this job is smaller than the pioneering wartime job of building Nicaro, which was well handled by a single company. That company was Frederick Snare Corp., famous in Cuba for over fifty years as an American constructor. Now it is the Snare of Snare-Merritt.</p>
<p>The Merritt of Snare-Merritt is Merritt-Chapman &amp; Scott, whose previous Cuban venture, a 1952 water-supply project, ended in a law suit. The boss of Merritt is Louis Wolfson, antagonist of Sewell Avery and manipulator of Capital Transit. At best, Merritt was superfluous. To elbow its way in, it got the help of National Lead. National Lead's main product is paint material and Merritt's subsidiary, Devoe &amp; Raynolds, makes paint. National Lead pressed Merritt's cause with Mansure.</p>
<p>So, by the way, did Secretary of Air Harold Talbott. Says Talbott: "I met Louis Wolfson in 1948 when I was chairman of the Republican Finance Committee." Talbott was also a major Republican money-raiser in 1952, but says he "never heard of Wolfson" in that campaign. He says that when he backed Merritt, with Mansure, it was "casual, at a dinner party."</p>
<p>Merritt had another avenue to Mansure. For Lewis M. Schott, Merritt's executive vice president for administration, knows Bill Balmer. Schott used Balmer -- who is experienced in this sort of thing in the political field -- to solicit proxies in Wolfson's unsuccessful fight for control of Montgomery Ward. Knowing that Balmer was a friend of Mansure, Schott discussed with him the contract for Nicaro. Balmer in turn discussed it with Mansure. The discussion, says Mansure, was "casual, at a dinner party."</p>
<p>Dining out is a well-known feature of Washington life, of course, and what with one thing and another, Mansure decided that Merritt should get 50 per cent of the Nicaro deal. Snare glumly took what was left. The fee to Snare-Merritt is $1 million.</p>
<p>The deal has not been good for the taxpayer. Snare has staffed the top of the on-site operation with men experienced in Cuban and in Nicaro operations. But the purchasing side of Snare-Merritt has been increasingly dominated by Merritt, with the backing of National Lead and the blessing of GSA. Interestingly enough, more than $300,000 worth of material has been bought by Snare-Merritt from subsidiaries of Merritt-Chapman &amp; Scott and of National Lead.</p>
<p><strong>Slow and high</strong></p>
<p>At least one contract, for big cranes, did not go to the low bidder but to Marion Power Shovel, a Merritt-Chapman &amp; Scott subsidiary. Marion, which bid $230,800 and offered two-week delivery, prevailed over a Baldwin-Lima-Hamilton distributor, who offered three-week delivery but asked only $185,000. Marion delivered one crane four weeks late by dint of using a rebuilt motor instead of a new motor as originally called for. Delivery of the second crane has been even more seriously delayed.</p>
<p>Delays have been heaped upon delays. It took GSA almost five months to name National Lead as its prime contractor. National Lead consumed three months in coming to its curious choice of a Snare-Merritt partnership. At first this delay was ignored by GSA, though it constituted a breach of contract, then it was forgiven. There have been other delays: in starting a program of workers' housing; in completing a construction-progress forecast; in completing engineering design (a job let out to H. K. Ferguson Co., a subsidiary of Morrison-Knudsen). After one-fourth of the two-year contractual time period, only about one-sixteenth of Nicaro's expansion had been done, as measured by payments made. It seems impossible that the job will be finished on the date set as a target in the contract -- unless the estimated cost of $40 million is grossly overrun by crash steps. Already there has been an overrun of almost $500,000 in engineering costs -- 25 per cent.</p>
<p><strong>How GSA got that way</strong></p>
<p>The origins of GSA's many messes go back to the first Truman Administration. In 1947 Jess Larson, later to be Truman's GSA Administrator, was General Counsel of the War Assets Administration, later to be dumped into GSA. WAA was headed by Major General Robert M. Littlejohn, who had won high praise as Eisenhower's top quartermaster in the European theatre. But W AA was a businessman's job, not a general's. In 1947, a congressional investigating committee headed by Ross Rizley (since appointed to the chairmanship of the Civil Aeronautics Board by President Eisenhower) took a look at Littlejohn's WAA. Here are some of its findings:</p>
<p>Slow disposal, small money return, inadequate control of regional offices, "unbelievable conditions of bad organization," improper accounting, deceptive reporting, possible fraud, failure to inventory millions of dollars worth of desirable surplus property, loss of much inventoried property, inaccurate and misleading sales figures, the loss of quantities of sales documents, countrywide violation of prescribed procedures, repeated promotions of individuals who made serious mistakes. "The amount in money," the committee concluded, "which this administrative failure has cost the taxpayer is inestimable, but it is certainly enormous." A White House aide of the period (Truman's) summed things up: "Littlejohn did a messy job."</p>
<p>Eventually, Littlejohn quit and Larson took his place. The Rizley committee sent material to the Department of Justice for study of possible criminal or civil action against people involved in frauds. The department never took any action--for reasons that will be related below. And Larson left the WAA personnel undisturbed.</p>
<p><strong>WAA forever</strong></p>
<p>Many of the W AA bureaucrats had been the first castoffs of the war agencies in 1945-46. Yet many of them, because WAA at its birth had a problem of quick staffing, were given high grades and salaries. And in 1949 they were taken into GSA with full civil-service rights when Congress dumped WAA into the new GSA for liquidation and Truman made Larson GSA's first Administrator. Personnel of the other agencies merged into GSA remained largely on the operating level, but the WAA refugees moved into the new agency's vacuum -- central staff positions and regional directorships.</p>
<p>Today, seven of the ten regional directors of GSA are ex-WAA men. So are all but one of GSA's four staff office chiefs. So are many of their top aides; a couple of second-echelon men in Public Buildings; the assistant general counsel in charge of real property management and disposal activity. So are almost all the GSA people ever involved in the Nicaro fiasco. So is Mansure's confidential secretary, who used to be Larson's confidential secretary.</p>
<p>So is GSA's No. 2 man, Assistant Administrator Almon E. Snyder. When Larson was Administrator, Snyder was his office assistant. He was close to influence-peddler Nathan, who testified that he brought occasional delicatessen lunches to Snyder's office. Mansure recently promoted Snyder to be his Assistant Administrator at a salary of $14,800. "When I'm away," says Mansure, "Snyder has the authority to sign documents for me; he knows my thinking."</p>
<p>Within GSA there has been some courageous, but on the whole ineffective, opposition to the WAA crowd controlling most of the staff and regional offices. It has come from the chiefs of GSA's four main operating divisions.</p>
<p>All the operating chiefs, when Mansure took over GSA, were old hands who had been legislated into GSA: three commissioners -- A.J. Walsh (Emergency Procurement, the stockpile), W.E. Reynolds (Public Buildings), Clifton E. Mack (Federal Supply Service)--and Dr. Wayne C. Grover, the National Archivist.</p>
<p><strong>Ninety-day revolt</strong></p>
<p>All these men took part in an abortive revolt against the staff clique, during a strange interregnum of ninety days between the departure from the Administrator's office of Democrat Larson, in January, 1953, and the arrival, with spring, of Republican Mansure. The revolt was invited by the man who served during those ninety days as Acting Administrator -- Russell Forbes, the first GSA Deputy Administrator, the man who had helped the first Hoover Commission to conceive GSA, and a conscientious public servant.</p>
<p>When Larson left, Forbes offered the commissioners their first opportunity to register their critiques. He set up a Committee on the Cost of Staff Services headed by the National Archivist. The report described GSA as being in a situation where everybody is boss, nobody can be held responsible, and our chief Central Office characteristics are friction, confusion, paperwork, and delay. [Operations are] continuously hampered ... In the field, we encourage [expensive personnel] to engage needlessly in the make-work manufacture of administration to the tune of several hundred thousand dollars a year ... If the recommendations in this report are adopted, annual savings would run to nearly $2 million as a minimum."</p>
<p>Forbes did not subscribe to all expressions of the Grover committee report, finding some of them extreme. But Forbes was anxious to cut the GSA budget and economize wherever possible, and he welcomed the report's general line.</p>
<p>The WAA clique took alarm and leaked copies of the report--supposedly for the Washington brass only -- to regional directors. One copy turned up in the Chicago regional office. At that time Mansure, with his high hopes of getting the Administrator's job, was dropping in there regularly. John Skeen, ex-WAA and the man who later was to be helpful to Balmer's friends, Paint Products Corp. of Elgin, was then -- and is now -- Chicago's regional director. In the Chicago office Mansure saw the Grover committee report. He also heard it denounced.</p>
<p><strong>Larson's friend</strong></p>
<p>When Mansure shortly thereafter arrived in Washington, to take over GSA, he addressed the agency's top-echelon men, both staff and operating. He was, he said, a personal friend of Larson. He made it clear that there would be no further encouragement of the type of criticism expressed recently by the operating chiefs. "I take full responsibility for shelving it," says Mansure of the Grover report. And he bore down on the operating chiefs and Deputy Administrator Forbes</p>
<p>Mansure so chastened Dr. Grover that even today the National Archivist will not discuss the episodes of the interregnum beyond saying that "some people" did not view his report as constructive. If Commissioner Mack's Federal Supply operation is fairly effective, the main reason is the close relationship between Mack and his field men, dating back to Treasury days. Mack manages to communicate with them out of channels, evading the regional directors, but Mansure now campaigns against "evening telephone calls" and similar desperate operating methods. Though Commissioner Walsh ostensibly has 700 stockpile employees under him, most of them have been put under the thumb of the staff clique in the central staff offices or in the regional offices. Commissioner of Public Buildings Reynolds took a pounding from the WAA clique, retired, and went to work for Webb &amp; Knapp.</p>
<p>The successor to Reynolds as Commissioner of Public Buildings is Peter Strobel, a distinguished New York engineer who took the job on the urging of the White House and at considerable financial sacrifice. Strobel is not happy with the GSA setup. For one thing, Mansure has decentralized most of the records of the Public Buildings Service. Strobel is largely ignorant of the actions of his field men and the procedures they follow. He sometimes finds his efforts to control field operations impeded by Mansure's personal control of travel authorizations.</p>
<p>As for Deputy Administrator Forbes, who helped to father GSA, Mansure aimed to lift his administrative power. When Forbes, balked and disillusioned, was asked by the second Hoover Commission to serve as a consultant in November, 1953, he quit GSA "with pleasure."</p>
<p><strong>The quality of justice</strong></p>
<p>So the old WAA people have been riding high all through Mansure's regime. Though he slurs the loyalty of his operating chiefs ("They would still like to be the XYZ Service instead of a division of GSA"), he defends and pampers the WAA clique. He pooh-poohs the Rizley Committee report that condemned them so scathingly. True, the Justice Department never took action as a result of the Rizley Committee's suggestion, but when that has been said, how much has been said?</p>
<p>The Justice Department to which the Rizley Committee referred certain of its WAA findings, for possible criminal or civil action, was the Justice Department of Attorney General (now Supreme Court Justice) Tom Clark. Here is part of the picture of that notorious department as painted by a congressional investigating committee in 1952-53: shockingly inefficient handling of contract fraud cases, acceptance by department officials of favors from persons against whom they were supposed to be defending the government's interests, improper interference with the work of a St. Louis grand jury "to an extent which merits grave censure."</p>
<p>Responsibility for many of the conditions and events was charged to Assistant Attorney General Caudle. But the committee concluded that much of the blame properly belonged to his superiors. Among the superiors named as responsible was one Peyton Ford. From 1947 to 1951 Ford was Assistant Attorney General in charge of the civil division, then the chief assistant attorney general, and at times in 1950- 51 Acting Attorney General. Peyton Ford is today the law partner of Jess Larson, who was WAA's General Counsel when the Rizley material was sent to the department.</p>
<p>No suit was brought. In the Justice Department today, there is in the central files no "closing-out" memorandum as required by departmental regulations, to show why no criminal suit was brought. The papers were, as explained last month by a department spokesman, "just sent to the central files without ever being properly closed, either on a formal or informal basis." The date of the pigeonholing was sometime in 1950, when Peyton Ford was the second man in the department. And the criminal statute of limitations ran out in 1951.</p>
<p>For Mansure, the whole matter is closed. He says he has read only a part of the Rizley Committee report and none of the King Committee bearings. "If there are any skeletons in the GSA closet," says Mansure pleasantly, "I haven't looked for them, and you can quote me on that."</p>
<p>There remains the question: How did President Eisenhower ever get stuck with this Mansure? The answer goes back to the infighting before the Republican national convention of 1952.</p>
<p><strong>Gunner's reward</strong></p>
<p>One of the many politicians, big and small, who worked for Wesley Roberts and Herbert Brownell, top Ike tacticians, was Bill Balmer of Chicago. Balmer was what Roberts called his "gunner" for the Illinois delegation, before and during the convention. It was understood that on the second ballot Balmer could help swing more than twenty Taft-pledged votes to Ike. In the event at Chicago, Ike won on the first ballot, with Illinois going fifty-nine to one for Taft, but Gunner Balmer was credited with a good preparatory performance.</p>
<p>Right after the election, Balmer and Moore, using the letterhead of the Cook County Republican organization that they control, wrote to Brownell. In tones of familiarity, they asked for lVIansure's appointment to the GSA job. The letter was eventually forwarded to Sherman Adams, Eisenhower's chief of staff. Brownell, who as Attorney General has since fully supported the Chicago fraud suit against Balmer, raised no warning flag. Adams was also the recipient of letters in Mansure's favor that were forwarded by Roberts, who had become Republican National Chairman. Adams also received copies of favorable press articles, warm letters from businessmen and Congressmen, and an FBI field report that showed no blemish on the Mansure record.</p>
<p>In Chicago there was some opposition to Mansure, whose intimacy with Balmer had come under observation at the national convention. It is said to have been led by Edward Ryerson of Inland Steel and R. Douglas Stuart of Quaker Oats, the latter now Ambassador to Canada. Both these men are long-time acquaintances of Mansure. But, on balance, they made little impression. As a lawyer, private enterpriser, civic leader, and party stalwart, Mansure looked all right to Roberts, to Brownell, to Adams, and to the President. And Balmer, not yet hit by the fraud suit, was thought of by top Republicans as just another ward leader and preconvention "gunner"--if anyone thought of him at all.</p>
<p>Mansure got the GSA job. He had had it, as this article went to press, for twenty-seven months. How much longer he would have it was up to Mr. Eisenhower.</p>
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		<title>Letting a star slip away (Fortune, 2005)</title>
		<link>http://features.blogs.fortune.cnn.com/2012/04/22/red-sox/</link>
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		<pubDate>Sun, 22 Apr 2012 13:00:39 +0000</pubDate>
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		<description><![CDATA[<p id="ext-gen1502"><em>Editor's note: Every Sunday, Fortune publishes a story from our magazine archives. April 20 marked the 100th anniversary of the opening of Fenway Park, home of the Boston Red Sox. In 2004, the Red Sox "reversed the Curse of the Bambino" and won their first World Series in 86 years, partly because of the deft work of team general manager Theo Epstein. One year after the 2004 win, Epstein <a href="http://features.blogs.fortune.cnn.com/2012/04/22/red-sox/">MORE</a><img alt="" border="0" src="http://stats.wordpress.com/b.gif?host=features.blogs.fortune.cnn.com&#038;blog=916416&#038;post=9033&#038;subd=fortunefeatures&#038;ref=&#038;feed=1" width="1" height="1" />]]></description>
			<content:encoded><![CDATA[<p id="ext-gen1502"><em>Editor's note: Every Sunday, Fortune publishes a story <a href="http://features.blogs.fortune.cnn.com/tag/fortune-classic/">from our magazine archives</a>. April 20 marked the 100th anniversary of the opening of Fenway Park, home of the Boston Red Sox. In 2004, the Red Sox "reversed the Curse of the Bambino" and won their first World Series in 86 years, partly because of the deft work of team general manager Theo Epstein. One year after the 2004 win, Epstein rejected team owner John Henry's re-signing offer, and Henry publicly questioned whether he was fit to own the Red Sox. Fortune examined the incident from a management perspective: what does a manager do to retain a valuable asset to the team? Epstein did eventually stay on as the Red Sox's general manager, but left in 2011 to become president of baseball operations for the Chicago Cubs. Henry is still the principal owner of the Red Sox.</em></p>
<h2>Red Sox owner and hedge fund guru John Henry blamed himself when hotshot GM Theo Epstein quit. But letting Theo come back could be an even bigger blunder.</h2>
<p>By Jon Birger</p>
<p>FORTUNE -- Boston Red Sox owner John W. Henry regretted the remark almost the moment it escaped his lips. Public self-doubt is as rare in major-league sports as it is in bigtime business, and Henry had turned a Nov. 2 press conference on the team's failure to re-sign Theo Epstein -- the young general manager credited with exorcising the Curse of the Bambino and bringing deliverance in the form of a World Series triumph -- into an anguished act of self-flagellation. "This is a great, great loss. I hold myself wholly responsible," Henry whispered in a Fenway Park meeting room packed with 200 bloodthirsty media types. Then came the kicker: "I have to ask myself -- maybe I'm not fit to be the principal owner of the Boston Red Sox."</p>
<p id="ext-gen1504">The only thing stranger than Henry's confession was its tone. A hedge fund whiz who achieved fantastic wealth by trusting computer models to trade currencies and commodities, the introspective and reserved Henry generally views human emotion as the bane of sound decision-making. Yet there he was, misting up and saving himself from tears only with a mawkish movie quote, "There's no crying in baseball." Henry continued: "I had this romantic notion Theo was going to be our general manager for the rest of my life. Never in my wildest dreams did I think this would ever happen." He shouldn't have been surprised when a next-day headline blared HAS JOHN HENRY LOST HIS GRIP ON THE SOX?</p>
<p id="ext-gen1505">For once, the overheated Boston press was asking the right question. By his own admission, the owner had allowed a critical management process to spin out of control. As a result, Henry had lost the man hailed for assembling the first Red Sox championship team in 86 years. The ultimate systems guy had trusted the system -- and it had blown up in his face. Most agreed that the result would have been different had Henry relied on himself rather than his hierarchy. As Red Sox star Curt Schilling put it in an e-mail to <em>Fortune:</em> "In my opinion, had Mr. Henry handled the negotiations, Theo would still be the GM." But Mr. Henry hadn't, and Theo wasn't.</p>
<p id="ext-gen1506">How did Henry let the Epstein situation get out of control? On one level, it's an age-old reminder of the perils of hands-off management and, more significant, the dangers of ignoring clear indications of looming trouble. On another, it's a reminder of the conflict that can result when a protégé bridles under a mentor. Finally, it's an object lesson in how not to retain a valued employee.</p>
<p id="ext-gen1507">What makes those classic themes stand out in sharpest relief is the backdrop -- not so much baseball as the media-saturated environment in which it took place, where leaks are endemic and every remark or gesture is dissected by the press and millions of fans. So volatile is the hothouse atmosphere of Red Sox Nation that a mere week after Epstein's departure press conference, the rumor wire started buzzing that Epstein would return. It's not impossible. Henry still pines for his old GM, so the story may have a happy ending. However it concludes, the Red Sox have been battered by bad press, hamstrung without a GM during baseball's trading season, and riven with turmoil. What's easy to miss is that those problems far exceed the damage from losing Epstein. They reveal a paradox: It may have been a mistake to let Epstein leave, but it could be an even bigger one to bring him back.</p>
<p>I first met John Henry in 2002, and it was immediately apparent that he is not your typical market whiz. In 20-plus years at the helm of his Boca Raton hedge fund firm, John W. Henry &amp; Co., the soft-spoken Henry had made billions of dollars for investors by trading everything from gold to energy futures. Yet when I asked him where he thought the dollar was headed or what the future held for oil, his answer was always the same: a placid "I don't know."</p>
<p>Henry, you see, is the rare money manager who doesn't purport to be an expert in the assets he trades. In fact, he thinks such expertise is counterproductive. What he is, he'll tell you, is a student of human nature -- or, more specifically, of how human behavior drives financial markets. Early in his career he combed through decades upon decades of market data, distilling pricing trends into mathematical models that gauge when to follow the Wall Street herd and when to zig if the frightened masses zag. "Actual data," Henry would tell me, "means more than individual perception or belief."</p>
<p>Now 56, Henry is a lifelong baseball fan. The son of an Illinois farmer, he came to love statistics as a kid, calculating the batting averages of Stan Musial and his other hardball heroes. So perhaps it's little surprise that, when Henry purchased the Red Sox in 2002 for $700 million with television mogul Tom Werner and Larry Lucchino (who now functions as the organization's CEO), he decided to employ the nouveau philosophy now known to the outside world as Moneyball, after the book that chronicled its famous proponent, Oakland A's GM Billy Beane. In simple terms, it involves eschewing traditional baseball metrics and qualitative judgments in favor of newer statistical measures that better gauge the way games are actually won.</p>
<p>Henry hired a cadre of baseball number crunchers -- among them author Bill James, baseball's best-known statistical muckraker -- and gave them the task of testing baseball's hoary conventional wisdoms against the cold, hard facts of performance. Henry opined that the best way to improve a team was to "take away the manager's bias and replace it with what actually works." And so, for example, the Red Sox dumped manager Grady Little, who had committed the sin of allowing Pedro Martinez to pitch past the statistical danger point in the Sox's bitter 2003 American League championship loss to the hated New York Yankees.</p>
<p>Leading the front office's disparate mix of analysts and post-modern baseball men was Epstein, then a tender 28. He was the brainy (but dashing) Boston native whom the even brainier Henry had plucked from obscurity to be the team's general manager. Epstein was initially derided by baseball lifers, many of them middle-aged former minor-leaguers, who viewed the Yale-educated lawyer as an interloper. But the World Series win two years later transformed him into Beantown's favorite son.</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/04/sox_party1.jpg"><img class="alignright size-medium wp-image-9051" title="sox_party" src="http://fortunefeatures.files.wordpress.com/2012/04/sox_party1.jpg?w=204&h=300" alt="" width="204" height="300" /></a>Yet only a year after spraying champagne in a championship locker room, Epstein spurned a reported three-year, $4.5 million contract offer and walked out. Epstein offered only evasive platitudes as explanation at his press conference. "The way I am, to do this job you have to believe in every aspect of the job," Epstein told a frustrated Boston press corps. "There's personal reflection about a lot of issues, and in the end I determined it was the right thing for me not to return." Epstein insisted that his much dissected, 14-year relationship with Lucchino was not the problem. Yet moments later, Epstein grimaced when Henry insisted there had been no "trust issue" between Epstein and Lucchino.</p>
<div>
<p>Henry shocked the sports world with his confession that "maybe I'm not fit to be the principal owner of the Boston Red Sox."</p>
<p>Should Henry even want to keep Epstein? After all, the GM got some key lucky breaks and had strong colleagues.</p>
</div>
<p>Was that a telling slip? Epstein won't say -- he did not respond to numerous e-mails and phone calls seeking comment. Nevertheless, Henry wasn't surprised when told of Epstein's body language. "There was a trust issue, and after I read through the transcript, I realized I should have just said, 'No comment,'" he concedes. "But I was trying to be very careful about not giving away his reasons. I felt like that's up to Theo."</p>
<p>Henry's belief in the certainty of numbers gives him a detached negotiating style. One of his former hedge fund employees recalls that when it came time to haggle over raises, Henry took a clinical approach: "His message was basically, 'I think you're worth X, but if you feel you're worth more, you're welcome to test the market."</p>
<p>At the same time, Henry has always been a delegator -- and he has plenty of reason to put his faith in Lucchino, whom he calls "the best CEO in sports." Lucchino, after all, has excelled at finding lucrative new sources of revenue. And it was Lucchino who groomed Epstein, taking the youngster with him from the Baltimore Orioles to the San Diego Padres and then to the Red Sox. Quite simply, without Lucchino, Epstein would never have been anointed Red Sox GM. But anyone who remembers, say, Jamie Dimon and Sandy Weill at Citigroup knows such relationships can be fraught as the junior party begins to emerge. Lucchino--who did not respond to requests for an interview -- "has a reputation for being very hands-on with younger subordinates in a way that, after a while, most people struggle with," says baseball consultant Craig Wright. The apparent result, according to Jim Callis, executive editor of Baseball America: "Epstein chafed working under Lucchino."</p>
<p>Henry viewed Epstein as Lucchino's responsibility. That may explain why Henry brushed off a direct warning. Epstein told him in August that negotiations were floundering and "could take a bad turn." Henry says he told his general manager "to just communicate more, to be forthright." Instead of intervening, Henry focused on other matters. The pennant race consumed much of his attention. And, as always, he was managing his hedge funds, several of which had fallen 15% to 20%. (Henry, who is quick to accept blame for myriad mistakes in the Epstein affair, dismisses the notion that he was distracted by his funds' travails.) Whatever the reason, he never plunged into the nitty-gritty of the negotiations until it was too late.</p>
<p>Henry's biggest mistake may have been failing to push for an early resolution. "Negotiating a talent deal against a deadline is never a good idea," says James Sebenius, a Harvard Business School professor who teaches a course in negotiating strategy. Not only does the talent gain leverage as the deadline approaches, but in this case the Red Sox wound up losing not only Epstein but also his likeliest successor, assistant GM Josh Byrnes, who accepted the top job with the Arizona Diamondbacks days before Epstein resigned.</p>
<p>Henry's other key tactical error also stemmed from his hands-off attitude. Epstein wanted to hire an agent to represent him in contract negotiations; Lucchino said no. "I actually thought it was a reasonable request, but I also saw why Larry did not," says Henry. "No front-office person he'd ever dealt with had ever used an agent." Henry now concedes the obvious: The talks would have been less personal had an intermediary been negotiating with Lucchino rather than Epstein himself.</p>
<p><img class="alignleft size-full wp-image-9047" title="parcells_kraft" src="http://fortunefeatures.files.wordpress.com/2012/04/parcells_kraft.jpg" alt="" width="300" height="287" /></p>
<p>Though Henry's willingness to take responsibility is laudable, what's striking is that the systems guy is still ruled by passion when it comes to the Epstein issue. Plenty of other people could do the job, leaving open the possibility that Henry's real mistake wasn't letting Epstein go but rather making such a public fuss about his exit. Nobody denies that Epstein is a smart guy with good people skills. Schilling, for example, insists he never would have joined the Red Sox had Epstein not charmed his socks off. But mightn't another GM have made an equally good impression?</p>
<p>Epstein acted immaturely at times. According to Andrew Zimbalist, a Smith College economics professor and a well connected sports business expert, Epstein was angered by a Boston Globe column that revealed that it was he rather than Lucchino who reneged on a trade with the Colorado Rockies in July. In the columnist's telling, Lucchino was the hero: "Lucchino took the fall, killing the deal and saving Epstein." Epstein was outraged by the article. During his press conference, he denied that the column affected his decision to resign, but Zimbalist isn't buying it: "It's unlikely you would own up to that because it does seem a little bit callow and precipitous."</p>
<p>It's also worth asking whether Epstein had gotten too much credit. According to one baseball insider friendly with Bill James, many of the under-the-radar players Epstein signed--including playoff heroes David Ortiz, Bill Mueller, and Kevin Millar -- were players James had recommended. "Epstein is a better than average GM," this person says. "But there is a lot of credit and blame in this business that gets stuck in places where it's not deserved." James declines to discuss his advice other than to say, "From my standpoint, we sink or swim together."</p>
<p>Finally, Epstein benefited from good fortune. For example, superstar designated hitter David Ortiz emerged only because the Sox's first choice, Jeremy Giambi, flamed out, notes Callis, who adds that the team came within a hair of losing the pennant in 2004. Had that happened, it's doubtful Red Sox Nation would be gnashing its teeth over the departure of a GM who led them to two consecutive defeats to the archrival Yankees. "I think it's possible to be very good at a job and overrated at the same time," says Callis. "Theo probably falls into that category."</p>
<p>While Henry seems to hold out some hope for a rapprochement with Epstein, could the relationship between Lucchino and him be repaired? Could Lucchino, who is so effective in other ways, change the way he operates to keep Epstein happy? Would Henry want him to? And why should Henry coddle Epstein, who has put himself ahead of the organization? Henry might look a few miles south for guidance. It was in Foxboro nine years ago that the New England Patriots wrestled with the departure of legendary head coach Bill Parcells after he had a row with Patriots owner Robert Kraft. Fans thought the sky had fallen, but not Kraft. "You can't be dependent on one person, because what happens when that person isn't there?" he said at the time. A few years later the Patriots hired coach Bill Belichick and began winning Super Bowls.</p>
<p>Ironically, Henry believes the Red Sox's road back started at his much-maligned press conference. "I know that quote [on whether Henry is fit to be the owner] may not have played well in the papers," he says. "But for me, losing Theo was very emotional -- very much like losing Game 7 against the Yankees in 2003. Back then, we all came back to the ballpark the next day so focused and determined to win a championship, which we did the next year. Well, that quote sort of galvanized me in the same way. What gives me great energy and enthusiasm to get past what's gone on here is to prove that I am up for the job. Because I am."</p>
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		<title>The love affair of William Francis Gibbs (Fortune, 1957)</title>
		<link>http://features.blogs.fortune.cnn.com/2012/04/15/william-francis-gibbs/</link>
		<comments>http://features.blogs.fortune.cnn.com/2012/04/15/william-francis-gibbs/#comments</comments>
		<pubDate>Sun, 15 Apr 2012 13:21:55 +0000</pubDate>
		<dc:creator>mvella1271</dc:creator>
				<category><![CDATA[Fortune Classic]]></category>

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		<description><![CDATA[<p><em>Editor's note: Every Sunday, Fortune publishes a story from our magazine archives. Today is the 100-year anniversary of the foundering of the RMS Titanic, one of the deadliest maritime disasters in history. A century later, the ship still fascinates, both as an archeological and cultural artifact, not to mention a great and tragic tale. (James Cameron didn't hurt the vessel's commercial appeal, either.) This week, we turn to the happier <a href="http://features.blogs.fortune.cnn.com/2012/04/15/william-francis-gibbs/">MORE</a><img alt="" border="0" src="http://stats.wordpress.com/b.gif?host=features.blogs.fortune.cnn.com&#038;blog=916416&#038;post=8983&#038;subd=fortunefeatures&#038;ref=&#038;feed=1" width="1" height="1" />]]></description>
			<content:encoded><![CDATA[<p><em>Editor's note: Every Sunday, Fortune publishes a story from our magazine archives. Today is the 100-year anniversary of the foundering of the RMS Titanic, one of the deadliest maritime disasters in history. A century later, the ship still fascinates, both as an archeological and cultural artifact, not to mention a great and tragic tale. (James Cameron didn't hurt the vessel's commercial appeal, either.) This week, we turn to the happier story of ship designer William Francis Gibbs. Gibbs' was the wily and irascible mind behind the SS United States, one of America's greatest engineering feats in league with the space shuttle, the Hoover dam and the interstate highway system. The ship is still the largest ocean liner constructed entirely in the U.S. and the fastest to cross the Atlantic in either direction. Like Ahab and Aeneas, Gibbs pursued his unlikely dreams across the oceans. Unlike them, he was successful and, more importantly, had lots of fun doing it.</em></p>
<h2>"I think people thank God I'm no worse than I am," says Willie Gibbs. A terror to the shipyards, a genius to the Navy, this designer has raised more hell and had more fun than any other man in his profession.</h2>
<p>By Richard Austin Smith</p>
<p><a href="http://fortunewallstreet.files.wordpress.com/2012/04/william_gibbs_portrait.jpg"><img class="alignright size-medium wp-image-33718" title="william_gibbs_portrait" src="http://fortunewallstreet.files.wordpress.com/2012/04/william_gibbs_portrait.jpg?w=300&h=225" alt="william_gibbs_portrait" width="300" height="225" /></a>FORTUNE -- Even before the heroine showed up, it was plain that this was a decidedly offbeat love affair. The time was six o'clock of a bald-headed May morning and the scene all wrong for a conventional romance. Manhattan was rising, coldly prismatic, out of the harbor mists. Brooklyn was already wide awake and on the way to work, a vehicular cataract that ran in a sort of growling sibilance along the smooth bed of the Narrows expressway. A few white guns wheeled above the oily chop of the Narrows itself, and on the far shore the whole of Staten Island seemed to be spilling down like a vast overstuffed warehouse into the waiting ships. As for the hero, the big Cadillac limousine at the curb suggested wealth and circumstance singularly at odds with his personal appearance. A tall, thin man going on seventy-one, he wore a battered brown hat, a blue suit under an old trenchcoat, cracked black shoes, and an expression of pleasurable cussedness. He had the reputation of being able to talk five minutes using only four-letter words, and indeed, when he had had the Cadillac's radiotelephone pulled out as unnecessary, office scuttlebutt was soon whispering that an outraged FCC had revoked the license for incorrigible inflammation of the air waves. "Do you see her?" he rasped now to his chauffeur, who was peering round the bend. "Well, go on down a little farther." Then, in an impatient aside, "most deliberate human being that God ever made. He's got one speed-dead slow." But a moment or two later, the lady in question made her appearance, the United States--the greatest passenger ship this nation has ever built, moving in from the Atlantic with the litheness of a yacht. Her running lights still burned from bridge and masthead, while halfway up her raking black bow was the mark of seas parted at thirty knots in another unrivaled crossing of the Western Ocean.</p>
<p>"I know her fairly well by sight," the old man remarked, his mouth resolutely turned down and the light in his taciturn brown eyes giving no indication that this ship was the embodiment of thirty years of dreaming. Nor was there a hint that every morning of her passage east or west across the Atlantic he telephoned her captain and chief engineer to learn how she was doing, that only twice in nearly five years, and then only because a doctor kept him in bed, had he missed seeing her sail into New York Harbor and out again.</p>
<p>The face that launched 6,000 ships</p>
<p>The love affair between William Francis Gibbs and the liner United States had its origin in some very unsentimental cogitation by a third party, in this instance the United States Lines. The U.S.L.'s President John M. Franklin had come to the conclusion that only the best naval architect in the country could design what would be preeminently the best ship afloat; superiority was what he was after and superiority was what he got. For many years William Francis Gibbs has stood at the top of his profession, both individually and through Gibbs &amp; Cox, the firm founded, owned, and run by himself and his younger brother Frederic. With a payroll of 1,000, Gibbs &amp; Cox is the best and biggest firm of independent naval architects anywhere in the world. Its performance from 1940 through 1946 was phenomenal: 63 per cent of all merchant ships of 2,000 tons up and 74 per cent of all American naval vessels (destroyers, landing craft, escort carriers, etc.) were built to the designs or working plans of Gibbs &amp; Cox. Over the past twenty years the firm has prepared designs or working plans (or both) for more than 6,450 ships, ranging from mine sweepers to passenger liners. Willie Gibbs himself? Vice Admiral Emory Scott Land, whose brilliant record in the Navy and as Maritime Commissioner was built upon hardheaded judgments, recently looked back over a quarter-century of professional association with the man and said flatly: "Gibbs is a genius." Vice Admiral Harold G. Bowen, onetime chief of the Navy's Bureau of Engineering, believes that "Gibbs has had the greatest influence on naval design since John Ericsson [creator of the Monitor]." As for the romance between Willie and his ship, America hasn't seen one like it for a century, not since another New York naval architect, John Willis Griffiths, designed the clipper Rainbow in 1843. The parallels between these two giants, each so patently a product of his times, is striking indeed.</p>
<p>William Francis Gibbs, like John Griffiths, willingly risked his reputation on a daring vessel, and had seen to it that she should be built exactly as he wanted her built&mdash;or not at all. Like Griffiths, who abandoned the codfish-bowed, say, 'All right, we'll stay but it's a God-damned highhanded procedure.' Well, we haven't lost a customer yet."</p>
<p>If Gibbs sometimes happens not to be autocratic, it doesn't mean that he's mellowed, just that he's decided to achieve the same ends by covert means. "Sometimes," complains a shipyard executive, "he short-circuits me and writes to my subordinates, suggesting what they should do about some important phase of the construction. If they weren't up on Gibbs's cagey ways, they might agree to do it, and we'd take the rap." Around the Navy Department, Gibbs's maneuverings to get his way are an old and familiar story. His method is to press his viewpoint for all he's worth, then, if balked, go into what has come to be known as "the black-book routine." Every detail of his position arid that of his opponents is carefully written down and, since he is an indefatigable record keeper--nothing moves through Gibbs &amp; Cox but in an orbit of paper-the "black book" on any given controversy may be several volumes thick. If subsequent events demonstrate Gibbs to have been wrong in his opposition, nothing more is heard of the affair. But if he is right, and legal training on top of technical brilliance has given him an astonishingly high batting average, there's a loud noise in the department and sometimes a sympathetic detonation on Capitol Hill. "The technique," sardonically remarked an admiral who has been on the receiving end of it for some years, "can make a great prophet out of a fellow." On occasion, however, the Gibbs strategy is to get in his licks first. When the carrier Ranger was being developed, the Navy had been committed to a ship of 60,000 tons maximum--all that a budget-conscious Capitol Hill would tolerate. This limitation didn't faze Willie Gibbs; he was thinking in terms of a substantially bigger vessel with a lot of special features. When he won support from some unreconstructed line officers. Gibbs vaulted solemnly over the Bureau of Ships and made a winsome appeal direct to Secretary Robert B. Anderson. Newport News Shipbuilding already had the contract for building the ship, but Anderson, strictly a landlubber, got himself sold on the G. &amp; C. plans; it took intense effort by the B. of S. to resell Anderson on designs "that were responsive to the Navy's operational requirements." Newport News was mad as hell and so was the Bureau of Ships. "Gibbs likes to cook up little secret gadgets, and show them to people," was the tightlipped comment of Rear Admiral Albert Mumma, its chief, "that is, to everybody but us."</p>
<p><a href="http://fortunewallstreet.files.wordpress.com/2012/04/savarona.jpg"><img class="alignright size-medium wp-image-33719" title="savarona" src="http://fortunewallstreet.files.wordpress.com/2012/04/savarona.jpg?w=300&h=157" alt="" width="300" height="157" /></a>Where important ship operators are concerned, this same brand of autocracy rises to the status of art. Despite the animosity many industry people have for him, Gibbs can charm the birds off the trees when he has a mind to. His humor is dry, penetrating, and sardonic; his talent for extemporizing on lumpy technical material, making it palatable to non-technical people, is unsurpassed. "Gibbs has a great way of getting what the owner wants and then steering things around to what Willie wants," remarked a Newport News yard executive.</p>
<p>Says Willie himself: "The trouble with the typical owner is he has to be an amateur. Owners think about a new ship as if it were the only one ever built. Why we couldn't possibly put most of the stuff on a ship that they want." But his specific point of view was perhaps best expressed in a talk with one of the younger executives of the Grace Line, for which he has been something akin to house architect. The latter had hardly begun with: "My idea ... " when Gibbs cut him short. "Now, now, young man, if you had any good ideas, you'd be working for Gibbs &amp; Cox."</p>
<p>"Harm's Way"</p>
<p>If autocracy is meat for Willie Gibbs, then certainly contention is his drink. A nautical approximation of his sentiments, written by John Paul Jones, is framed on the wall of the G.&amp; C exhibition room: "I wish to have no connexion with any ship which does not sail fast. For I intend to go in Harm's Way." Gibbs's habitual going in harm's way is no less deliberate than Captain Jones's and has been made even more profitable. "Contention is advantageous," he says reflectively. "The shipyards would put you out of business if you didn't fight. Controversy--we eat it up. This business of being popular and having everybody like you is for the birds. I think people thank God I'm no worse than I am. I'm not particularly popular, because first, I don't have a very pleasant personality, and second, because they say 'I'm afraid of this guy.' If people stopped criticizing me, I'd be worried&mdash;was I losing my grip? No, there's no possibility of this leopard changing his spots when the spots have been so damn successful. Isn't it funny they hire us," he added, with a sly smile, "when we're so unpopular?"</p>
<p>Why, indeed, do the lines keep coming back for a second helping of orneriness? Partly because much of the shipping business is characterized by somnolence and atrophy; its chief executives are seldom engineers and consequently grateful for just the sort of "guidance" Gibbs hands out. And partly because in naval architecture, traditionally a feast or famine profession attracting too few of the top engineering graduates, Gibbs is a man of unquestioned stature. His contributions in fireproofing, in high-pressure, high-temperature steam, in compartmentation, have been epochal.</p>
<p>Status by collision</p>
<p>The soundness of Gibbs's views on compartmentation, for example, was brought dramatically home to the entire shipbuilding industry when the brand-new liner Malolo, designed by him and at that time (1927) the largest U.S. merchant ship afloat, was rammed at full speed by a Norwegian collier. The Malolo's accident, a broadside collision, on the engine-room bulkhead, exactly duplicated that which sent the Empress of Ireland to the bottom in ten minutes with the loss of over 1,000 lives. The Malolo, however, not only remained afloat but was towed back to port with a list of less than five degrees. "That collision gave us a status no one could argue with," ruminated Gibbs. "You have to regard yourself as a trustee of the public when you build a ship. The public just doesn't give a damn about safety. So I say, if I'm going to do ships, I'll do them to suit me. If a fellow doesn't want a ship properly divided, he can go somewhere else." An interesting footnote to this view occurred last July when a group of shipbuilders and operators vainly tried to enlist Gibbs's support for a relaxation of U.S. compartmentation requirements, the strictest and consequently the costliest in the world. A few weeks later, the Doria, a vessel of minimal safety compliance, sank. "Gibbs," one of the ex-drumbeaters conceded in a rueful telephone call, "you're always right." Gibbs allowed as how he was.</p>
<p><a href="http://fortunewallstreet.files.wordpress.com/2012/04/ships.jpg"><img class="alignright size-medium wp-image-33720" title="ships" src="http://fortunewallstreet.files.wordpress.com/2012/04/ships.jpg?w=198&h=300" alt="" width="198" height="300" /></a>On fireproofing, Willie Gibbs is equally adamantine and has had a commensurate impact. The combustibility of most foreign ships gives him the horrors, particularly when their interiors are aglow with beautiful wooden paneling. He remembers the incendiary electrical system in the unrefurbished Europa--solid wire, thinly covered with rubber and cotton, lying in a wooden raceway. Unfortunately, making foreign lines accept American safety standards is an all but impossible undertaking, particularly when some governments, in the absence of an international inspection agency, look the other way at cheating on their own minimal standards. American ships, however, are quite a different proposition. All Gibbs's vessels are fine examples of fireproofing, but in the United States, with the government wanting a noncombustible troopship in return for footing over half her cost, he was at last able to go whole hog. The Gibbs specifications were written so that the only wood aboard her was in the piano and the butcher's block. When a subcontractor of Newport News, the builder, tried to use a thin strip of wood as a bonding layer between the aluminum dressers and their Formica tops, Willie's built-in fire alarm began to clang; he made the subcontractors develop a method of bonding Formica to bare metal. And, characteristically, he made them do it at their own expense. Plastic door numerals also went by the board, while the decorators went through agonies trying to find dyes that would produce the right color on flameproof fabrics. But Gibbs's day came when he took three leading British naval architects through the great ship, noncombustible even down to her paint and draperies. "Their faces clouded over during the tour," he recalled, "and no wonder it made them mad! They realized they'd have to recast everything to bring their ships up to the standards of the United Stales. They just couldn't modify the Elizabeth--a little face-lifting, add a few feet of length and beam. They'd have to redesign from the keel up, and if you knew what a job that is! Then people expect me to be popular!"</p>
<p>Shellacking the shell backs</p>
<p>Gibbs's third major contribution to his profession--a successful drive to get the Navy to use high-pressure, high-temperature steam--was probably the most courageous of his career, for it was undertaken in 1933, in the depths of the depression. At the time, the single men on Gibbs &amp; Cox's twelve-mail staff were getting $25 a week, the married men $50. What was obviously needed was not controversy but business. Willie? He sailed out to do battle with the Navy's shellbacks as if he had an order book in the billions.</p>
<p>The heart of the controversy was whether to use in marine turbines the higher-pressure, higher-temperature steam that had proved so successful in land power plants. Some diehard line officers fought the innovation as inviting greater danger into their engine rooms. The Big Three--Newport News, New York Shipbuilding, and Bethlehem--didn't like it either; their oversized, low-speed turbines were unsuitable for h-p, h-t steam, and would be discontinued. But the battle went on, furiously, led by a group of far-seeing young officers who were convinced the change would make our destroyers exceptionally "long-legged" (the eventual increase in their cruising radius was an astonishing 25 per cent).</p>
<p>Gibbs was brought in as a consultant because the progressive Navy people saw in him a powerful ally; he had studied h-p, h-t steam in land power plants with the support of manufacturers like General Electric. But what finally won the day was intervention by Charles Edison, then Secretary of the Navy. Edison, sold on the idea and sold on Gibbs, knocked heads together with a clap that reached all the ships at sea. It was a memorable victory both for warships and for merchant ships, for in this country, unlike Britain, the commercial yards take their cue from the Navy.</p>
<p>C. Richard Soderberg, now dean of engineering at M.I.T., who was with Westinghouse at the time of the great battle, has this accolade for his old comrade-in-arms: "Gibbs and the Navy Bureau of Ships were probably the most successful team in our history. Our Navy had been behind in the Thirties, but during the war we were ahead--maybe not in weapons, but certainly in hull and propulsion. This was due to W. F. Gibbs." Says Charles Edison: "You know the Big Three would have liked to get rid of him. But if ever I made a contribution to the Navy, it was keeping William Francis Gibbs in the picture."</p>
<p>Superstition and paternalism</p>
<p>The more human aspects of Willie Gibbs have a way of emerging at some distance from his drawing board. He loves the circus and ragging his subordinates in the field when he invites them out to dinner. ("What's the matter with that fellow?" he'll say afterward, if someone hasn't given a's good as he got. "Why doesn't he fight back?") He also loves anything mechanical and still trots down every once in a while to stoke up the scale-model fire engine meticulously built for him in G. &amp; C. 's own shops. His principal aversions are antithetical--obesity and exercise--so his favorite sport, according to Mrs. Gibbs, "is walking through engine rooms." He is superstitious to a degree and seldom steps aboard the United States save wearing the battered brown hat and paint-smudged shoes he wore when first standing upon her keel. Curiously, the set face he wears when stalking around the "spaces" at Gibbs &amp; Cox is entirely absent once he sets foot on the United States. His cordiality there embraces not only old friends like Chief Engineer William Kaiser and Jones F. Devlin, general manager of the U.S. Lines, but scores of waiters, stewards, and other crew members. In his own bailiwick, Gibbs's image of himself appears to be a paternal one, the strait-laced father fearful of spoiling his "children" with liberal salaries and insubstantial work loads, while expressing his affection in free Salk shots, personal loans, and occasional little gestures of sentiment. When Mrs. Henry Culpepper, wife of G. &amp; C.'s chief engineer, arrived in the hospital to find a mysterious untagged basket of roses by her bed, her nurse reported that an unidentified man had telephoned to say that if those roses weren't in the room before the patient's arrival he'd be up and tear things apart. "Oh," said Mrs. Culpepper instantly, "Mr. Gibbs."</p>
<p>"I thought him strange"</p>
<p><a href="http://fortunewallstreet.files.wordpress.com/2012/04/ss_malolo.jpg"><img class="alignright size-medium wp-image-33721" title="ss_malolo" src="http://fortunewallstreet.files.wordpress.com/2012/04/ss_malolo.jpg?w=300&h=157" alt="" width="300" height="157" /></a>Gibbs first met his future wife, the daughter of a distinguished New York lawyer, at a dinner party in 1927. Vera Cravath had just got a divorce. She remembers, "'Francois' was graver than he is now. You know, he wore only black suits and wing collars. I thought him rather strange, but I was fascinated. It may sound trite, but he knew what he was going to do in life. Later success never changed his feelings. He wanted to build ships--if that meant being the best naval architect, all right--but building ships was the most important thing in the world to him." Vera Cravath left on a European trip next day, but sometime later she received a wire from Gibbs, who was in London, saying he'd like to call on her in Rome. "I was impressed, you know, that he'd come all the way down there to see me . . . It set me to thinking." Gibbs, bachelorlike, arrived with a big bag of laundry "which we had to get washed," took Vera Cravath and her small son for a carriage ride, and departed. But once both were back in the U.S., Willie threw himself into romance with a will. "We were married about two weeks later, without even telling the family," Mrs. Gibbs recalled, an element of surprise still in her voice. Vera Gibbs now takes the surprising Willie with a stoicism acquired over thirty years.</p>
<p>"He keeps himself like a trainer would a race horse," she says. "He's up regularly at six-thirty, except the days when the United States comes in, then it's four-forty-five. He fixes his own breakfast of weak tea with lots of sugar and Uneeda biscuits. He really only eats one meal a day--dinner." That meal, invariably eaten out, invariably the same, includes one-half of a whiskey old-fashioned, canned peaches on the side, chocolate and vanilla ice cream.</p>
<p>A leaf from Clemenceau</p>
<p>"I always say the United States was started at home--the plans were laid out all over the place. He was tense from the laying of the keel on--once he came home particularly worn out. 'God, I'm tired,' he said, 'I've been deciding on the height of the toilets all day long.' He seldom brings work home [a modest Fifth Avenue apartment] but he does go down both Saturday and Sunday, after attending St. Thomas Church [where he's a diligent vestryman]. Usually, he goes to bed about nine-thirty. But before he's asleep, I come in and there he is, lying in bed looking at the pictures he carries. It's always either his model fire engine or the United States." Mrs. Gibbs paused, her hand unconsciously touching the sofa cushion with its legend: Enjoy yourself, it's later than you think. "I'll have to get William Francis out on his boat more this year," she remarked, half to herself. But Willie's wife, like everyone else, has long ago given up the thought that her husband, full of honors, might now retire. Lately Gibbs has been talking of Clemenceau, active in his eighties. "When I retire," he says, "I'll be dead."</p>
<p>These words epitomize the problem that has been plaguing the staff of Gibbs &amp; Cox for five years or more. What happens to a one-man show when the one man disappears? It goes through purgatory, if past experience in the profession is any index, unless preparations have been made well ahead of time. The sad part about G.&amp;C. is that Willie, with the help of brother Frederic, has reserved important management decisions to himself. Non-Gibbsian management at G. &amp; C. has not only been deprived of policy-making experience, but has remained rather meager numerically; only a thin layer of administrative talent lies on top of the technical staff, and through this Willie's long arm plunges at will.</p>
<p>Who will take the helm?</p>
<p>None of these gloomy aspects of G. &amp; C., however, are intended to suggest that the situation is hopeless or that the firm would disintegrate without Willie Gibbs. Quite aside from W.F.G., it is a highly skilled collection of engineers, designers, and scientists--the technical staff numbers almost two-thirds of the thousand-man total--and, moreover, some of its senior people feel perfectly competent to run the show. But the problem is nonetheless present, and formidable enough to arouse concern among outsiders like the Navy and particularly the Bath Iron Works, for which G. &amp; C. is the sole design agent. Who might take over the helm?</p>
<p>Frederic H. Gibbs certainly has the capability of running the firm. Willie's closest friend, he has devoted himself to the financial side and without his astuteness Gibbs &amp; Cox, by common consent, would "not be worth a dime." Deprived of a college education when his father's fortune was washed out for the third time, Frederic is nevertheless a highly competent technical man. It was he who worked out the computations on the first ship the Gibbs brothers ever designed--the thousand-footer initially set down on paper in 1913-15, later metamorphosed into the United States.</p>
<p>From the staff itself, a half-dozen people stand out. Chief among them: Rear Admiral Paul F. Lee, U.S.N. retired, a steadfast man of impressive technical ability with a special talent for getting the most out of a conference group; Matthew Forrest, one of the most brilliant naval architects in the country, who in thirty years' work at Gibbs &amp; Cox has kept his pencil sharp, busy, and creative. But when Willie is prodded about the matter of the succession, his eyes drop down to the middle button of his coat, a locale that habitually attracts them when unwelcome questions are put to him. "A committee is studying it," he murmurs. Yet finding out when the committee meets or what progress it has made is, in 'his own phrase, like "unscrewing the inscrutable."</p>
<p>Compounding the internal problems of Gibbs &amp; Cox, Gibbs's reluctance to share power goes hand in hand with his unwillingness to share ownership. This, to employees of long standing, seems particularly unjust in view of the nature of the enterprise, for Gibbs &amp; Cox is not built upon capital assets. The $7 million to $8 million worth of business it does every year is the result of nothing more material than skill and brains. And since this gray matter produces a respectable gross profit of some $400,000 in a shop where even the furniture is charged off to the client, the staff feels it should participate in the ownership of the firm. Willie himself is concerned about this, but not to the point of amelioration. On many occasions he has blown up and barked that he'd "just sell the God-damn place out," but when one of his senior people offered to scrape up a reasonable price, partly from staff subscriptions, it was plain Willie had no intention of selling so much as a share.</p>
<p>The crock of gold</p>
<p>One legitimate obstacle to employee ownership at this time--though certainly not of the magnitude of Gibbs's opposition--is the firm's tangled financial situation. Not only is G. &amp; C. the exclusive property of the two brothers, but they have never paid themselves a dividend on the stock and draw only modest salaries. The result is a heavy accumulation of undistributed profits, augmented even further by uncollected debts. "Literally millions of dollars are owed Gibbs &amp; Cox," said one staff man. "He tells them to hold onto it, he doesn't want to be paid." Lawyers have been working on the attendant tax problem in Washington, and there's a possibility that one of these days the big G. &amp; C. pot of gold may be spun off. But would this open the way for partial ownership of the firm by its staff? Not so long as William Francis Gibbs looks on power as absolute. Over the past few years, a score of young engineers and technical people have left, in the main because of uneasiness about the continuity of the firm. And departures have unhappily gone hand in hand with an exodus from the atomic department, prematurely organized and imperfectly developed. In the Navy's book, Gibbs &amp; Cox, though re-emphasizing atomic development, is now trailing the field with only a joint General Electric nuclear contract to show. It is Newport News's design department that is working on the new atomic carrier and Bethlehem's on the atomic cruiser.</p>
<p>But to Willie Gibbs the look of things around G. &amp; C. has, no doubt, never been rosier. The greatest shipbuilding boom in peacetime history is under way. The Navy is certain to keep ordering ships so long as the cold war continues. The result: Gibbs &amp; Cox has more business than ever; Willie has the United States and the happy prospect of designing her sister ship. Yet it is one of the little ironies of time that the Gibbs of twenty years ago would likely have looked the present situation over and asked a pointed question. The firm is certainly prospering, he might have said, but is its leadership up to its full potential? The answer to that by people in the profession would have to be no.</p>
<p>"A block to progress"</p>
<p>Gibbs's position now is that of a man who has enjoyed so much success, he finds it hard to risk failure. The great ship that the lines dream of may be just over: the horizon, waiting for an adventurous designer. But Gibbs, so the criticism goes, is looking back, at the United States, whose design span began ten years ago. However strongly some members of his staff may feel that the pace of innovation and development in naval architecture is completely out of tune with the times, that the sister ship of the United States should be something strikingly new, not a copy, Willie is unmoved. It could still be that the prospective vessel will embody major innovations other than higher-pressure, higher-temperature steam and a welded rather than a riveted aluminum superstructure, but there will be no radical difference between her and the United States, unless Willie radically alters his present outlook.</p>
<p>At this stage of the profession a bold willingness to risk failure, as Willie himself risked it in the Thirties over high-pressure, high-temperature steam, is essential if ships are not to be hopelessly outdistanced in the air age. Today's drive by Rear Admiral Mumma to hurdle the tremendous gap between pedestrian ship technology and vaulting air technology with vessels of lighter materials and more highly stressed machinery--this simply results in Gibbs bringing out his black book. That Willie was right in protesting use of hollow alloy propeller shafts--it cost the Navy $15 million to $16 million to replace them--suggests the enormous hazard of flying in the face of his opinion. Unhappily, not to do so is an open invitation to conservatism, even stagnation.</p>
<p>"Gibbs is so damn sound that he may be a block to progress now," said his old colleague, Dean Soderberg. "In the past generation a new technology has grown up which really hasn't influenced ships. In twenty years, the technology of heat engines in airplanes has overshadowed all the developments of the last hundred years. I feel it is necessary to use this new technology in ships--particularly warships. Gibbs's dream is to build the best damn ships in the world. I don't think he's interested in airplanes or the whole [the interrelationship of every form of transportation]. But progress now involves the whole, the entire technological complex. I sounded him out a couple of months ago on air technology as applied to naval architecture. His attitude? A wet blanket. The greater the man, the harder to change."</p>
<p>"Don't we have fun!"</p>
<p>The prevailing opinion around his own shop is that Willie Gibbs shouldn't be criticized for indifference to "the air age"; he's already made his contribution and an immense one it is. What he can be criticized for is failure to let others carry the ball he disdains, for not spending more G. &amp; C. money on free-lance research, say, in exotic fuels, pushing more projects like G. &amp; C. 's hydrofoil boat--which one day may permit the Navy to "fly" landing craft to shore at forty miles per hour.</p>
<p>Once such a man as W.F.G. produces a masterpiece, he becomes in many ways its captive. But Willie Gibbs would likely say: "If this be captivity, let's have more of it, for it has brought me the greatest happiness of my life." A hundred years from now people will have forgotten the personality of Willie Gibbs, the man who once, lying spent on a half-finished deck of the great vessel, a friend beside him, cried out with sheer joy: "Boy, don't we have fun!" Yet those with a love of ships will very likely recall Gibbs of the United States the way they recall Griffiths of the Rainbow, one of the few great men of his profession.</p>
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		<title>Yahoo's brilliant solution (Fortune, 2005)</title>
		<link>http://features.blogs.fortune.cnn.com/2012/04/08/yahoos-brilliant-solution-fortune-2005/</link>
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		<pubDate>Sun, 08 Apr 2012 12:09:27 +0000</pubDate>
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		<description><![CDATA[<p><em>Editor's note: <em>Every Sunday, </em></em>Fortune<em><em> publishes a favorite story from our magazine archives. This week, we turn to an August 2005 cover story on troubled internet giant Yahoo. The story chronicles the great dream behind Yahoo -- and its potential to become a major force in media. That dream didn't pan out. After a series of caustic executive departures, Yahoo is again at a crisis point. This week, its current <a href="http://features.blogs.fortune.cnn.com/2012/04/08/yahoos-brilliant-solution-fortune-2005/">MORE</a><img alt="" border="0" src="http://stats.wordpress.com/b.gif?host=features.blogs.fortune.cnn.com&#038;blog=916416&#038;post=8908&#038;subd=fortunefeatures&#038;ref=&#038;feed=1" width="1" height="1" />]]></description>
			<content:encoded><![CDATA[<p><em>Editor's note: <em>Every Sunday, </em></em>Fortune<em><em> publishes a favorite story <a href="http://features.blogs.fortune.cnn.com/tag/fortune-classic/" target="_blank">from our magazine archives</a>. This week, we turn to an August 2005 cover story on troubled internet giant Yahoo. The story chronicles the great dream behind Yahoo -- and its potential to become a major force in media. That dream didn't pan out. After a series of caustic executive departures, Yahoo is again at a crisis point. This week, its current CEO, Scott Thompson, announced a major restructuring that will bring with it 2,000 job cuts or 14% of its workforce. Still, the company that Thompson is left with may not look so different than what is described here.</em></em></p>
<h2>By figuring out how to make brand advertising work online, Terry Semel is on the verge of creating the 21st century's first media giant.</h2>
<p>By Fred Vogelstein</p>
<p>FORTUNE -- Julie Roehm has more than $2 billion to spend this year, and the way she's been spending it worries executives at News Corp., the Washington Post Co., and virtually every other media company on the planet. As Chrysler's director of marketing communications, Roehm, 34, oversees a budget that Advertising Age ranks as the sixth-largest pool of ad dollars in the nation. She decides how many minutes of the carmaker's commercials appear on networks and cable channels nationwide and how many pages of its ads turn up in magazines like this one and newspapers such as USA Today.</p>
<p>Here's the scary part: Roehm rarely misses a chance to talk about how delighted she is with online advertising. Last year she spent 10% of the budget online; this year she is allotting closer to 18%; next year, she says, she will allocate more than 20%. Do the math: In 2006 roughly $400 million of Chrysler's money that used to go into TV, newspaper, and magazine ads will be spent on the Internet. Says Roehm: "I hate to sound like such a marketing geek, but we like to fish where the fish are."</p>
<p>No wonder media executives are concerned. One of their headaches is Googlemania--Google effectively reinvented online advertising with the targeted, classified-like text links that you now see everywhere. Soaring profits from selling those ads have helped drive Google's stock market capitalization to some $85 billion, making Google the most highly prized media company in the world. But while the old guard is keeping a watchful eye on Google, the company it really fears--and the one advertisers like Roehm increasingly love--is Yahoo.</p>
<p>It's been easy for most people to overlook the media and advertising juggernaut that Terry Semel, Yahoo's CEO, has assembled since he arrived from Hollywood four years ago. That's partly because Semel makes himself easy to overlook. He's not a showman like Apple's Steve Jobs or a high-tech rock star like Google's Larry Page or Sergey Brin. In fact, he seems to work hard at being bland. Listen to him theorize about the online revolution: "The great part about the Internet of all the existing mediums from before is that it's the first one that is truly global, and its impact is massive." Caffeine, anyone? Semel doesn't care if he's boring. Like many good negotiators, he knows that the more he says publicly, the less he's likely to win. Twenty years of doing movie deals as co-CEO of Warner Bros. taught him that. At 62, Semel's a behind-the-scenes guy, a strategist with a bold master plan: to transform Yahoo into the 21st century's first media titan. He has surrounded himself not with nerdy brainiacs but with veteran advertising and media executives adept at building bridges to the powerful businesses that feel the most threatened by the Internet.</p>
<p>So far, Semel has put together one of the web's hottest winning streaks. When he took over in 2001, the Sunnyvale, Calif., portal--founded in 1994 by Jerry Yang and David Filo--was a mess. The dot-com bubble had burst, revenues had fallen by half, and red ink flooded the bottom line. As the founders took a back seat (today Yang acts as the resident visionary, and Filo works in IT), Semel and his enforcer, COO Dan Rosenzweig, set about diversifying sales beyond the banner ads Yahoo had lived off. He added search advertising, online classifieds, and a host of commission-generating businesses such as selling SBC and Verizon broadband subscriptions. The moves transformed a money loser into a $3-billion-a-year company that this year will post operating income in excess of $1 billion--a near-Microsoftian operating margin of some 30%. (By comparison, Google is about the same size, but its margins are almost double.) Today Yahoo arguably offers the online world's broadest array of information and entertainment for users, married to the web's most sophisticated collection of offerings for advertisers. Each month more than 430 million people worldwide typically visit one of its myriad sites.</p>
<p>Until recently Semel's grand plan was missing a crucial strand: widespread use of online advertising by big marketers like Chrysler. Burned or disillusioned by the bubble, they questioned whether online advertising would ever match the effectiveness of commercials or print ads. Sure, Google's text ads work, because you throw them in front of users just as they are looking to buy or research something online--like a smart, aggressive yellow pages. (MSN and Yahoo's search ads work the same way.) But using the Internet to sell "that Pepsi feeling"--creating and fostering an emotional attachment to a brand--was a challenge of an entirely different order. Most marketers doubted that it could be done.</p>
<p>But lately decision-makers like Roehm are seeing the Internet in a new light. Their conversion can be explained in one word: broadband. Roughly a third of U.S. households now have high-speed Internet connections, which has done two things that advertisers like. It has caused the average time Americans spend online to grow 50% since 2001, according to Knowledge Networks, a Menlo Park, Calif., research firm. Surfing the Internet now takes up 15% of the time Americans spend with all media, it says. (That's conservative, say Forrester Research and many advertisers, who believe the number is double that.) Second, instead of handcuffing advertisers to the banner ads of the bubble years, broadband has freed them to fashion creative messages that are more like TV commercials.</p>
<p>In a May report Forrester surveyed 99 major advertisers and 20 ad agencies and found that nearly 85% of them planned to expand their online ad budgets this year. More significant, it reported a radical shift from the belief that brand building and the Internet don't mix. Sixty-three percent of those surveyed said that online advertising was a brand-building tool "equal to or better than" advertising on TV or in print. Anecdotal evidence supports that. Not a week goes by, it seems, without a big advertiser--P&amp;G, Pepsi, and Georgia Pacific are recent examples--announcing plans to expand promotion of its products online. The trend means that a huge volume of brand advertising will flow into the online world--$8 billion to $12 billion a year by 2010, depending on whom you ask, up from less than $5 billion now, about 3.5% of total U.S. spending on brand advertising.</p>
<p>For Semel and Yahoo, that is the best possible news. Although Google leads the pack in the $5-billion-a-year market for search-related ads, Yahoo is increasingly competitive there. And in the scrum for online brand advertising--almost as large a market--Yahoo is poised to grab the biggest share. Its 181 million active registered users are probably the largest online clientele, which means Yahoo can tell advertisers it knows the habits of more users than any other portal--or any traditional media company. In contrast, Google never trained its users to register and has only recently started to ask them to sign up for services like e-mail or blogging. What's more, measured by page views--the indicator that brand advertisers watch most--Yahoo users are the most engaged. Yahoo generated nearly twice as many page views --178 million worldwide in May--as its nearest competitor, MSN. (MSN generated 96 million page views in May, Google 68 million, and AOL [which, like FORTUNE, is owned by Time Warner] 39 million, according to Comscore Media Metrix.) Says Brian McAndrews, CEO of Aquantive, one of the largest advertising firms specializing in Internet distribution: "Yahoo's opportunity is massive." And while its online rivals are ramping up to attract brand advertising too, Morgan Stanley Internet analyst Mary Meeker says the advantage right now is Yahoo's: "If you're new to online advertising (and a lot of big advertisers are), Yahoo is your first call because they do everything."</p>
<p>The woman Semel has hired to go after brand-advertising dollars is no one you would expect to find at a tech company. Wenda Millard, Yahoo's 50-year-old head of ad sales, looks and acts like the publisher of a fashion magazine. She talks about the importance of "engaging" and "delighting" users, about "relationships" and "building trust" with advertisers. And she does it in an even, mellifluous purr that is both reassuring and utterly persuasive.</p>
<p>No wonder: Before jumping in 1996 to DoubleClick, the once-powerful Internet ad-processing company, and then to Yahoo in 2001, Millard spent 20 years in the magazine business. She started out selling ads for Ladies' Home Journal and New York magazine. By 38 she was publisher of Family Circle, making her one of the industry's youngest publishers and the first woman to run a major women's magazine. Though she works for Yahoo, she is based in New York City, and is unapologetic about her old-media ways. Indeed, she--and many others--thinks they are her greatest asset. "When you're asking a major marketer to spend hundreds of millions of dollars on a new medium, they want to trust you," she says. "If I didn't have a relationship with the presidents of all these FORTUNE 1,000 companies or the heads of all these agencies, why would they trust me?"</p>
<p>Remember, during the bubble the Internet portals, including Yahoo, thought their sites would forever be in such demand that they could cut ad agencies out of the loop and take orders directly from advertisers by e-mail. They viewed media's traditional lunching and golfing with advertisers and their agencies as a waste of time. That arrogance backfired when the bubble burst, and portals became persona non grata on Madison Avenue.</p>
<p>Millard was the first to make peace. Because of her background, she recognized the importance of agencies as gatekeepers for big advertisers and reinstated them as partners. McAndrews of Aquantive says that earned her lasting credibility with him and other middlemen.</p>
<p>By 2003, advertisers and agencies were starting to respond to Yahoo's broad reach, diverse ad offerings, and deep knowledge of its users. Today Yahoo is where Dave Burwick, chief marketing officer at Pepsi-Cola North America, spends the biggest chunk of the nearly $20 million that he has allocated to online advertising (about 5% of his total budget). He's so enamored of Yahoo's "progressive view of where its medium is going and willingness to experiment" that last month he decided to shift his company's two-year-old Pepsi Smash music video series from the WB television network to Yahoo. The Internet brings Pepsi a larger audience of teenagers, he says, enabling them to watch its videos when they want and to interact with one another and with Pepsi via instant messaging.</p>
<p>Roehm too spends the biggest chunk of her online dollars on Yahoo. She says that Yahoo gives her the most information about how the advertising performs, allowing her to slice and dice the effectiveness of every dollar she spends. "We marketers are much more obligated to tell our shareholders and our management what the real return on our spending is. Online provides us the opportunity to give a real answer to that question," Roehm says. "It's measurable. It allows you to have a one-on-one, two-way dialogue with your customers." She knows that almost every dollar she spends online generates $1.50 or more in sales for Chrysler. Although she doesn't have a comparable figure for her spending on TV or in print, her gut, says Roehm, tells her online is a lot better.</p>
<p>Not only can Yahoo provide Roehm with extremely detailed demographic information about the people who click on her ads, it can also predict the probable response rate to the ads on each segment of the portal. It can predict what time of day the ads are likely to be most effective. And increasingly, by analyzing "click streams" on its network, Yahoo can spot potential buyers at various stages of the consideration process. In other words, by looking at the billions of user clicks that flow through its servers every day, Yahoo is getting better and better at figuring out that a given pattern--say, a user who's looked up football on Yahoo Sports, checked out adventure movies on Yahoo Entertainment, and compared truck prices on Yahoo Autos --means the browser is interested in buying a Jeep and is just beginning to think about a purchase. Another pattern might mean a user is interested in minivans and is just a few days from buying. Such information is hugely valuable, says Roehm: Once Yahoo knows where a potential customer is in the car-buying process, it can serve up the appropriate Chrysler ad.</p>
<p>As advertisers flock to Yahoo, media companies that supply it with content are increasingly upset. Indeed, if anything threatens Semel's vision of the 21st century's first media giant, it's the growing irritation of the giants of the 20th century. That's because Yahoo produces relatively little content of its own--it's an aggregator vulnerable to being cut off if old media become angry enough.</p>
<p>Old media's worries are legitimate. While declines in TV ratings and newspaper circulation accelerated last year, Yahoo's traffic, as measured in unique users, grew 24%. The fear that Yahoo will wreck their business model is especially acute among newspaper and TV-news executives. Yahoo's success "has become a red-meat issue," says Tom Curley, CEO and president of the Associated Press. "If there were an enemies list, [Yahoo] would be front and center." Donald Graham, chairman and CEO of the Washington Post Co., was probably the first to see Yahoo as a rival, says Curley, but now he hears it regularly from publishers who sit on his board of directors.</p>
<p>It's easy to see why. Just look at Yahoo News, the company's second-most-visited page after Yahoo.com. Yahoo News attracts 4.6 million visitors a day on average, according to Comscore, about the same number of people who read the New York Times every day. USA Today, the nation's largest newspaper, says its readership is 5.6 million. Add in all the people who get their news via Yahoo's myyahoo pages--which users program for themselves, mixing and matching from a seemingly limitless array of news, weather, finance, and entertainment feeds--and the number is double that.</p>
<p>Here's what News Corp. CEO Rupert Murdoch had to say on the subject of Internet news in an address to editors last spring in Washington, D.C.: "Unless we awaken to these changes, we will, as an industry, be relegated to the status of also-rans. We need to realize that the next generation of people accessing news and information have a different set of expectations about the kind of news they will get, including when and how they will get it, where they will get it from, and who they will get it from."</p>
<p>Convincing old media that they will gain rather than lose from doing business with Yahoo is a big reason Semel hired Lloyd Braun nine months ago; Semel is hoping that just as Millard's roots in magazine publishing make her a soothing presence on Madison Avenue, Braun's roots in Hollywood will reassure old media.</p>
<p>The 46-year-old Braun certainly has the charisma to bring anxious media execs to the table. In his capacious Santa Monica, Calif., office, whose terrace is the size of many New York City apartments, he ranges around like a pent-up teenager. Dressed with the studied schlumpiness--untucked shirt, spotless shoes--that is the uniform of Hollywood creative executives, he fiddles with a golf ball and putter, a chair, and a Magic Marker; he plays Michael Jackson's "Bad" from his Yahoo music collection. "Right after the trial I downloaded it and started blasting it, and everyone has been loving it," he screams over the King of Pop's familiar sound blaring from the speakers.</p>
<p>Braun is charged with keeping Yahoo's hundreds of millions of users coming back day after day. Don't mistake his enthusiasm for flightiness: He is one of Hollywood's toughest, most connected operators. A former entertainment lawyer and talent agent, he has created hit TV shows for more than a decade. At Brillstein Grey Entertainment he helped develop The Sopranos, and at ABC he was one of the brains behind Desperate Housewives, Lost, and Grey's Anatomy.</p>
<p>Though he has been been at Yahoo less than a year, Braun has already shaken things up--to the consternation of some of Yahoo's old guard. Before he came, Yahoo's various sites, like finance, news, and entertainment, were semiautonomous units largely run as fiefdoms by powerful general managers. That caused problems. The sites didn't cooperate well, so lots of work was duplicated, and Yahoo had difficulty dealing coherently with content suppliers. Semel says, "Even though sports, news, and entertainment were licensing things and doing partnerships with the same companies, we did it through five different voices and five different people."</p>
<p>Braun is fusing the fiefdoms into a single unit in the Colorado Center in Santa Monica and requiring everyone to relocate. Yahoo Finance, which is based in New York City, is moving; so are Yahoo News and Yahoo Sports, both currently in Sunnyvale, Calif. Braun has also imposed a new layer of centralized management. He hired Scott Moore from Microsoft's MSN to oversee news and finance, David Katz from CBS to run sports and entertainment, Shawn Hardin from AOL to run games, and Ira Kurgan from Fox to focus entirely on making deals for more content. They'll join Dave Goldberg, who has been running music at Yahoo since it acquired Launch, the music company he co-founded, four years ago. (Three of the eight old-guard general managers have quit, and three have shifted to other jobs.)</p>
<p>With the new team largely in place, Braun is ready to apply principles of programming from the TV business to enrich users' Internet experience. The tricky part is doing it so that Yahoo users will still feel as though they control what they do and see instead of feeling as if they are watching, say, ABC television. In fact, before Semel approached him about coming to Yahoo, Braun probably would have said it couldn't be done. "I remember during the bubble when I was hearing about all these different deals for television shows on the web and wondering why anybody would want to watch [them] when they could watch The Simpsons on television. The TV industry has 50 years' experience doing television, and most of it isn't good enough. How is this business going to all of a sudden do this?"</p>
<p>The arrival of broadband has expanded the universe of what's possible online, however, like video and music, enabling Braun to rethink how Yahoo presents content. Asked to detail his strategy, Braun alternates between coy and expansive (see box), but he is clear about his mission. Yahoo must create a venue that attracts so many viewers and creates so much buzz that no matter how disconcerted old media become over Yahoo's growing popularity, the money and attention it delivers to content suppliers will be too great to resist. "Aren't they going to want to be at the place where hopefully you're going to find all these other unique, exclusive, engaging things going on? I think they are," he says.</p>
<p>If only it were that easy. Reassuring traditional media companies that he's not out to eat their lunch is still a big part of Braun's job, and old media have made dozens of moves to assert themselves online. Two years ago the New York Times pulled its content off Yahoo; it wants readers to visit nytimes.com directly. Last year Reuters, after 154 years as a wholesaler of news to newspapers, television, and radio, set up its own news site and put customers, including Yahoo, on notice that it will soon charge more for its content. More recently, in March, newspaper companies Tribune, Knight Ridder, and Gannett bought 75% of Topix, an online rival of Yahoo News. "There's no question that a lot of the other media companies out there are nervous about [us and wondering], Okay, are they friend or foe?" says Braun. The problem isn't that they hate Yahoo, he adds; it's that "everybody now is feeling this out. There are a lot that we're talking to about working together. They far outnumber the ones that are saying, 'We want to go it alone.'"</p>
<p>Braun is willing to resort to old-fashioned incentives to keep his suppliers onboard--like sharing ad revenues, paying a license fee, or cutting them in on one of the premium services that Yahoo users pay for, like Yahoo Music. "Or there could simply be some promotional value that they're getting, which, by the way, is a great value," he says. "If we're sending a zillion eyeballs, 18- to 34-year-old eyeballs, let's say, to an older-skewing network, I know how valuable that would have been to me" when I was at ABC.</p>
<p>Watching Terry Semel surf the broadband wave should be quite a show. He has rescued Yahoo, true, but nowhere is success more likely to draw a crowd than online. Microsoft, AOL, and even Google are adjusting their business strategies to better compete. AOL last month said it's moving away from its subscription-based model and making more of its content available for free. It wants to recapture users who defected to portals like Yahoo--and the ad revenues that followed them. MSN is building its own search-advertising business in hope of someday not needing to outsource it to Yahoo as it does now. It is also working hard to cut ad clutter on its pages and broaden its brand-advertising offering, which is increasingly competitive with Yahoo's. Google, having built a mammoth franchise on the principle that old-fashioned cost-per-1,000 advertising--banner ads--has no place online, is now letting advertisers pay for ads that way. Why? Google insiders believe that as the $150-billion-a-year brand-advertising business moves online, it would be stupid not to compete.</p>
<p>Yahoo's rivals could also leapfrog it by innovating more fiercely. Though it spends as heavily on product development and R&amp;D as Google and Microsoft (between 11% and 14% of revenues), both competitors define themselves as technology companies foremost, while Yahoo does not. Yet for Yahoo, falling behind in this arms race would spell big trouble.</p>
<p>Perhaps the biggest risk Yahoo faces is living up to the high expectations set by investors. They're not as stratospheric as those for Google, but by awarding Yahoo a $50 billion market cap and a future P/E of about 50, investors have priced in 30% revenue growth--that's doable given all the new money heading Yahoo's way, but it doesn't leave much room for error. For example, although Yahoo reported second-quarter growth of 39% in the U.S. and 59% abroad, its earnings were a hair below expectations and its stock immediately fell 10%.</p>
<p>Negotiating in intensely competitive environments, though, is Semel's greatest skill. In Hollywood he was known as the man who could make even the most intractable deal work. In Silicon Valley he looked like an odd duck. Just a few years shy of collecting Social Security, he barely knew how to use a computer when he arrived at Yahoo four years ago. But so what? Yahoo may have started out as a high-tech company, but it's a media company now.</p>
<p>It turns out that the riddle of how to succeed online isn't so tough after all. Semel is taking everything he learned in his analog past and marrying it to what he can see in the digital future. After all, he was in Hollywood when studios worried that VCRs would ruin their business and again when DVDs arrived on the scene. In each case, the studios' revenues grew, because, says Semel, new distribution options "help them reach a much larger audience--and make more money." He's betting that can happen again, but (remember the quote we said required caffeine?) this time on a scale as immense as the Internet itself.</p>
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		<title>Take me out to the boardroom (Fortune, 1997)</title>
		<link>http://features.blogs.fortune.cnn.com/2012/04/01/la-dodgers-murdoch-fortune-1997/</link>
		<comments>http://features.blogs.fortune.cnn.com/2012/04/01/la-dodgers-murdoch-fortune-1997/#comments</comments>
		<pubDate>Sun, 01 Apr 2012 13:22:23 +0000</pubDate>
		<dc:creator>Fortune Editors</dc:creator>
				<category><![CDATA[Fortune Classic]]></category>
		<category><![CDATA[Los Angeles Dodgers]]></category>
		<category><![CDATA[Major League Baseball]]></category>
		<category><![CDATA[News Corp]]></category>
		<category><![CDATA[RUPERT MURDOCH]]></category>

		<guid isPermaLink="false">http://features.blogs.fortune.cnn.com/?p=8837</guid>
		<description><![CDATA[Corporate owners are revolutionizing the economics of pro sports. Now Rupert Murdoch is in the game, and he's throwing curve balls. By Roy S. Johnson with Rajiv M. Rao and Erin Davies<img alt="" border="0" src="http://stats.wordpress.com/b.gif?host=features.blogs.fortune.cnn.com&#038;blog=916416&#038;post=8837&#038;subd=fortunefeatures&#038;ref=&#038;feed=1" width="1" height="1" />]]></description>
			<content:encoded><![CDATA[<p><em>Editor's note: <em>Every Sunday, </em></em>Fortune<em><em> publishes a favorite story <a href="http://features.blogs.fortune.cnn.com/tag/fortune-classic/" target="_blank">from our magazine archives</a>. This week, we turn to a July 1997 feature on the Los Angeles Dodgers. Team owner Frank McCourt announced this week that he will sell the baseball franchise to a consortium led by Magic Johnson for a record-shattering $2.15 billion. In 1997, however, the O'Malley family still owned the team, but the longtime owners were on the cusp of selling it off to Rupert Murdoch's News Corp. Fox Entertainment Group paid approximately $350 million for the Dodgers in 1998 -- a record price at the time (News Corp. sold the team to McCourt in 2004 for $430 million). Murdoch's purchase portended an end of an era for both the Dodgers and major league baseball, as corporations took a greater controlling interest in sports franchises.<br />
</em></em></p>
<h2><em><em></em></em>Corporate owners are revolutionizing the economics of pro sports. Now Rupert Murdoch is in the game, and he's throwing curve balls.</h2>
<p>By Roy S. Johnson, with Rajiv M. Rao and Erin Davies</p>
<p>FORTUNE &ndash; Peter O'Malley sounds like a man who's tired of the fight. His family has owned the Los Angeles Dodgers for 47 years --a longer tenure than any other ownership group in Major League Baseball -- but earlier in the year he stunned the sports industry by announcing that the team, one of baseball's crown jewels, was for sale. It is a sunny afternoon in May, and in a few days O'Malley will make a deal with Rupert Murdoch's News Corp., selling the team for an extraordinary $350 million, the most ever paid for a sports franchise.</p>
<p>But on this particular day O'Malley is troubled. He's a baseball man, after all. Running the team has been his full-time job -- practically his only job -- and the Dodgers franchise has also been the O'Malley clan's primary investment. Yet as a family business, baseball has become almost absurdly expensive and contentious. Labor wars. Rising salaries. Marketing ineptitude. Disappearing fans. A commissioner? Please. For O'Malley it is time to cash out and leave the headaches to someone more battle-ready. Someone who can afford to ride out the squalls of the tempestuous sports scene. Someone who might bring some fiscal discipline to the sport. Someone who can afford to pay him what he wants. O'Malley knows that that someone will almost certainly be a corporation.</p>
<div id="attachment_8860" class="wp-caption aligncenter" style="width: 622px"><a href="http://fortunefeatures.files.wordpress.com/2012/04/take_me_out_to_the_boardroom.jpg"><img class="size-full wp-image-8860" title="take_me_out_to_the_boardroom" src="http://fortunefeatures.files.wordpress.com/2012/04/take_me_out_to_the_boardroom.jpg" alt="Fortune_take_me_out_to_the_boardroom" width="612" height="441" /></a><p class="wp-caption-text">Franchises are rapidly becoming the core asset in the sports communications business, and long-ball hitters are buying them up. The media lineup includes Murdoch's News Corp., Eisner's Disney, and Levin's Time Warner.</p></div>
<p>"Corporate ownership is the way of the future, and I think that's good," O'Malley says, looking out at the field from his wood-paneled office inside Dodger Stadium. "I think it was [the late Chicago Cubs owner] Phil Wrigley who said that baseball is too much of a sport to be a business and too much of a business to be a sport, and golly, he was right on target. The last four years have been very tough for fans, players, owners, executives, everyone. In many cases, corporations have a greater sense of responsibility and more financial stability -- as well as fewer personal agendas -- than some of the individuals who have bought franchises, and that appeals to me a lot. Corporate ownership is good for sports."</p>
<p>Good or bad, it is revolutionizing the economics of professional sports. Once the sale of the Dodgers is approved by baseball owners -- and they will approve it, despite Murdoch's running feud with Ted Turner -- News Corp. (<a href="http://money.cnn.com/quote/quote.html?symb=NWS">NWS</a>) will become one of 52 public companies owning at least a slice of the 113 Major League Baseball, National Basketball Association, or National Hockey League franchises (the NFL doesn't allow corporations to own teams, at least for now). Once a playground for the rich, pro sports is swiftly becoming a company picnic. "Almost total corporate ownership is an inevitability," says Leigh Steinberg, the influential agent. "It's a trend that can be delayed but not reversed. Leagues can resist it. They can create rules trying to discourage it, but ultimately the nature of the sports-entertainment matrix will demand it."</p>
<p>Murdoch, in fact, is staking claims on the sports landscape as if he were in the Oklahoma Land Rush. While still crunching the numbers on the Dodgers deal, he actually ended up owning pieces of the New York Knicks and the New York Rangers as part of an $850 million investment in Rainbow Media, the sports programming arm of Cablevision Systems. (Murdoch is expected to sell his stakes in the New York teams to clear the way to purchase two teams closer to corporate headquarters: the Los Angeles Kings and a portion of the Los Angeles Lakers. That way he'll have the part of Southern California that doesn't already belong to Disney (<a href="http://money.cnn.com/quote/quote.html?symb=DIS">DIS</a>), owner of the Anaheim Mighty Ducks and 25% of the Angels.)</p>
<p>Beyond the sheer numbers, the News Corp. deals are emblematic of a deeper change: Sports franchises are quickly becoming the core asset in the sports communications business, and the long-ball hitters are getting into the game. Murdoch's arrival creates a true Murderers' Row of powerful media and entertainment companies in the owner's boxes. Leading off with Tribune Co., which purchased the Cubs back in 1981, the lineup now includes Disney, Time Warner (<a href="http://money.cnn.com/quote/quote.html?symb=twx">TWX</a>) (Atlanta Braves and Hawks, and the NHL expansion Atlanta Thrashers, who begin play in 1999), Comcast (<a href="http://money.cnn.com/quote/quote.html?symb=CMCSA">CMCSA</a>) (Philadelphia 76ers and Flyers), and Cablevision (<a href="http://money.cnn.com/quote/quote.html?symb=CVC">CVC</a>).</p>
<p>What attracts these companies is a powerful mix of potential strategic alliances: a growing need for live-event programming in a zillion-channel broadcast, cable, and satellite universe; the emergence of sports franchises as solid "brands" that can be exploited in numerous ways; and the opportunity to blend sports with the companies' entertainment properties in stadium and arena complexes where the game is only one of many attractions. "Our main goal is to get people to spend their disposable income with properties associated with the company, whether they're our theme parks, videos, movies, or our sports teams," says Tony Tavares, president of Disney's Anaheim Sports. "If you've got a dollar, we want it."</p>
<p>To put it another way: An entertainment brand is really a set of managed allegiances, and there's no quicker way to forge an allegiance than by purchasing fandom. "What else can you go out and buy today that's a living, breathing example of tradition and loyalty?" says Mark B. Mahoney, who heads the investment banking division at First Union, which has represented many companies seeking to tap into the sports industry. "A film library? A music collection? That's about it. Besides, how much would it cost for any company to go out and build a brand on its own? It's easier -- and probably cheaper -- to simply buy something everybody already likes."</p>
<p>For all these reasons, a sports franchise has an entirely different kind of value for a corporate owner than it does for a family or an old-fashioned syndicate. If annual profitability is what you're after, you're better off with a Burger King franchise than with a sports team. Soaring salaries will likely force almost half the National Basketball Association teams into the red for this season, despite an expected increase in league revenues to $1.5 billion this season from $1.3 billion in 1995-96. In baseball, teams lost in aggregate between $200 million and $300 million last season. "Operating the team is essentially the same business it was in the 1920s; you sell tickets and hot dogs," says Stan Kasten, president of the Hawks and Braves. "And there's only so many you can sell. It's not like Microsoft, which can grow a million-dollar business into a $50 billion business."</p>
<p>The Dodgers, for instance, had $13.5 million in operating income last year on revenue of $75 million. Does that justify a price that's about 30 times earnings? Sure, if you're a conglomerate with plans to conquer the world, not just win the World Series. Compared with News Corp.'s $10 billion in annual revenues, the purchase price of the Dodgers looks like a rounding error. "So what if a huge company overpays by $25 million or so," says Mahoney. "It's nothing. Immaterial. Fundamentally, cash flows are generally low in comparison to values, but companies are not buying for value, they're buying the underlying software. The payout's in the pipeline."</p>
<div id="attachment_8862" class="wp-caption alignleft" style="width: 310px"><a href="http://fortunefeatures.files.wordpress.com/2012/04/kasten_mcguirk.jpg"><img class="size-full wp-image-8862" title="kasten_mcguirk" src="http://fortunefeatures.files.wordpress.com/2012/04/kasten_mcguirk.jpg" alt="" width="300" height="356" /></a><p class="wp-caption-text">Home of the Braves: Kasten (center) and McGuirk (right), who oversee Time Warner's sports teams, created a $242.5 million multimedia cyber-stadium at Turner Field.</p></div>
<p>No kidding. Baseball as a fully leveraged asset bears hardly any resemblance to what you may recall as a quiet day at the ballpark with Dad. The $242.5 million Turner Field in Atlanta, the Braves' new world, is a testament to what lies ahead: interactive cyberball. You can pitch and hit in simulated games, use electronic kiosks to peruse scouting reports on 300 current and former Braves, or watch any other Major League game in progress on one of the televisions in the Clubhouse Store. Big screens show live locker-room interviews, and there is enough fiber-optic cable buried underneath the place to allow games to be broadcast live anywhere on the planet. Kids can frolic with Bugs Bunny, Foghorn Leghorn, and other Warner Bros. cartoon characters in the children's areas. And oh, yeah, the Braves play there too.</p>
<p>As a business, baseball is learning what basketball has known for more than a decade. "I talk about the NBA as having 29 'theme parks,' cable distribution, a consumer products business, publishing interests, trading cards, and sponsorship relationships," says league commissioner David Stern, in his Manhattan office overlooking Fifth Avenue. "Those are areas that are attractive to the people at any major company. With that combination of opportunities, plus the increasing value of the franchises themselves, it was inevitable that you would soon move toward an ownership mix of the Fortune 500 and people among, if you'll pardon the expression, the Forbes 400."</p>
<p>Since 1990 the cost of entry to the NBA has quadrupled. That year the Orlando Magic and Minnesota Timberwolves paid $32.5 million each as expansion teams. Two years ago the Toronto Raptors and Vancouver Grizzlies anted up a whopping $125 million each to join the party. In baseball, Baltimore businessman Peter Angelos and a group of investors (among them novelist Tom Clancy and former tennis star Pam Shriver) purchased the Baltimore Orioles four years ago for the then handsome sum of $193 million. In light of the Dodgers' deal, the Orioles could likely command much more if they were for sale.</p>
<p>"Individuals are simply being priced out of the marketplace, unless they're infatuated with the thought of owning a team," says Jerry Colangelo, president and CEO of the Phoenix Suns and part owner of just about every sports property in the city, including the baseball expansion Diamondbacks and the Coyotes hockey franchise. "But that will become a more and more expensive toy."</p>
<p>Corporate owners aren't new to pro sports, of course. Teams were wearing the names of local businesses on their uniforms as long ago as the turn of the century. Big business stepped up to the plate in 1953, when Anheuser-Busch (<a href="http://money.cnn.com/quote/quote.html?symb=BUD">BUD</a>) bought the St. Louis Cardinals.</p>
<p>Big media first entered the game in 1964, when CBS (<a href="http://money.cnn.com/quote/quote.html?symb=CBS">CBS</a>) purchased 80% of the New York Yankees for $11.2 million (later it bought the rest for $2 million). But a ball team was just a ball team back then; the breathtaking TV deals were still more than 20 years away. Licensing and apparel sales were in their infancy. Autographs were free. Nine years later, with the Yankees faltering, CBS sold the team to a partnership of wealthy individuals led by a bombastic shipbuilder named Steinbrenner. The price tag: $10 million. Nice investment, guys.</p>
<p>A few years later, Turner, then a fledgling entrepreneur, had this zany idea of building a national television network out of a tiny UHF station by beaming its signal to cable systems around the country via the emerging satellite technology. Lacking much juicy programming, Turner had another radical thought: Buy the Braves and the Hawks, slap them on the bird and let 'em fly. So began the "superstation," which ultimately begot a slew of broadcast properties known as Turner Broadcasting System, acquired last year by Time Warner (corporate parent of <em>Fortune's</em> publisher). Turner is now Time Warner's vice chairman.</p>
<p>That strategy will never be repeated: Each league now controls the national and international television rights to its teams, so an owner today can't use the franchise as national programming the way Turner did. Today the opportunities lie in local and regional programming.</p>
<p>Enter Murdoch, the guy who likes to change the rules of every game he plays. The guy who dropped a bomb into the middle of the NFL's television negotiations three years ago by offering a staggering $1.58 billion to broadcast National Football Conference games. Today his Fox network also shares the national broadcast rights for Major League Baseball (it airs a third of all baseball games televised). Now he's at it again. With the Cablevision move, Murdoch makes the sports cable game a real slugfest.</p>
<p>The king of sports cable at the moment is Disney's ESPN, which reaches 71 million homes and carries only national programming. Murdoch is betting that on most nights, fans would rather watch their home team than a nationally televised game between two other teams. In a joint venture with TCI, he is stitching together a network of 20 regional cable outlets, called Fox Sports Net, that televise local teams.</p>
<p>Once the deal's done, FSN will own the regional rights to 49 pro teams and reach 55 million households nationwide. Since telecasts of the home team usually earn higher ratings locally than games televised nationally, Murdoch will be able to offer national advertisers a unique alternative to ESPN: a customized package of regional advertising that could, in aggregate, reach an audience bigger than what ESPN's national telecasts draw. Also, Fox Sports Net will be able to sell the kind of local and regional advertising ESPN can't. "It'll take some time for Fox to find its programming stride, but obviously ESPN will be looking over its shoulder," says Mike Garofolo, vice president of local sports for Zenith Media, a division of Saatchi &amp; Saatchi Advertising.</p>
<p>How does owning the Dodgers, and possibly the Lakers and Kings, fit into this strategy? Unlike national and international rights, a team's local and regional rights can be exploited freely by the owner. And live sports is some of the most valuable programming in the land. "Our business has become more and more event-driven, and sporting events are second to none," says News Corp. co-chief operating officer Chase Carey. "Sports will have a more and more important role in our business. That's part of what justifies our belief in this move."</p>
<p>Not all corporate team owners have quite so elaborate a game plan, but all are looking for leverage of one kind or another. The beer synergy endures: Coors owns part of the Colorado Rockies, Interbrew SA of Belgium has a stake in the Toronto Blue Jays, and Molson owns the Montreal Canadiens. (Anheuser-Busch sold the Cardinals last year, but it still owns the NHL's St. Louis Blues.)</p>
<div id="attachment_8861" class="wp-caption alignright" style="width: 350px"><a href="http://fortunefeatures.files.wordpress.com/2012/04/peter_omalley_dodgers.jpg"><img class="size-full wp-image-8861" title="peter_omalley_dodgers" src="http://fortunefeatures.files.wordpress.com/2012/04/peter_omalley_dodgers.jpg" alt="" width="340" height="279" /></a><p class="wp-caption-text">End of an era: His family has owned the Dodgers for 47 years, but Peter O'Malley is cashing out and leaving the headaches to Murdoch.</p></div>
<p>Other potential owners are forming corporate versions of the old-fashioned syndicates of rich individuals, putting together groups of local companies to either buy an existing team or attract an expansion team to give a boost to the regional economy. That was the pitch Jerry Colangelo made when he began approaching Phoenix-area companies four years ago about forging a partnership that would ultimately bid for a Major League Baseball expansion franchise. Fourteen businesses eventually helped forge a group that pledged $300 million, which the lords of baseball couldn't resist. What was the attraction for the locals, who could certainly have found other, more profitable places to stash their cash than in the Diamondbacks? "I think it was a situation where the private sector invested simply to add to the quality of life in the area," Colangelo says. "All of them, for instance, are competing for talent, just as the teams are. And just as we think this is a city where athletes will like to play, our investors believe that the presence of sports will make Phoenix an attraction for their own potential employees as well."</p>
<p>Beer and boosterism will always have their place in sports, but it is the big media companies that have shown other owners how their teams can play in a larger arena. In Toronto, Isaiah Thomas has a vision for the Raptors that extends far beyond winning an NBA championship: He wants the team's dinosaur mascot to become "the Mickey Mouse of the sports world." (Remember when that phrase would have meant the very opposite of an ambitious dream?) The former all-star guard has owned 9% of the two-year-old team since its inception, and he currently heads a group of investors, Chase Manhattan among them, that's trying to purchase the controlling interest. "I don't see the Raptors as just a basketball team," Thomas says. "I see them as one day being the centerpiece of an entertainment entity. Our intention is to make this a $1 billion company. Even now our corporate culture is to create an environment in every division similar to what Disney has done."</p>
<p>The Raptors may be the only "ride" in Thomas' proto-Disney so far, but already he's thinking in terms of the sports-entertainment matrix. "I want to be able to preserve the sheer enjoyment a fan gets when he walks through the door, sits down, and buys a hot dog from a vender," he says. "They should experience that true joy, not what I feel when I close a business deal. In Disneyland you're in Mickey's World, not Michael Eisner's."</p>
<p>Take a good look around. Take a deep breath. Take your kids. Dodger Stadium won't feel like this much longer. The view from O'Malley's office is a window to an era when natural grass, one-run games, and a Dodger Dog were enough. There are no luxury boxes. No corporate logos plastered everywhere -- just an inconspicuous Coca-Cola sign atop a pole in center field.</p>
<p>It is a special place, and the Dodgers are a special team: winners of six World Series, breakers of baseball's color barrier, the team of Koufax and Drysdale. "We have an extraordinary tradition, and we respect it, nurture it," O'Malley says. "Our reputation is unique and we want to enhance it. We're proud of it, and it's very important to all of us."</p>
<p>News Corp.'s Carey and Peter Cherin, the company's other co-COO, will be charged with preserving what's special about the Dodgers. They're on the hot seat, and they know it. Screw this Dodger thing up, and FOX is fur. Yes, they'll start building sky boxes as soon as the deal is ratified, and yes, they'll welcome corporate sponsorship and advertising. But no, Bart Simpson will not throw out the first pitch of the new regime. "We'll be far less intrusive than others," says Chernin, a former New Yorker who grew up a fan of the Brooklyn Dodgers. "We know the Dodgers represent something special to the people in the city, evoking an era of nostalgia that resonates from Jackie Robinson to Hideo Nomo." Adds Carey, a longtime Yankee fan: "This is a wonderful opportunity to build upon something that already resonates with its fans. With some of our other businesses, that's the hardest part."</p>
<p>There will be a few speed bumps as the sports industry barrels toward corporate ownership. Conflict of interest, for instance. During negotiations for national broadcast and cable rights, three media company/owners will be represented on both sides of the table. FOX and Fox Sports Net, ESPN, and Time Warner's WTBS and TNT all figure to vie for some portion of the broadcast or cable rights whenever any of the league's current contracts expire. The rights are now negotiated by committees made up of a handful of owners, but as more and more corporations buy franchises, it may become increasingly difficult to screen out the potential conflicts.</p>
<p>Another bump: Each of the leagues has rules preventing owners from circumventing salary-cap regulations by offering "side deals" like stock, options, or movie deals to players. But who's to say some of the major media companies, with their television and movie units, won't be more attractive to an agent looking to sign his client with a team that offers a few (wink, wink) "post-career opportunities?" Leigh Steinberg calls the notion "tempting." NBA team executives, for instance, must sign affidavits stating they won't cut such deals. But if Michael Jordan ambles into Jerry Reinsdorf's office and asks for a piece of the Chicago Bulls in exchange for playing another season, what's the guy supposed to say? You haven't earned it, Michael. Sorry.</p>
<p>Major bump: Do the math. As successful financially as Major League Baseball, the NHL, and the NBA may claim to be, their annual revenues are no match for those of many of the large corporations whose teams they must govern. Could the big dogs someday plot to take over the pound? Fear of such a putsch was at the heart of the NFL's decision to ban corporate ownership decades ago. "We've always had the view that the ultimate value of our franchises is in being part of the overall operation," says Stern. "If you deteriorate into anarchy and are unwilling to check your corporate identity at the door, you're going to wind up with a very damaged asset that won't be able to compete globally."</p>
<div id="attachment_8863" class="wp-caption alignleft" style="width: 350px"><a href="http://fortunefeatures.files.wordpress.com/2012/04/carey_chernin_news_corp.jpg"><img class="size-full wp-image-8863" title="carey_chernin_news_corp" src="http://fortunefeatures.files.wordpress.com/2012/04/carey_chernin_news_corp.jpg" alt="" width="340" height="295" /></a><p class="wp-caption-text">Designated hitters: Carey (left) and Chernin, co-COOs of News Corp., must preserve the Dodgers' legacy.</p></div>
<p>Traditionalists will warn that the big, bad corporate Cuisinart will ultimately grind sports fans' cherished games into pulp. Decisions will be made with the stock price in mind, not the final score. The number crunchers will force the team's general manager -- the guy who knows sports -- to pass on the high-priced free agent because, well, the numbers didn't work. Fans will be assaulted with nine innings of "It's a Small World," four quarters of <em>Batman and Robin</em> previews, or three periods of insipid scenes from <em>Party of Five</em>.</p>
<p>Relax. It's not likely. Let's face it, many of the sports industry's current ills -- public bickering between players and management, nomadic franchises, and fiscal irresponsibility, to name a few -- can be blamed largely on the few egotistical individual owners who allow personal agendas to override the good of their sport. In fact, corporate owners would probably never commit the sin of moving a franchise -- the bane of the fan's existence. Why? Does Michael Eisner really need a bunch of rabid fans picketing at Disneyland?</p>
<p>"Some rich guy who believes he has only a five- to seven-year window in which to win will spend almost any kind of money to do so," says Peter Ueberroth, the former baseball commissioner. "Corporations will tend to be more responsible. Operating records will be more public and thus available to communities and fans. Ultimately they are more responsible to shareholders than to fans, which should bring some reasonableness to the cost of salaries." It's a nice thought, but probably not a very realistic one. Hasn't at least one of the media companies that also owns a sports franchise paid Demi Moore $20 million to star in a movie?</p>
<p>There is reason to believe that, in the end, not much will change when it comes to what matters most -- winning. Most successful corporations and the people who run them are as competitive as they come. If it comes down to signing the free-agent 20-game winner for $50 million or meeting the Wall Street analysts' estimates, well, which way are the new corporate owners likely to swing? "Do we need to make money?" asks Terry McGuirk, president and CEO of Turner Broadcasting System, which oversees the Braves and Hawks. "Yes, we try to. Do we always? No. But we take a lot of value in winning, and sometimes we're willing to sacrifice profits in order to achieve that."</p>
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		<title>Can wine become an American habit? (Fortune, 1934)</title>
		<link>http://features.blogs.fortune.cnn.com/2012/03/25/american-wine-fortune-1934/</link>
		<comments>http://features.blogs.fortune.cnn.com/2012/03/25/american-wine-fortune-1934/#comments</comments>
		<pubDate>Sun, 25 Mar 2012 13:30:26 +0000</pubDate>
		<dc:creator>Fortune Editors</dc:creator>
				<category><![CDATA[Fortune Classic]]></category>
		<category><![CDATA[American wine]]></category>
		<category><![CDATA[Wine]]></category>
		<category><![CDATA[Wine Consumption]]></category>

		<guid isPermaLink="false">http://features.blogs.fortune.cnn.com/?p=8768</guid>
		<description><![CDATA[<p><em>Editor's note: <em>Every Sunday, Fortune publishes a favorite story from our magazine archives. This week, we turn to a feature from 1934 on the U.S. wine industry (original headline: "The Wines of the U.S."). Prohibition, which lasted for just under 14 years before it was repealed on December 5, 1933, decimated the U.S. commercial wine industry. After the repeal, American<em><em> winemakers and merchants had to play a serious game of catch up, both <a href="http://features.blogs.fortune.cnn.com/2012/03/25/american-wine-fortune-1934/">MORE</a><img alt="" border="0" src="http://stats.wordpress.com/b.gif?host=features.blogs.fortune.cnn.com&#038;blog=916416&#038;post=8768&#038;subd=fortunefeatures&#038;ref=&#038;feed=1" width="1" height="1" />]]></description>
			<content:encoded><![CDATA[<p><em>Editor's note: <em>Every Sunday, Fortune publishes a favorite story <a href="http://features.blogs.fortune.cnn.com/tag/fortune-classic/" target="_blank">from our magazine archives</a>. This week, we turn to a feature from 1934 on the U.S. wine industry (original headline: "The Wines of the U.S."). Prohibition, which lasted for just under 14 years before it was repealed on December 5, 1933, decimated the U.S. commercial wine industry. After the repeal, American<em><em> winemakers and merchants had to play a serious game of catch up, both in their quest to make decent wines and in converting U.S. drinkers.</em></em></em></em><em><em> Today, California is one of the finest wine regions in the world. And in 2010, the U.S. surpassed France and became the world's largest wine consumer -- by total volume, not per capita -- a far cry from the situation in 1934. </em></em><em>One additional note: The writing below is a product of its time. It does not reflect the cultural sensitivity that we at </em>Fortune<em> observe today. </em></p>
<h2>Can wine become a national habit? Several people, not altogether disinterestedly, have set out to make it one. But even in the world's greatest grape-growing country, there are many obstacles.<a href="http://fortunefeatures.files.wordpress.com/2012/03/barrells.jpg"><img class="alignright size-full wp-image-8782" title="barrells" src="http://fortunefeatures.files.wordpress.com/2012/03/barrells.jpg" alt="" width="340" height="280" /></a></h2>
<p>FORTUNE -- Fine sleet beat a painful tattoo against the windows of the Manhattan apartment in which Mr. Paul Garrett sat nursing a fever and talking about utopia. A utopia of vineyards stretching southward to the Gulf and northward to the Lakes and across the debt-ridden farm belt down to where California pokes a long fingernail into the tropics. Outside, the holiday traffic rumbled through East Seventy-ninth Street, making jagged discords in the shrill music of the sleet upon the windowpanes; inside the only sounds were Mr. Garrett's hoarse voice and the soft burr of a sliver of jewel scraping against the wax cylinder that was Mr. Carrett's only audience.</p>
<p>There was good reason why Mr. Garrett could talk about a vineyardist's utopia. Everybody called Mr. Garrett the Dean of American Wine Growers, although sometimes Mr. Garrett didn't like to be reminded of that. If he had not so persistently kept his mind upon utopia, Mr. Garrett might perhaps have become bitter ... The cylinder began to whir beneath the sharp sapphire and Mr. Garrett resumed his monologue into the mouthpiece.</p>
<p>"In France the average per-capita consumption of wine is thirty-seven gallons a year. The population of France is less than one-third that of the U.S. About 7,000,000 people are employed in France in the growing of wine grapes, wine making, and in the transport and sale of wine. If we apply these figures to this country we have 130,000,000 people each consuming thirty-seven gallons of wine a year, which makes 4,810,000,000 gallons of wine. At the same rate of man-hours per gallon the production and distribution of 4,810,000,000 gallons of wine would give employment to 21,000,000 people. The development of a wine industry in this country comparable to that in France would wipe out unemployment and provide a shortage of labor able to absorb further technological unemployment for a generation to come."</p>
<p>Now Mr. Paul Garrett is no idle dreamer. It took a very practical man to promote the only American wine whose name almost everybody knew -- Virginia Dare. Mr. Garrett had been in the wine business since 1876, when he was thirteen and began work in the North Carolina vineyards his father and uncle had bought at the close of the Civil War. While still in his teens he took over the management and conceived the idea of establishing a name for his wine and selling it in bottles, a procedure hitherto unheard of in the U.S. By prohibition time Virginia Dare was selling 1,000,000 cases a year and was by far the most popular bottled wine in the country ... And so Mr. Garrett switched off his dictaphone and ran over in his mind some statistics he knew by heart.</p>
<p>In 1918 U.S. wine consumption was 51,000,000 gallons. During prohibition it trebled. Mr. Garrett was one of the few people who realized that amazing fact -- that by 1928 the annual consumption of wine had become about 160,000,000 gallons a year. During those years liquor consumption increased only 50 percent -- by gallons, 60,000,000. Yet the liquor business was organized and aggressive, and the wine industry had been disrupted.</p>
<p>The statistics told Mr. Garrett more. In 1918 some 3,000,000 gallons of wine were imported to fill the slippers of chorus girls and the gullets of the rich. Most of the 51,000,000 gallons produced domestically was sold in bulk and drunk by the foreign-born people of the cities. Of the 159,000,000 gallons consumed in 1928 only a few thousand were imported and only 5,000,000 produced legally and domestically for refreshment while communing with the Lord. That left 154,000,000 gallons which were made illegally in cellars and legally in homes. Since the foreign-born population has not increased since 1918, it seems logical to conclude that much of the 100,000,000-gallon increase in those years was due to new habits contracted by the rank and file of the population. In other words, prohibition has done something very startling to the taste of this nation.</p>
<p>If wine consumption trebled in a dry decade, suppose it trebled during the next wet decade? And again in the next two, which would take it until about 1960, or a generation, to approximate 4,810,000,000 gallons a year and produce an eight-billion-dollar industry and the utopia of Mr. Garrett. The only trouble with drawing such a conclusion is that it is contingent upon wine's being plentiful and good and cheap, and that is why Mr. Garrett, knowing whereof he spoke, did not draw it. The rumble of the traffic and the patter of the sleet kept Mr. Garrett from going too utopian ... The cylinder whirred again.<span id="more-8768"></span></p>
<p>"Are these figures fantastic? Possibly. Then let us reduce them by two-thirds. Let us assume that consumption of wine in the U.S. could be brought to twelve gallons per capita per year -- one bottle a week, with a few left over for Christmas and birthdays ... Well, even that small ration would call for the production of 1,600,000,000 gallons a year (ten times more than we have ever produced to date) and the employment of -- let me be very conservative and say 5,000,000 men and women."</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/03/bottling.jpg"><img class="alignleft size-full wp-image-8781" title="bottling" src="http://fortunefeatures.files.wordpress.com/2012/03/bottling.jpg" alt="" width="340" height="228" /></a>As Mr. Garrett becomes excited his accent returns to North Carolina, where he was raised. Mr. Garrett's dictaphone was now getting the benefit of his broadest speech, for he was talking not to the machine but to the members of an industry that he knew from long association with it to be shortsighted and jealous and stubborn.</p>
<p>"There is no reason why our industry should be a small industry. It ought to be -- it can be -- bigger than the automobile industry, bigger than the steel industry, if wine makers will seize the opportunity that lies before them ... The opportunity has never existed at any time in this or any other country. There is no likelihood that it will ever come again ... Who knows that we are a nation of hard drinkers? We were a nation of hard drinkers, but maybe we are willing now to be sensible-reasonable. Who knows that if wine were properly presented to the American people they might not accept it for what it is -- a wholesome, health-giving accompaniment of good food? ... Millions of people are out of work and government agencies are trying to find work for them. Millions of acres of land, now unproductive or to be withdrawn from agriculture owing to overproduction in every other line, are eminently suitable for the growing of wine grapes. Federal and state governments should be willing to provide funds for getting this land under vines. No investment would be more self-liquidating provided the government, at the same time, would stimulate consumption by liberating the wine industry from the shackles of onerous regulation and restriction. To induce the government to do this will not be difficult if the case be intelligently presented."</p>
<p>Mr. Garrett snapped off his machine, blew his nose, took some medicine. His speech, like all good speeches, did not tell all. He knew very well that his utopia was far distant. He knew very well that there was not enough wine in the U.S. to meet the present demand. For a people that will want 150,000,000 gallons of wine there are in storage 25,000,000 gallons. In 1933 California produced about 30,000,000, three times its prohibition average. The rest of the country probably produced two or three millions. Of this total of less than 60,000,000 gallons about one-half will be put on sale. The rest will be kept for aging and blending with the wines of future years.</p>
<p>For, unlike whiskey, even the worst wine cannot be produced overnight. It takes from three to five years for a grapevine to bear. What Mr. Garrett and every other wine man knows too well is that it will be five years before U.S. wineries will be able to distribute annually 150,000,000 gallons of wine, from good wine grapes, at least one year old. Meanwhile it will be neither plentiful nor cheap.</p>
<p>Nor will it be so very good.</p>
<p>--</p>
<p>Wine is a habit, an industry, and an art. The men who pick and trample barefoot the rare fine grapes beside the Gironde have their own carafes filled with a liquid poorer than the grand Medocs, and in Jerez de la Frontera, whose brave wine the linguistically lazy English made famous, the people drink manzanilla, which is the unfortified wine of the country and cheap. A tall sleek bottle of Liebfrauenstift would not make a Rhenish peasant so gemütlich as beer; and the gypsies that sing plaintively across the Danube on still nights have their jugs filled, but a real Tokay is rarer than a clean gypsy. Fine wine is tradition and pride and love; it is not drunk by the peasantry and it is not conceived by fourteen years of prohibition.</p>
<p>Wine men like Mr. Garrett and many a similar character before him have wanted to be artists. Few in this country have succeeded; few will succeed in the near future. Mr. Garrett and some of his contemporaries would like to be educators, to give the U.S. peasantry a good, cheap wine, and to teach them to like it. But to live they must be businessmen, and their living lies in that broad middle class of wine the production of which is everywhere an industry. U.S. wine is in the immediate future forced into that class, whether or not Mr. Garrett and his colleagues like it. For of the 1,500,000,000 gallons of wine consumed annually in France at least four-fifths is <em>vin ordinaire</em>, while of the 150,000,000 gallons consumed last year in the U.S. at least four-fifths was, in price, wine of the middle class. That is to say, most of the people who bought wine in a speakeasy or from an Italian delicatessen paid from $1 to $4 a bottle for it. Even if the more honest wine producers would like to sell their wine frankly as <em>vin ordinaire </em>-- which it is -- they could not do so because most state laws forbid the selling of wine in bulk. The wine people might get these laws changed in time to teach the country the habit of wine; just at the moment they are satisfied with their limited field of competition because it looks like a very profitable field.</p>
<p>Since repeal became imminent the U.S. has been flooded with wine propaganda. In every metropolitan newspaper, experts have conducted daily columns on the art of wine drinking. Makers of the variously shaped glasses from which one drinks hock and Sauternes and Burgundy have done a boom-time business. The Marquise de Polignac, whose husband makes French champagne, has been repeatedly interviewed. The propaganda has been paid for by the French wine interests and by California's. (The French are now feeling pretty glum about their quota.) But however it started, it has made the drinking and serving of wine, for the moment, as much a fad as was the cross-word puzzle or mah jong. So U.S. wines have a market worth competing for, an opportunity which may not come again for many, many years.</p>
<p>They will compete with the cheaper wines of Europe and Asia and Africa and Australia, with wines that are frankly mediocre and with mediocre wines masquerading as something else. By now it is an open secret that many French and German blenders -- as distinguished from the artists who make and bottle their own vintage wines -- put labels on wines that have no right to them. There is more wine bearing the label Chablis than all Burgundy could produce and all the authentic Chambertin in the world comes from a twenty-eight-hectare (seventy-acre) vineyard that in an average year yields 42,000 liters, or less than 60,000 bottles, or just about one-fourth of the so-called Chambertin that will be sold in the U.S. this year. France imports more wine than she exports; it is against the law to mislabel wine, but only the growers are prohibited from buying wine anywhere. The blenders may buy wine from the great vineyards -- and from Algeria -- and nobody knows how much of either goes into a bottle labeled Pommard. German law demands only that a wine be 51 percent of what it is labeled, and <em>Liebfraumilch</em> is not a wine but a flavor. <em>Mise en bouteille au château</em> and <em>Original-abfüllung</em> are phrases of safety, but many a new chateau has been discovered in the Médoc since December 5. [Editor's note: Prohibition was officially repealed on December 5, 1933.]</p>
<p>For the great mediocre wine market of 150,000,000-gallons-plus, U.S. wines will have the advantage of a tariff, at present $1.25 a gallon; the disadvantages of inexperience and some very bad habits that have brandy to make imitation ports and sherries, muscatels, etc. California has for twenty years made, and will this year make, 85 to 90 percent of U.S. wine.</p>
<p><strong>Wine Rush</strong></p>
<div id="attachment_8779" class="wp-caption alignright" style="width: 310px"><a href="http://fortunefeatures.files.wordpress.com/2012/03/california_wine_map_large.jpg"><img class="size-full wp-image-8779" title="california_wine_map_SMALL" src="http://fortunefeatures.files.wordpress.com/2012/03/california_wine_map_small.jpg" alt="" width="300" height="372" /></a><p class="wp-caption-text">Click to see larger view of map.</p></div>
<p>The people out there were always starting for utopia on the wrong foot and getting tripped. There was, for instance, the astonishing Count Agoston Haraszthy, who founded the California wine industry and made such a good job of it that it has had a mighty hard time surviving his mistakes. The first California vineyards were planted by the Franciscan missions in the 1700s; the grapes were all of a Sardinian variety called Monica, which in its new setting was naturally known as the Mission. When Count Haraszthy got to California along about 1850 there was still nothing in the big wide state but a few Mission vineyards whose wines nobody much drank. Count Haraszthy changed all that.</p>
<p>In 1852 he imported some cuttings of the Alexandria Muscat, which grape was the backbone of California's raisin industry when the wine industry went to pieces. Later he imported a lot of cuttings from his native Hungary, among them the one which came to be called the Zinfandel and was the base of most of the pre-prohibition wine that Italo-Americans loved and of the prohibition wine we used to buy for a dollar a bottle and called Château Grosso or Château Bono and which wasn't so bad at that. Within a few years of his arrival in California Count Haraszthy had a vineyard of some 85,000 vines in the Sonoma Valley and a nursery of 460,000 rooted cuttings. He also had three sons, Gaza, Attila, and Arpad.</p>
<p>By 1860 Count -- or Colonel, as he preferred to be called in gun-toting California -- Haraszthy had started a great wine boom. Next year the state established a viticultural commission, of which there were three commissioners, Colonel Haraszthy and two figureheads. The Colonel immediately set out for Europe, taking Attila, and when he returned he had with him 200,000 vines and cuttings. These he planted throughout the state. By 1877 California was producing 4,000,000 gallons of wine a year.</p>
<p>Now, all of the vines Colonel Haraszthy introduced in California -- and there are few varieties there he didn't introduce -- were of European varieties. The first results were bad: the wine was not fit to drink. The second results were worse: instead of dumping their bad wines the Californians began shipping them to France, where they were blended with anaemic French wines and shipped back to the U.S. under fine old names. Other California wine growers saved themselves that trouble by just importing labels and cases and straw. That stigma of European imitation California still suffers from today.</p>
<p>The 1880s were an era of reform. The state established a board of viticulture, passed a pure-wine law. California wine began to take on an identity of its own. Soon the best vineyards of the coast counties, particularly Sonoma, Napa, and Alameda, had adopted the custom of estate-bottling and California seemed in a fair way to amount to something in the art of wine making. By 1895 the state was making 15,000,000 gallons a year and sending it to the eastern U.S., to Mexico, Central America, Hawaii, and the Orient.</p>
<p>By 1900 California wines had won a few blue ribbons in international expositions. That year California made a great bid for honors in the Paris Exposition. Dr. Harvey W. Wiley took personal charge of the American entries. On the morning of the tasting somebody introduced a resolution barring wines "with labels affixed bearing a false indication of origin." All the California wines had to be withdrawn. For, since Colonel Haraszthy had planted European grapes in California, California's wines were called by European names: Chablis and red Burgundy and Médoc and even Château Yquem; sherry, Tokay, Riesling, and Chianti. Dr. Wiley wrote a very clever piece defending the practice, but the wines lost a lot of ribbons nevertheless.</p>
<p>Still, the wine growers did not change their habits. They had an increasing market for their product in the U.S. and abroad and a lot of their wine still went to France for blending. In the next decade production rose to 50,000,000 gallons a year, at which figure it stayed until prohibition. Some of the wine was almost fine, bore the good names of Krug, A. Finke's Widow, Hoelscher, and others; most of it was <em>vin ordinaire</em> and was sold in bulk and blended by merchants in the cities. All the same, the industry was getting along and if it hadn't been for the Eighteenth Amendment we might have become a wine-drinking country before this.</p>
<p>--</p>
<p>Prohibition killed the wine industry: it made the grape industry temporarily thrive. For since wine making in the home was still legal, amateur wine makers bought quantities of California grapes and fermented their own wine. As all wine men know, the best-looking grapes do not make the best wine. With prohibition, the good-looking, indifferent grapes, which had formerly sold for $12 to $18 a ton, jumped to $120; the Pinots and the Rieslings couldn't be sold at all. Vineyardists discovered that the East offered a market for grapes -- not fine wine grapes, but the pretty, big, round things that look as if they should yield good wine. So they grafted Muscats and Tokays and Missions to their Pedro Jimenes and Riesling roots and the grape business flourished for a while. In 1921 wine grapes (so-called) sold in the New York market for more than $200 a ton. Between 1920 and 1925 California doubled her grape acreage. Private wine production--from California grapes only--went to 90,000,000 gallons in 1922, 137,000,000 in 1925, 154,000,000 in 1925. But overproduction had broken the market.</p>
<p>In 1929 private wine production was 118,000,000 gallons, a 25 percent drop from 1928. Grapes glutted the eastern market and the Californians, who had sacrificed their good vines to the grapes the market demanded, were frantic. They looked around for some means of reviving their ill industry.</p>
<p>Now all the wine that was made in homes was not made by housewives. There were several tricks to the business. There was the grape-juice trick. The company sold you a barrel of grape juice, then a man from the company came around and put a funny looking tube in it and it bubbled and stank and after a while he came back and bottled the stuff and put labels on it and when you drank it it was wine. That worked fine for a few years after prohibition but it was limited to a few small companies. Next came the concentrate trick, which was an improvement. The concentrate was grape juice which had been reduced to syrup by the removal of the excess water. It was easy to ship and less likely to spoil. Then for a while there was the wine brick, which was pressed grapes that would ferment and make wine if you added water to it. By the time of the wine brick these tricks had spread to the racketeers, but long before that California had seen the rich opportunity they offered and had thought up a trick of its own.</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/03/guasti_vineyard.jpg"><img class="size-full wp-image-8778 aligncenter" title="guasti_vineyard" src="http://fortunefeatures.files.wordpress.com/2012/03/guasti_vineyard.jpg" alt="" width="612" height="271" /></a>In 1929 was formed Fruit Industries, Inc. (later Ltd.), a merger of eight leading wine interests in the West. Chief unit was the Italian Vineyard Co., largest (5,000 acres) vineyard in the world. It was founded by an Italian immigrant named Secunda Guasti and before prohibition did a thriving business in the fortified sweet wines of the port, sherry, muscatel types. After Secunda Guasti died in 1927 the business was run by his regal widow and her son, Secunda II. Secundo Guasti II became President of Fruit Industries, Ltd. Board Chairman was Paul Garrett, who had bought a lot of California vineyards as demand for his Virginia Dare outstripped the capacity of his North Carolina and New York grapes. The largest other unit was the California Wine Association, an organization that before prohibition operated fifty wineries throughout the state and crushed 200,000 tons of grapes annually, onetime operator of the famed Italian Swiss Colony in Sonoma County, whence comes the best dry wine in California. There were several smaller units. Altogether Fruit Industries represented 80 percent of the California wine business.</p>
<p>Fruit Industries people had been in Washington and talked to Mrs. Mabel Walker Willebrandt, who was the Assistant Attorney General in charge of prohibition enforcement and a mighty fine enforcer too. Mrs. Willebrandt gave their trick her legal blessing and became their counsel.</p>
<p>Fruit Industries was set up under the control of the Grape Control Board, a national cooperative to which the Federal Farm Board was empowered to lend money. The Farm Board lent Fruit Industries money -- $3,500,000. Whereupon Fruit Industries put on the market a thing called Vine-Glo. Vine-Glo was a concentrate. Prohibition Director Amos W. W. Woodcock emphasized that Vine-Glo was legal if there was no "intent" to advertise or sell the concentrate as something that would be potentially illegal. Everything went along nicely until Federal Judge Otis in 1931 ruled that concentrate companies incriminated themselves when their agents "serviced" and bottled the concentrates as wines. The case in question was not against Fruit Industries, but Vine-Glo disappeared. The grape growers raised a monstrous cry against the smart Mme Willebrandt and even went to the extent of blaming California's own Herbert Hoover, who had been Secretary of Commerce when the scheme was first hatched.</p>
<p>With its one big market gone, with thousands of gallons of Vine-Glo on its hands, Fruit Industries found itself split between the big units, which managed it, and the small ones, which were becoming mightily mistrustful of that management. The small growers began to drop out. And finally, last August, with repeal in sight, Paul Garrett's company picked up its skirts and returned to the East.</p>
<p>When repeal appeared in the offing California began to make real wine again. And Fruit Industries disposed of all its surplus Vine-Glo by making it into brandy. Mr. Garret realized that his trade name, perhaps the most valuable in the industry, was the property of the combine. Mr. Garrett decided he wanted to go back on his own, was soon made aware of the fact that in entering Fruit Industries he had pooled his properties with the rest and that the only way he could get out was to buy himself out, the price being his wine stocks in California. He forfeited stocks worth millions of dollars; he has the trade name Virginia Dare, but not Virginia Dare Wine Tonic as long as there is any of the tonic left.</p>
<p>Fruit Industries, which at the time of its founding represented 80 percent of the California wine industry, now represents about 30 percent. In it are only the Guastis, the California Wine Association, and two or three small wineries. The Guasti company (which since the death of Secundo II last summer has been headed by James A. Barlotti) has a capacity of some 4,000,000 gallons of wine a year.</p>
<p>Fruit Industries is the only large company in the business and people who ought to know say that it may soon break up. The wine industry, unlike the whiskey industry (FORTUNE, November, 1933), has not been able to organize itself into a big business. Before prohibition there were 750 wineries in California; now there are 240. Here are a few of the companies:</p>
<p>Colonial Grape Products Co., itself a merger (in 1920) of the Colonial Vineyards Co. and the Federspiel Wine Co. It can produce 2,500,000 gallons of wine a year. Colonial's vineyards are in Napa and Sonoma counties, the heart of the dry-wine district, but Colonial's officials have no illusions about the quality of even the best California wines, would much rather sell in bulk than bottle their wine and put a fancy label upon it ... Padre Vineyard Co. (Vai Brothers): capacity, 2,500,000 gallons a year; distinction: third largest winery in California ... California Mission Vintage Co., which has no vineyard, nevertheless rates as one of the state's important wineries. It was bought in 1914 by one G. Guerrieri, who went to California to join the Italian Swiss Colony, was later employed by the elder Guasti. Proudest boast of the wine maker Guerrieri is that he used to make the private wine stock for Secundo Guasti Sr ... Beaulieu Vineyard Co., which, unlike most California wineries, is French-descended. Georges de Latour founded it in 1899, bought 500 acres in Napa Valley. Beaulieu claims to have been the largest purveyor of sacramental wines throughout prohibition. M. de Latour still goes to France to get cuttings of vines. Stocks on hand this year: 1,600,000 gallons ... Italian Swiss Colony, formed in 1881 as a cooperative to aid needy immigrants, now a corporation headed by the Rossi brothers, sons of one of its founders. Capacity: 4,000,000 gallons.</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/03/guasti_vineyard_workers.jpg"><img class="aligncenter size-full wp-image-8777" title="guasti_vineyard_workers" src="http://fortunefeatures.files.wordpress.com/2012/03/guasti_vineyard_workers.jpg" alt="" width="612" height="241" /></a></p>
<p>--</p>
<p>They are the companies, with many smaller ones, that will produce the wine that California will furnish to the U.S. this year. That will be some 90 percent of the total. It will be wine of the middle class because (a) California cannot yet produce fine wine (b), state laws will not permit the selling of wine to the public in bulk, and (c) mediocre wine is what the public wants. California wine authorities seem to agree that what the U.S. most wants just now are strong, fortified wines of the sherry, port, muscatel types. They are no more like the real sherries and ports than crème de menthe is like a mint julep. Nor are the table wines like the wines they pretend to imitate. Most California Riesling, best of the white wines, is watery and just something to drink with your fish. Sauternes, so-called, are sweet enough to wash down an éclair. The red wines, the clarets and the Burgundies and the Chiantis, have neither the authentic flavors of the originals nor the strong, honest quality of the wines we bought last year. Most California wine, in short, is belly wash.</p>
<p>But the imported wines, judging by the quality of what has been sold so far, will have their faults. It takes a good wine to stand a sea trip and the wines that France and Germany have sent to the U.S. since December 5 have had very weak stomachs. California wine can undersell even the most indifferent French and German wines because of its tariff advantage. At its present price of $1.25 a bottle it is selling at 50 percent less than the cheapest Médoc and is just about as good.</p>
<p>Nobody can say accurately what it costs to produce a gallon of American wine, but a few quotations from a Macy advertisement of 1902 will give some hint. Cheapest wine was a claret, retailing at twenty-three cents a quart, sixty-nine cents a gallon. Most expensive was a "Red Star Zinfandel," thirty-three cents a bottle, $1.19 a gallon. Port and sherry sold for eighty-four cents a gallon. These are about one-fifth the present prices for the same wines. If production costs have doubled it is mighty, mighty strange.</p>
<p>And so, no matter how cheaply foreign wine is dumped in this country, California should be able to undersell it. And by underselling it, to get a market for its product during the next five years when demand will far outweigh supply. Perhaps before five years are up the gentlemen from California will have set a more realistic value upon their product. But California has had three or four bad years and nobody should begrudge it its killing. It is the privilege of industry to make a killing once in a while.</p>
<p>If California had been any state but California it might have produced something fine in wines. But California has always done things on a grand scale; it would rather produce the most than the best. The psychology of California, from its Haraszthy on down, has not been the psychology of fine wine makers. For the possibilities of wine as an art, or as a habit, in the U.S. we must go eastward.</p>
<p><strong>Foxes and Lice</strong></p>
<p>Mr. Garrett's dictaphone was not geared to a dream; Mr. Garrett took his text from 300 years of failure. When English colonists went <a href="http://fortunefeatures.files.wordpress.com/2012/03/wine_press.jpg"><img class="alignright size-full wp-image-8774" title="wine_press" src="http://fortunefeatures.files.wordpress.com/2012/03/wine_press.jpg" alt="" width="340" height="311" /></a>bushwhacking in America they found that nothing grew so abundantly as the wild grape. "Oh, ho," thought they. "If the wild one grows so well, what will the tame one do?" The tame one got sick. The wild ones, after centuries, were immune to a certain little pest called <em>Phylloxera vitifoliae</em>, which was neither more nor less than a grape louse. The tame ones got bitten and died. And so the first century of grape culture in America was a series of attempts to transplant the European varieties, all ending in failure, and a persistent neglect of the native grapes, which, being foxy in taste, were considered fit food for the foxes (see Æsop).</p>
<p>Along about the end of the 1700s a man from Switzerland named John Dufour organized the Kentucky Vineyard Society and tried to grow European grapes in Kentucky. He failed, too, but one grape survived the louse, a bastard grape called the Cape. It was because Mr. Dufour didn't know the Cape was an American bastard that he took so much trouble with it. The chief and very important effect of his experiment was to suggest to the American mind that native grapes might be just a little bit better for wine making than the European varieties.</p>
<p>Mr. Nicholas Longworth took the suggestion -- not the late Speaker of the House, but his grandfather, who was even more famed in his day. He got rich at the Cincinnati bar and, by speculating in real estate, paid more real-estate taxes than anybody in the U.S., excepting William Backhouse Astor. The wine business was a hobby with Mr. Longworth, but one he rode steadily from 1825 until his death in 1863. He began cultivating the native Catawba in Ohio, near the confluence of the Little Miami and Ohio rivers. He was able to produce a champagne that could hold its head up in Rheims. He had standing an offer of $500 for a better native grape than the Catawba and nobody ever took it. Along about 1855 he had nearly 300 vineyardists working for him on 1,200 acres of vineyards and was producing 100,000 bottles of his sparkling Catawba a year. It sold for $12 a case. He died two years after the Civil War began, was mourned as "the founder of grape husbandry." His estate was split among several heirs and sparkling Catawba disappeared. Last month the John C. Meier Grape Juice Co. was thinking about reviving it.</p>
<p>In 1852 one E. W. Bull produced the Concord, which was the most prolific and hardiest of all American grapes. Connoisseurs complain that wine made from Concords is unfit to drink. There is room for argument on that point, and at least the Concord made the grape-juice industry. Afterward came various other native varieties, the Delaware, and the Diamond. In the 1850s, too, the New York Finger Lakes region began to develop into the only U.S. wine district that can begin to compete with California in quantity. In quality it is far ahead.</p>
<p>--</p>
<p>The Finger Lakes district is thirty miles long, five miles wide. Its grape, like Longworth's, was the Catawba. But the farmers of the region had been raising grapes for two decades before they thought of using them for wine. It took a German to tell them why they had the best wine-producing region in the U.S.</p>
<p>The German was named John F. Weber and he was working for the Agricultural Division of the U.S. Patent Office, preparing data on grape culture. The Finger Lakes district struck him as almost a duplication of the rolling, sometimes precipitous, hills of the Rhine and the Marne. Intrigued, he studied the climate, analyzed samples of the soil, investigated drainage, found the resemblance to the French champagne region borne out in all. So Mr. Weber wrote up his report and resigned.</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/03/wine_bottles.jpg"><img class="aligncenter size-full wp-image-8776" title="wine_bottles" src="http://fortunefeatures.files.wordpress.com/2012/03/wine_bottles.jpg" alt="" width="612" height="290" /></a></p>
<p>Then he got in touch with a farmer of the region, one Charles D. Champlin. Mr. Champlin was impressed, formed a company, made Mr. Weber his wine maker. That was the Pleasant Valley Wine Co. By 1865 it was making 20,000 gallons of wine a year, most of it still, some of it sparkling. The sparkling wine was not very good, so Wine Maker Weber imported an expert named Joseph Masson. Two years later Pleasant Valley Champagne won a gold medal in the Paris Exposition, By 1870 the company was making 150,000 bottles of champagne a year, had acquired another Masson brother, Jules, who had once worked for Mr. Longworth . And it had a new champagne, Great Western. Great Western won a gold medal in Vienna in 1873 and became the most famous pre-prohibition champagne in the U.S.</p>
<p>--</p>
<p>Prohibition did not treat all grape regions alike. California prospered for a while, but New York had a hard time. That was because the best of the New Yorkers' business (90 percent of the sparkling wines of the U.S.) was in champagne and champagne, being a carefully matured and tended wine, cannot be made by anybody who buys the grapes.</p>
<p>There was another difficulty. The government's list of sacramental wines did not include champagne. "Why not?" asked the champagne makers. The U.S. Government shrugged. "It isn't wine." So the gentlemen of the Urbana Wine Co. (founded in 1865) filed suit against the government to prove that champagne was wine.</p>
<p>In 1927 the suit was called. The government, knowing it was beaten, offered the gentlemen of Urbana a compromise in the form of a special dispensation to sell champagne to the servants of the Lord. The Urbana gentlemen were delighted. For two years they had a rich monopoly. Then Pleasant Valley and other vintners made such a fuss that the government put all champagne on the sacramental wine list.</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/03/wine_cellar.jpg"><img class="alignleft size-full wp-image-8775" title="wine_cellar" src="http://fortunefeatures.files.wordpress.com/2012/03/wine_cellar.jpg" alt="" width="340" height="280" /></a>With repeal, Pleasant Valley, Urbana, and other New York wineries had about 2,000,000 gallons of still wine in storage and about 500,000 quarts of champagne, bottled. But much of it could not be sold because it was not finished: after fermentation, champagne bottles must be twisted, disgorged, recorked, and there was not enough skilled labor to do the work.</p>
<p>But for all the people who have taken up the fad of wine drinking New York offers the hope of a decent wine to drink. Champagne making requires less of a grower's than a blender's skill, and the vintners of the Finger Lakes district have proved that they can practice it.</p>
<p>--</p>
<p>If California furnishes the industry of wine, and New York the art, what about Mr. Garrett's fine dream of wine as a national habit? That utopia is far distant, but if it is to be found at all it will probably be found in those other states where wine making is practiced on a small scale, for home consumption. Along the Atlantic coastline grow the native grapes, the Delaware and the Concord and the Muscadine, the strong foxy grapes at which European palates twitch. Mr. Garrett himself had a vineyard at Charlottesville, Virginia, and a Mr. Bernard P. Chamberlain has found the making of wine there so interesting that he has written a book about it. In the Lake Erie district there are three or four small companies that have survived prohibition and will again produce wine. In St. Louis the American Wine Co. made Cook's Imperial champagne in 1859, is now making it again. At Highland, New York, on the Hudson, there is the Hudson Valley Wine Co. run by the family Bolognesi, which makes good dry red and white wines from native varieties of grapes. Grapes will grow anywhere in the U.S.; it is the best grape-growing country in the world.</p>
<p>And American grapes are the strongest, the only ones that resist the grape louse. France imported some American vines back in the 1860s and they gave <em>Phylloxera</em> to all the French grapes, so the French had to import more U.S. <em>Phylloxera</em>-resistant root stocks and graft their own vines upon them. That is why gouty old connoisseurs insist that French wine has never been any good since 1876.</p>
<p>If the U.S. is to become a wine-drinking country it must become a wine-producing country on a large scale. Otherwise the wine would cost too much. And to become a wine-producing country it must first become a wine-drinking country on a small scale. Which looks like a paradox but isn't. For the germ has been distributed by the propagandists and the country has caught it. The country must now learn to discriminate. Some sections of the U.S. can produce wines with a distinctive American taste; they are pretty good now and they can be better.</p>
<p>It is probably just an affectation to say that good wine must taste like the wine of the Médoc and Burgundy and the Rhine. They are the best wines because of the care and pride of their producers and if they are not produced with care and pride they can be just as bad as anything out of California. If somebody over here would spend a lifetime producing the finest wine he could, he might have something that could hold its head up in the proud company of a Chateau Lafite or a Romanée-Conti.</p>
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		<title>The man who walked away from Goldman Sachs (Fortune, 2010)</title>
		<link>http://features.blogs.fortune.cnn.com/2012/03/18/the-man-who-walked-away-from-goldman-sachs-fortune-2010/</link>
		<comments>http://features.blogs.fortune.cnn.com/2012/03/18/the-man-who-walked-away-from-goldman-sachs-fortune-2010/#comments</comments>
		<pubDate>Sun, 18 Mar 2012 13:30:38 +0000</pubDate>
		<dc:creator>Shelley DuBois, writer-reporter</dc:creator>
				<category><![CDATA[Fortune Classic]]></category>

		<guid isPermaLink="false">http://features.blogs.fortune.cnn.com/?p=8691</guid>
		<description><![CDATA[<p><em>Editor's note: Every Sunday, Fortune publishes a favorite story from our magazine archives. In light of Greg Smith's dramatic resignation from Goldman Sachs this week, this classic looks back, not too long ago, to 2010, when another top Goldman Sachs executive left the firm. Jon Winkelried decided to get off the track to possibly become CEO and  ranch for a spell. Apparently, CEO Lloyd Blankfein was not pleased. </em></p>
<p>Jon Winkelried was on <a href="http://features.blogs.fortune.cnn.com/2012/03/18/the-man-who-walked-away-from-goldman-sachs-fortune-2010/">MORE</a><img alt="" border="0" src="http://stats.wordpress.com/b.gif?host=features.blogs.fortune.cnn.com&#038;blog=916416&#038;post=8691&#038;subd=fortunefeatures&#038;ref=&#038;feed=1" width="1" height="1" />]]></description>
			<content:encoded><![CDATA[<p><em>Editor's note: Every Sunday, Fortune publishes a favorite story <a href="http://features.blogs.fortune.cnn.com/tag/fortune-classic/" target="_blank">from our magazine archives</a>. In light of Greg Smith's dramatic resignation from Goldman Sachs this week, this classic looks back, not too long ago, to 2010, when another top Goldman Sachs executive left the firm. Jon Winkelried decided to get off the track to possibly become CEO and  ranch for a spell. Apparently, CEO Lloyd Blankfein was not pleased. </em></p>
<p><strong>Jon Winkelried was on the fast track to run one of the world's most powerful financial institutions. Then he vanished last winter amid rumors about his personal finances. Here, for the first time, the banker turned rancher explains what happened.</strong></p>
<p>by William D. Cohan</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/03/jon_winkelried.jpg"><img class="alignright size-full wp-image-8709" title="jon_winkelried" src="http://fortunefeatures.files.wordpress.com/2012/03/jon_winkelried.jpg" alt="" width="240" height="320" /></a>(Fortune Magazine) -- When Jon Winkelried first ventured inside Goldman Sachs it was early spring of 1981, and the future co-president of the 141-year-old firm was just finishing up the fourth year of his five-year undergraduate/MBA program at the University of Chicago. He had come to New York City in the hopes of securing a summer internship, but the firm's hallways felt alien to him. While only 20 miles due west of Wall Street, the town of Millburn, N.J., where Winkelried grew up, was a world away. His mother was a schoolteacher, his dad the product of a Jewish, working-class neighborhood in Newark who managed local parking garages.</p>
<p>Winkelried had made his way to Chicago thanks to a full academic scholarship and his athletic promise (he had been a star pitcher and third baseman on his high school team). He had been invited to Goldman's offices that spring day after doing well in the first two rounds of the firm's notoriously exhaustive selection process -- a series of on-campus interviews, followed by a second round of grilling at Goldman's Chicago office. If he made it through the next step -- a third round of eight interviews -- he would be on the first rung of a stairway to vast wealth. Or as his enthusiastic tour guide told him, "If you get a job here and you're successful and you become a partner, you're going to be a millionaire."</p>
<p>Winkelried (pronounced wink-el-reed) wasn't sure the day went so well. After leaving the building, the aspiring banker was picked up by his dad, Irwin, in a Chevy Impala. As the two drove home over the Pulaski Skyway, the son was feeling disappointed, so his father leaned over to comfort him. "Listen, don't worry about it. Don't let anybody ever kick you in the ass."</p>
<p>Twenty-seven years and $500 million or so in personal net worth later, Winkelried would be the one to dole out the anxiety when he walked away from Goldman (<a href="http://money.cnn.com/quote/quote.html?symb=GS&amp;source=story_quote_link">GS</a>, <a href="http://money.cnn.com/magazines/fortune/fortune500/2009/snapshots/10777.html?source=story_f500_link">Fortune 500</a>) not long after being anointed as a potential successor to the current CEO, Lloyd Blankfein. His unlikely departure, in March 2009, and subsequent disappearance from Wall Street at age 49 started a maelstrom of rumors about his and the firm's finances -- a maelstrom that Winkelried left Blankfein to navigate by himself.</p>
<p>Depending upon who was doing the gossiping, Winkelried left the firm for either political, financial, or medical reasons having to do with heart palpitations. Some thought Winkelried had made an unsuccessful power play with Goldman's board -- of which he had been a member since June 2006 -- to oust Blankfein during the financial crisis. Others saw his departure as the result of suffering a personal liquidity crisis. It is difficult to imagine someone who in 2007 was paid close to $71.5 million, in a mixture of cash and stock, suffering from a shortage of the green stuff. But when Goldman announced that it was buying back around 30% of Winkelried's illiquid private equity and hedge fund investments in various Goldman ventures -- for $19.7 million in cash -- that rumor spread like wildfire. "One of its wealthiest employees on paper, Winkelried was nonetheless facing a liquidity crisis last fall and had to be bailed out by Goldman," is the way<em>Financial Times</em> columnist John Gapper described the incident in <em>New York</em>magazine last April.</p>
<p>Thanks to the Wall Street rumor mill, Winkelried's 27 years at the firm were quickly reduced to a Victorian morality tale in which the banker had gotten drunk on margin loans to support an increasingly costly lifestyle that included a beach house and several ranches where he lived out his cowboy fantasies. After all, if he couldn't manage his own finances, how could he be expected to manage Goldman Sachs? So he was kicked off the Goldman gravy train, or so the story went. This version of events was fueled in part by his and his wife's decision to put their estate in the Monomoy neighborhood of Nantucket, Mass. -- dubbed "Money-moy" around the island -- on the market for $55 million, the highest price ever sought for a spread on Nantucket.</p>
<p>Never mind that Goldman had allowed Greg Palm, the firm's general counsel, to cash out $38.3 million for 25% of his illiquid stakes, and that Palm remained at Goldman. This fact was overlooked, as were many others, as the rumors surrounding Winkelried became gospel. Speaking to the press for the first time since he left Goldman nearly a year ago, Winkelried addresses the rumors here and tells Fortune how a combination of burnout, office politics, and panic about his personal finances brought his career at the firm to an end.</p>
<div><strong>The rise of "Winks"</strong></div>
<p>Walking away from Goldman Sachs is a bit like walking away from a cult, albeit a particularly remunerative one. Among the central tenets of the faithful is one first articulated by Gus Levy, a legendary trader who ran the firm from 1969 to 1976. To Levy's way of thinking, Goldman partners should be "greedy, yes, but long-term greedy." He also felt that personal lives were almost expendable. Levy used to say, "The firm doesn't come first, but it has to be second -- a very close second."</p>
<p>The firm puts a big emphasis on being a team player. "You can have a great career in banking as an individual, but it won't be here," is the way one Goldman partner described the ethos. Winkelried, known at the firm by the nickname "Winks," turned out to be a team player. His career at the bank was largely a charmed one, in which he was able to move between the two principal factions -- the traders and the bankers who were each vying for control of the firm during his formative years there.</p>
<p>After graduating from the University of Chicago, he could have gone back to trading equities at Goldman, where he had spent his first summer as an intern. Instead he reapplied to the investment-banking arm of the firm. He was accepted but relegated to working with companies in the utility industry -- an area he considered a "backwater." Nevertheless he kept his eyes open and his mouth shut. He describes his mindset back then: "Be a student of the market. Always try to improve your game. Learn from experience. Learn from doing. Learn from mentorship."</p>
<p>He spent several years helping pipeline companies defend themselves from the hostile incursions of raiders like T. Boone Pickens and Oscar Wyatt. Then, in 1984, he was asked if he wanted to go back to the trading floor as part of an effort -- pioneered by Goldman and Salomon Brothers -- to put investment bankers in newly formed "capital markets" groups on their or the firms' trading desks. The thinking was that having bankers closer to the market action would make them savvier when they advised clients about raising capital. After a few years he was asked to run the bond syndication business. This new position came with a lot of responsibility because the banks were starting to put their own skin in the game.</p>
<p>For instance, if Ford Motor wanted to raise $5 billion in debt from public investors, chances are it would turn to Goldman Sachs to help it raise the money. In the past, Goldman would have lined up buyers for the bonds before committing its capital and would then sell the bonds on a best-efforts basis. Under the new, riskier system Winkelried and bankers like him were committing the firm's own capital to buy the whole debt offering before selling it whenever and however they felt they could maximize profits. "That business is not a business where you make decisions by consensus," Winkelried says, "because at some point, somebody has to decide, 'We're going to pay 42 [basis points] over the 10-year [Treasury] for these bonds. Period.'" In his new capacity Winkelried was often helping the firm's most senior bankers raise money for their clients, so he got to know many of them -- including future CEO Hank Paulson, who would become his rabbi.</p>
<p>Winkelried became a Goldman partner in 1990 at the beginning of a decade that would be one of the firm's most challenging. The Russian crisis, the Long-Term Capital Management crisis, the firm's first failed effort to go public, and the coup that toppled senior partner Jon Corzine and put Paulson at the top of Goldman Sachs all took their toll on the bottom line and morale. In one particularly grim year, 1994, Goldman lost hundreds of millions of dollars betting the wrong way on interest rates and on ill-fated trades. Those losses came out of partners' capital accounts on a pro rata basis (although some partners had gains used to offset the losses). A wave of them left, including the two who ran Goldman's high-yield group. Winkelried was asked to add this business to his portfolio.</p>
<p>By the end of the decade the firm was on surer footing after a successful IPO, and Paulson asked Winkelried to move to London to head up the European end of the firm's huge fixed-income, currency, and commodities business, known as FICC. Back then FICC reported to Lloyd Blankfein and Michael Mortara, a former Salomon Brothers banker. Before packing up his wife and three children in the middle of a school year, Winkelried asked Paulson to guarantee him the top job at FICC if either Blankfein or Mortara moved up. Paulson told him no. He wanted Winkelried to earn the respect of the bankers and traders in those businesses before making any promises. When Mortara was moved to head up Goldman's venture capital business (and shortly thereafter died tragically from an aneurysm), Paulson made Winkelried co-head of global FICC with Blankfein.</p>
<p>Even though Winkelried and Blankfein were ostensibly equals, Winkelried knew back then that Blankfein's ascent would be faster than his own. "Lloyd is a great student of markets," he says. "One of the things that he helped me understand is how sentiment is so powerful in driving markets and driving human behavior." Together they turned around the FICC business -- and put it on a trajectory to become a profit center of the firm.</p>
<p>As Blankfein continued to rise through the ranks, so did Winkelried, and his friendship with Paulson grew too. Winkelried and Paulson bonded on tarpon and bonefishing trips in the Florida Keys and on Andros Island in the Bahamas, and it was Paulson who gave Winkelried the heads-up that he possessed the right stuff to one day run the firm. So when Paulson agreed to become President Bush's Secretary of the Treasury in June 2006 and selected Blankfein to become the new CEO, it was not a surprise to Winkelried that he was named co-chief operating officer and co-president, with Gary Cohn.</p>
<div><strong>The view from the top</strong></div>
<p>Winkelried now found himself in one of those bake-offs that define succession at Goldman Sachs. On the surface Winkelried and Cohn are not that different. Both are hard-charging, follically challenged alpha males. But Cohn, who grew up in Shaker Heights, Ohio, and graduated from American University, is a pure trader. He made his bones on the silver desk at J. Aron, the same shop where Blankfein was a gold trader. (Goldman acquired J. Aron in 1981.) Fittingly, when Blankfein divided up lines of business between his two deputies, Cohn was put in charge of trading and asset management. Winkelried was assigned investment banking and merchant banking. The two men worked well together, but they are not friends, according to former colleagues.</p>
<p>Within a year Cohn was pulling ahead of Winkelried. The FICC business was generating the bulk of the firm's profits, and Cohn was close to Blankfein personally. Both Cohn and Blankfein lived in Manhattan and had weekend homes near each other in Sagaponack, in the Hamptons. Their families vacationed together.</p>
<p>As his prospects to become CEO dimmed and burnout set in, Winkelried mentioned to his wife of 24 years, Abby Lipsey, a preschool teacher, that he was thinking of leaving the firm. It was a Friday night in January 2008, and he had just returned home after a long business trip to Asia. Bone tired, he had dinner with her and announced, "I'm just not sure how much longer I really want to do this."</p>
<p>By the summer of 2008 he knew he wanted to spend more time on ranching than banking. The question of how a suburban kid from New Jersey became a cowboy is one that Winkelried gets all the time. The short answer is that the family used to ski in Telluride, Colo., among other resorts, but grew tired of the crowds and the glitz. Winkelried's love of fishing took him deeper and deeper into the backwoods of a number of Western states. After a four-year search for the perfect ranch, he and his family purchased adjacent ones in Meeker, Colo.: the Marvine and the Pot Hole, where Winkelried quickly learned to be a near-professional-level "cutter," a sport in which horseback riders separate one calf from the cattle herd.</p>
<p>The Winkelrieds have three children: Matt, a sophomore in college; Jen, a senior; and Jane, a high school senior. In Colorado, starting at age 14, Matt learned to be a roper, which is a rodeo event in which two riders work together to lasso a calf in the open ring.</p>
<p>Being a gentleman rancher did not come cheap. In 2003, Winkelried started building a facility to raise, train, and ride horses at the Pot Hole Ranch. In 2005 he spent $460,000 on a stallion named "I Sho Spensive." He also owned cutting champions Quintan Blue and Copaspepto. He built Red Oak Ranch in Aledo, Texas, to breed and raise cutting horses. (All of his ranches go by the name Marvine Ranch these days.)</p>
<p>Unlike other firms where many bankers hang in long after they have lost the fire in the belly, there is an adage at Goldman: When you no longer have the passion to be here, make room for others. Winkelried had reached that point. "I was about to turn 50," he says. "I was running around all over the place. This whole notion of 'Was I in the slipstream to become the CEO?' -- I imagine I was one of two candidates, and I don't know whether or not I would have gotten it. But here's the important thing: It was no longer important to me. It just wasn't ... It changed for me somewhere. I don't know where."</p>
<div><strong>Ain't but one way out</strong></div>
<p>The first time that Winkelried approached Blankfein about leaving Goldman Sachs was during the summer of 2008. Bear Stearns had collapsed into the arms of J.P. Morgan Chase (<a href="http://money.cnn.com/quote/quote.html?symb=JPM&amp;source=story_quote_link">JPM</a>, <a href="http://money.cnn.com/magazines/fortune/fortune500/2009/snapshots/2608.html?source=story_f500_link">Fortune 500</a>) three months earlier, and there was a calm before the storm in the capital markets. He didn't come right out and say he wanted to leave, only that he was wondering aloud how much longer he could stay. Blankfein told him there was "lots of stuff going on" and that he should just keep his "head down and keep driving." Obviously Winkelried's departure would make Blankfein's life more difficult. Winkelried went back to work.</p>
<p>By the infamous weekend of Sept. 13-14, when Lehman Brothers, Merrill Lynch, and AIG (<a href="http://money.cnn.com/quote/quote.html?symb=AIG&amp;source=story_quote_link">AIG</a>, <a href="http://money.cnn.com/magazines/fortune/fortune500/2009/snapshots/2469.html?source=story_f500_link">Fortune 500</a>) all were teetering on the verge of collapse, Winkelried knew that leaving was not an option. His biggest contribution during the crisis came from working with his partner Byron Trott to get Warren Buffett to agree to a $5 billion convertible preferred investment in Goldman on Sept. 24. (Trott was Winkelried's fraternity brother and baseball teammate at the University of Chicago, and by far Buffett's favorite Wall Street banker.) As part of the Buffett deal, however, Goldman's top four partners would be unable to sell significant amounts of their shares for three years.</p>
<p>Thanks to Buffett and an additional $5 billion raised in the public markets, Goldman was still standing in the wake of Lehman Brothers' filing for bankruptcy. But Winkelried was in a state of panic about his own finances. The majority of his net worth was tied up in illiquid assets: Goldman stock, Goldman private equity and hedge fund investments, three ranches, a beach house in Nantucket, and a primary residence in Short Hills, N.J. Sure, he had some Treasuries and municipal bonds, but he had the majority of his savings in Goldman stock -- roughly 2.8 million shares, second only to Blankfein among the firm's brass and nearly 800,000 shares more than his rival Cohn. If Goldman's stock went to zero as Lehman Brothers' had -- or dropped to $6.71 per share as Morgan Stanley did that fall -- then Winkelried's decades of hard work would be vaporized in the blip of a Bloomberg screen. "I didn't know what was going to happen, and nobody else knew," he says of his state of mind at the time. His options to get liquidity were limited: There was a little-known proviso in the Buffett deal that allowed the top Goldman execs to sell up to 10% of their stock at any time. For Winkelried that would have been 280,000 shares at around $50 per share for a cool $14 million, but the firm did not want him to sell because an officer unloading stock could have spooked the market. "So I decided to go to the firm and say, 'I'd like to sell back my interest in some of these [hedge and private equity] funds [instead],'" says Winkelried.</p>
<p>In late September the firm agreed to buy back a portion of his illiquid fund investments for the fire-sale price of $19.7 million, around a 5% discount to their already heavily discounted mark-to-market value. Winkelried paid a steep price for this cash in the middle of the crisis. (It is difficult to say what those stakes would be worth in today's calmer markets, but his Goldman stock has more than tripled and is worth a little under $500 million.)</p>
<p>Even after this personal bailout Blankfein urged Winkelried not to resign when Winkelried brought up leaving at his annual review in December. Over the holidays, at their ranch in Colorado, Winkelried and his wife reached the decision that as soon as he "was comfortable" that the firm was "on sound footing in terms of the future," he would retire. That moment came on Feb. 12, 2009. "What was clear to me was that Goldman was probably going to be net-net a beneficiary of what happened," he says.</p>
<p>Winkelried went to talk to Blankfein one final time and told him he intended to leave at the end of the first quarter. Blankfein was not pleased. This seemed like a selfish act -- leaving the firm during a moment when it was becoming a lightning rod for populist rage over its role in the financial crisis -- but Winkelried did not see himself as disloyal. He felt he had paid his dues for 27 years, stayed through the worst of the crisis, and now wanted to figure out his next act. There was some discussion between the two men about the wisdom of the timing of the decision and whether Winkelried truly wanted to proceed down this path. "He didn't want me to leave," Winkelried says of Blankfein. "He felt it was going to place more of a burden on him."</p>
<p>Blankfein declined to comment for this story, but a Goldman spokesman confirmed that the above account is accurate. "Winkelried certainly wasn't pushed," says Lucas Van Praag, Goldman's global head of corporate communications. "[He was] increasingly disenchanted" and didn't love the "enormous pressures" of the top job. As for Winkelried's financial pressures, Van Praag added that his ranch was a "big business that employs a lot of people. Winkelried was very focused on that. The business had no debt, but there were big cash-flow demands, and he had no liquidity."</p>
<p>According to Winkelried, there was no shouting during the meeting in which he resigned, but another Goldman partner told Fortune that the bailout of Winkelried and his subsequent decision to leave caused Blankfein a great degree of angst. "It really pissed Lloyd off because the buyout happened in the midst of a complete disaster and he had to spend three weeks explaining this every day, and it's hugely embarrassing that he's got to bail these guys out." Added another partner, "You really want to get Lloyd going? Ask him about Winks' departure."</p>
<p>So how will that departure be remembered at the firm? A former partner and friend of both Winkelried and Blankfein answers the question this way: "I can relate to his decision of wanting to do something else, but I don't like how he did it or when he did it. If he had asked me for advice, I would have told him wait another year. A year's nothing."</p>
<p>Since leaving the firm, Winkelried has continued to study the markets every morning, and he reads research to keep up. He has fielded a few calls, mostly from friends, about the possibility of getting back into the money game. But his heart really isn't in it. "My next chapter, whatever it is, has to be something different," he says. He dreams about succeeding Bud Selig as commissioner of Major League Baseball, being Secretary of the Interior, head of the U.S. Forest Service, or the head of the U.S. Fish and Wildlife Department. (Unfortunately Winkelried has few, if any, of the political connections enjoyed by other Goldman honchos.)</p>
<p>He's been living the cliché about spending more time with his kids. In September his daughter Jen called and told him she was moving into a new apartment, which was in poor condition. He drove to upstate New York and spent three days repainting her whole apartment. "I like doing that kind of stuff," he says. "It reminds me of the kinds of chores I used to do with my father."</p>
<p>One thing is clear about Winkelried: He likes being able to pursue his passions without having to worry that he should be focused instead on a client or on the insatiable demands of the firm. "When you're the president and co-chief operating officer -- or in particular if you're the CEO -- you are 24/7," he explains of the all-encompassing demands of running a firm like Goldman Sachs -- demands he does not miss. "In the executive office of Goldman we had something called 'executive office whereabouts.' They know where you are every minute. They should know where you are every minute. They need to be able to get you if something happens." But these days one of those masters of the universe is unaccounted for. Winkelried is now free to roam about the country.  <a href="http://money.cnn.com/2010/01/25/news/companies/goldman_sachs_winkelried.fortune/index.htm#TOP"><img src="http://i.cdn.turner.com/money/images/bug.gif" alt="To top of page" width="7" height="7" border="0" /></a></p>
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		<title>Why Chief Executives' Pay Keeps Rising (Fortune, 1985)</title>
		<link>http://features.blogs.fortune.cnn.com/2012/03/11/why-chief-executives-pay-keeps-rising-fortune-1985-2/</link>
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		<pubDate>Sun, 11 Mar 2012 14:30:39 +0000</pubDate>
		<dc:creator>Shelley DuBois, writer-reporter</dc:creator>
				<category><![CDATA[Fortune Classic]]></category>

		<guid isPermaLink="false">http://features.blogs.fortune.cnn.com/?p=8656</guid>
		<description><![CDATA[<p><em>Editor's note: Every Sunday, Fortune publishes a favorite story from our magazine archives. These days, CEO salaries make headlines and generally stir up resentment because they're so huge. Even those who accept low official salaries, such as Chrysler's CEO Sergio Marchionne who had a $1 salary for 2011, are quite comfortably compensated in other ways, for example, equity. This week, we look back to 1985, when FORTUNE called out how the <a href="http://features.blogs.fortune.cnn.com/2012/03/11/why-chief-executives-pay-keeps-rising-fortune-1985-2/">MORE</a><img alt="" border="0" src="http://stats.wordpress.com/b.gif?host=features.blogs.fortune.cnn.com&#038;blog=916416&#038;post=8656&#038;subd=fortunefeatures&#038;ref=&#038;feed=1" width="1" height="1" />]]></description>
			<content:encoded><![CDATA[<p><em>Editor's note: Every Sunday, Fortune publishes a favorite story <a href="http://features.blogs.fortune.cnn.com/tag/fortune-classic/" target="_blank">from our magazine archives</a>. These days, CEO salaries make headlines and generally stir up resentment because they're so huge. Even those who accept low official salaries, such as Chrysler's CEO Sergio Marchionne who had a $1 salary for 2011, are quite comfortably compensated in other ways, for example, equity. This week, we look back to 1985, when FORTUNE called out how the paychecks of CEOs were getting much fatter much faster than those of other employees. Writer Monci Jo Williams explains some of the origins of the trend. </em></p>
<p><strong>By trying to keep up with the Joneses, companies are hiking the boss's compensation at a rapid pace. The independent directors on the compensation committee aren't so independent, it turns out. And yes, the urge to please the C.E.O. plays a role.</strong></p>
<p>by Monci Jo Williams</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/03/jack_macallister_us_west.jpg"><img class="alignright size-full wp-image-8657" title="jack_macallister_us_west" src="http://fortunefeatures.files.wordpress.com/2012/03/jack_macallister_us_west.jpg" alt="" width="340" height="240" /></a>The compensation paid to America's chief executives keeps increasing at a handsome rate. The phenomenon is a puzzler because pay inflation is slowing dramatically in the lower ranks (see chart). Why is the boss's pay exempt from the general trend? The reasons turn out to be considerably more complicated than mere managerial greed--though that is indeed a problem at some companies. At the heart of the phenomenon is the use, or abuse, of salary surveys--studies of how much other companies are paying. The studies were supposed to provide a coherent statistical framework for what might otherwise be a highly subjective exercise. What the surveys have provided instead is a set of averages that most companies get an understandable itch to exceed. Who, after all, wants to be considered merely average? So the averages, and the chief executive's pay, keep ratcheting upward year by year.</p>
<p>The trend lines on those charts don't necessarily demonstrate that chief executives as a group are overpaid. In this unique job, the "right" salary--one that will encourage superior performance from which the company's shareholders will benefit--is probably unknowable. For that matter, not every chief executive fits the trend and gets a raise--and some get fired.</p>
<p>But the boss's raise--revealed in a proxy statement prior to that spring rite, the annual meeting--has been attracting extensive media coverage, most of it critical. As this has happened, the entire subject of executive pay has become so controversial that many companies, and many directors, were unwilling to discuss with FORTUNE how they determine executive compensation. Still others agreed to be interviewed, but only if their remarks were not attributed to them by name. As one corporate personnel executive explained it, "I'm very close to retirement, and I'd like to retire in peace." The people who will talk for attribution are mostly the consultants whose survey data seem to have put their corporate clients on a smooth upward escalator.</p>
<p><span id="more-8656"></span></p>
<p>From conversations with the players, it's clear that most of American big business believes in a fairly standard model of how the chief executive's pay is supposed to be determined. The process begins in the corporate personnel department, where the vice president in charge, or his deputy, assembles salary surveys put together by compensation consulting firms and others as a guide to the raises and incentive pay awards other companies are offering. The vice president looks at what the market is paying and at his own company's financial performance, then makes a recommendation to the compensation committee of the board of directors on what pay levels might be reasonable. But the personnel executive's ultimate boss is the chief executive, and that relationship might be thought to sway his opinion. So at most companies a consultant weighs in with a second opinion--based on his own collection of survey data--just to ensure that directors will get all the facts.</p>
<p>The surveys themselves are tributes to that old American fondness for sampling and statistics. Consultants survey companies continually through the year, collecting data on past and projected pay levels and increases in salary, bonuses, and long-term incentive pay. They then spew out an endless variety of surveys. One of the largest data banks belongs to the New York consulting firm of Towers Perrin Forster &amp; Crosby: it puts out surveys on salaries, bonuses, long-term incentives, benefits, and perquisites, based on information from some 800 mostly industrial companies. Hewitt Associates, another consulting firm, offers a survey called Total Compensation Measurement, which covers the same types of compensation for about 300 industrial and financial service companies. Hewitt used to publish data about salaries and bonuses alone, but in the competitive quest to provide bigger and better surveys, has added information about perquisites, benefits, and long-term incentives as well. A few companies have even gone into the survey business for themselves. One consultant reports that a client compiled its own "Survey of Other High-Paying Companies."</p>
<p>By the time a couple of sets of such documents are unloaded on it, the compensation committee is inundated with what one director says is "about six tons of data, certainly enough to make a decision." The committee's recommendation goes to the full board for still more discussion, and finally a vote. The chief executive is informed of the results only after his pay package has been approved by the full board.</p>
<p>The trouble is, the decision is almost never really made this way. In practice, contrary to the basic tenets of the model procedure, the chief executive often has his hand in the pay-setting process almost from the first step. He generally approves, or at least knows about, the recommendation of his personnel executive <em>before</em> it goes to the compensation committee, and may take a similar pregame pass at the consultant's recommendation too.</p>
<p>Personnel executives and consultants say they have only rarely been pressured to change their recommendations to suit a chief executive. But the urge to please, though more subtle, can work to shape their proposals. Both, after all, rely upon the good graces of the chief executive for their livelihood. The consultant in particular--who is typically hired by management--would like to be invited back for a return engagement.</p>
<p>The board's compensation committee doesn't operate independently of the chief executive either--although it is usually composed of outside directors with the aim that it will: At a very few companies--Pacific Telesis is one--the chief executive is actually a member of the compensation committee. But at most other companies he just sits in on the committee meetings at the committee's invitation. When the boss's compensation is about to be discussed, the directors ask him to leave the room, but the committee's decision rarely comes as a big surprise--and if properly done, perhaps shouldn't.</p>
<p>Why do directors put up with this state of affairs so readily? Howard Waner, a retired manager of executive compensation at Exxon, says that directors are simply afraid to stand up to the chief executive. Graef S. Crystal, a vice president and compensation consultant with Towers Perrin, believes that directors feel compelled to please the C.E.O. because they regard him as EI Supremo on his own turf. Edward Delahanty, a partner with Hewitt Associates, points out that most directors are chief executives of their own companies. He believes that members of the compensation committee simply do unto the chief executive as they want their compensation committee to do unto them.</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/03/graef_crystal_towers_perrin.jpg"><img class="alignleft size-full wp-image-8658" title="graef_crystal_towers_perrin" src="http://fortunefeatures.files.wordpress.com/2012/03/graef_crystal_towers_perrin.jpg" alt="" width="340" height="241" /></a>For such reasons, directors don't need to be pushed around by the chief executives&mdash;they can usually find a few good reasons to raise his pay on their own. Consultants help in various ways. A few, such as Crystal and Louis J. Brindisi Jr. of Booz Allen &amp; Hamilton, say they believe it is their job to advise the C.E.O. and the compensation committee how much pay is too much, and which long-term performance plans best measure and reward executive excellence. What does Brindisi do when faced with a client that he thinks is paying its top executives too much? "We up the performance goals and integrate them into the bonus system and the incentive plan," he says. That way, the executives have to prove they're worth the high pay. Other consultants don't try to tell directors what's best for the company and the shareholders. Says Michael Guthman, manager for compensation consulting in Hewitt's eastern region, "We view ourselves as providers of information. We interview the board to find out their compensation philosophy and present them with alternatives in keeping with their goals."</p>
<p>With surveys in hand and the C.E.O. looking over their shoulders, directors come up with a number of justifications for higher pay, many perfectly rational. Take a company whose performance is well above the average and whose compensation committee has adopted a policy of paying above the market rate. The committee gets its recommendations from the personnel director and the compensation consultant, each buttressed by plenty of data from several surveys. The committee members look at what competitors are paying their top executives, and at how well the company has done, and conclude that their policy of paying much more than the average is justified.</p>
<p>Across the street sits an average-paying company, whose performance is also just middling. The directors may look at the survey data, look at the company's performance, and conclude that pay increases are not warranted. "But hold on," one director argues. "We're a quality company, and average isn't good enough for us. We want to make a long-term investment in our people, hold the good ones, and be able to attract the best. We have to start paying more."</p>
<p>A similar kind of logic may prevail at the company down the road that pays at the low end of the scale and whose performance is poor. The survey data come in, the directors look at the lousy performance, and pretty soon someone has suggested, rightly or wrongly, that part of the problem is paltry pay. "We aren't competitive," the argument goes. "We need to pay more, or we'll lose the good people we have and our performance will suffer more."</p>
<p>By the time the following year's survey comes out, the market average has moved up. Even the low-paying company must pay more to try to avoid being at the bottom of the heap. It helps push everybody else's pay scales upward too.</p>
<p>These annual exercises have had their inflationary effects not just on salary but also on the size of bonuses and long-term incentive awards. These days directors usually construct the chief executive's pay package so that bonuses and long-term incentives account for at least as much as his base salary. The idea is to tie the bulk of the executive's pay to the performance of the company, and thus to make him attentive to the shareholders' interests. But many directors now view bonus awards and incentive payments as part of the total market price they need to pay to stay competitive. So when they raise part of the pay package, they have to adjust the other components to keep the proportion of base and incentive pay constant.</p>
<p>If the incentive plan is a sound one, with demanding performance goals, the shareholders' interests will be served. Some of the best plans tie the payout to return on shareholders' equity, a measure that over the long run acts as a powerful determinant of the stock price. But at too many companies, says Delahanty of Hewitt Associates, executives have come to view the payoff from incentive plans as "entitlements." Indeed, when consultants are called in to overhaul compensation plans, it is often because the plans don't pay out enough money. "Executives and directors know they must make some cosmetic effort to reward for performance," says Delahanty. "But they want to make sure that plans are put in place so they will pay well."</p>
<p>One way to do that is to structure plans so they require executives to do a minimum of stretching before the plans start to pay out. Most companies tie incentive plans to such measures as earnings per share-one of the easiest targets for management to manage. They avoid tough ones like total return to shareholders--dividends plus stock price appreciation. Many argue that this yardstick is too subject to the vagaries of the stock market.</p>
<p>Or a company can leave performance requirements entirely to the discretion of the board. Earlier this year the shareholders of Walt Disney Productions approved a stock incentive plan that allows the compensation committee to award stock, options, and stock appreciation rights. As to performance measures against which to gauge the Disney executives' mettle, the proxy informed shareholders that "the committee may, but need not" establish them.</p>
<p>That's not to say that Disney's new president, Michael D. Eisner, doesn't have goals to meet. In fact, he had such goals written into his employment contract. For starters, Eisner got a yearly salary of $750,000 and a $750,000 one-time bonus to compensate him for the benefits he lost when he quit as head of Paramount Pictures. His contract also grants him the option to buy 510,000 shares of Disney stock at the market price of $57.44. The stock was recently trading at over $77. The contract also stipulates that Disney pay him "an annual bonus equal to 2% of the amount ... by which the company's net income for the fiscal year exceeds a 9% return on stockholders' equity."</p>
<p>Many analysts laud the plan because it encourages Eisner to increase a measure usually critical to stock price: the more he improves return on equity, the more money he will pull down. Dave Londoner, a security analyst at Wertheim &amp; Co., suggests, however, that coming up to the 9% benchmark is the equivalent of achieving "a C-plus average at a good college." Disney's return on equity may have been 8.5% in fiscal 1984, but it averaged more than 10% over the previous eight years. Security analysts say Eisner will meet his mark easily in fiscal 1985.</p>
<p>Some executives seem to wonder what all the fuss is about. When asked about his 1983 compensation of $1.1 million, GM's Roger Smith reportedly replied: "Do people say, 'I'm not going to listen to Michael Jackson now because he made $20 million'?" Such comparisons don't cut much mustard with people outside the executive suite. Several compensation experts believe that by failing to address the issue of executive pay levels, corporate America invites continued criticism and government meddling. Congress has already slapped a penalty tax on some of the income executives get from golden parachutes--they pay out if the recipient's company is taken over. As part of its tax proposal, the Treasury Department has also taken aim at the tax breaks on incentive stock options.</p>
<p>At least one chief executive has taken it on himself to hold directors accountable for the shareholders' interests in setting managerial compensation. He is Jack MacAllister, a former chief of Northwestern Bell who inherited the newly created U.S. West regional telephone company after the AT&amp;T breakup. Faced with the task of creating an entirely new compensation plan for an entirely new company, MacAllister decided to place the matter in the directors' hands, and to leave it there. "My experience at AT&amp;T convinced me that the usual process for setting pay puts management in control of the database, and that doesn't give directors much lever-age in dealing with management or in representing the shareholders' interests," MacAllister says. He did let his compensation committee know he favored a salary level for U.S. West somewhere between that of utilities and more competitive companies. He also wanted an incentive plan that would tie bonuses and stock grants to how well the shareholders fared with the company's stock. But he refused to discuss the subject further with directors, consultants, or the head of his personnel department.</p>
<p>The committee collected its own information and selected its own consultants, firing one because it was dissatisfied with an off-the-shelf solution to the problems of the new company. When Ed Delahanty, the consultant who was brought in to complete the job, made his recommendations, the committee thanked him for his efforts, saying they would figure out what to do from there. Delahanty says it was the first time in his 15-year career that a compensation committee did not adopt his recommendations wholesale.</p>
<p>What the committee ended up with was a performance plan that tied compensation directly to the shareholders' interests. To be paid a bonus, MacAllister and the 67 other top executives at U.S. West and its subsidiaries must meet a combination of targets for net income, growth in earnings per share, and return on shareholders' equity. In 1984 MacAllister was paid $380,000 in base salary and a bonus of $219,500. U.S. West's long-term incentive plan calls for comparing, over three years, the company's total return to shareholders with the return of companies in two different groups, the first a group of other regional telephone companies, the second a collection of corporate paragons such as GE, IBM, and 3M.</p>
<p>The idea--that a company's executives will be paid well only when its shareholders gain--is right. If more C.E.O.s championed it as MacAllister did at U.S. West, or more compensation committees came to feel they had a responsibility to insist on it, executives might take a lot less flak when their raises are announced every spring.</p>
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		<title>George Romney: Businessman in a Political Jungle (Fortune, 1964)</title>
		<link>http://features.blogs.fortune.cnn.com/2012/03/04/businessman-in-a-political-jungle-fortune-1964/</link>
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		<pubDate>Sun, 04 Mar 2012 14:00:00 +0000</pubDate>
		<dc:creator>Sierra Jiminez</dc:creator>
				<category><![CDATA[Fortune Classic]]></category>

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		<description><![CDATA[<p><em>Editor's note: Every Sunday, Fortune publishes a favorite story from our magazine archives. This week we turn to a story from 1964, which takes a look at the political journey of the late George Romney, father of Mitt Romney, who's seeking the GOP nomination for the 2012 U.S. presidential race. Similar to his father, Mitt Romney was known for his business acumen before jumping into politics. George Romney might have lost <a href="http://features.blogs.fortune.cnn.com/2012/03/04/businessman-in-a-political-jungle-fortune-1964/">MORE</a><img alt="" border="0" src="http://stats.wordpress.com/b.gif?host=features.blogs.fortune.cnn.com&#038;blog=916416&#038;post=8611&#038;subd=fortunefeatures&#038;ref=&#038;feed=1" width="1" height="1" />]]></description>
			<content:encoded><![CDATA[<p><em>Editor's note: Every Sunday, Fortune publishes a favorite story <a href="http://features.blogs.fortune.cnn.com/tag/fortune-classic/" target="_blank">from our magazine archives</a>. This week we turn to a story from 1964, which takes a look at the political journey of the late George Romney, father of Mitt Romney, who's seeking the GOP nomination for the 2012 U.S. presidential race. Similar to his father, Mitt Romney was known for his business acumen before jumping into politics. George Romney might have lost the 1964 GOP presidential nomination, but he nevertheless went on to become a popular Michigan politico. As the pivotal Super Tuesday approaches this week, might Mitt Romney pick up any pointers from dad? </em><em></em></p>
<p><strong>George Romney may have lost his way in the quest for the Republican nomination for President in 1964. But he can still be re-elected governor-if he can handle attacks from labor, some businessmen, Democrats, and some Republicans.</strong></p>
<p>by Harold B. Meyers</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/03/george_romney_1964.jpg"><img class="alignright size-medium wp-image-8612" title="george_romney_1964" src="http://fortunefeatures.files.wordpress.com/2012/03/george_romney_1964.jpg?w=300&h=225" alt="" width="300" height="225" /></a>A chill January wind blustered snow around the Michigan capitol's slender white dome at Lansing. In the cavernous House chamber within, below partially filled public galleries, Republican Governor George Wilcken Romney, fifty-six, addressed the Republican-controlled state legislature. On the dais behind him the Lieutenant Governor--astute, globular Democrat T. John Lesinski&mdash;sprawled in a chair marked "Speaker" and yawned widely and often. T. John had opened the joint session as presiding officer of the Senate, but his demeanor assured all who viewed him that his interest in the proceedings was irretrievably fled. On the floor of the House a few representatives and senators followed the text as the Governor spoke. Others read newspapers, worked on their mail, trimmed their nails, or leaned together in earnest conference. Only the Governor's vivacious wife, Lenore, seemed raptly attentive; she lent a kind of body English to his words by nodding at important passages. Meager applause came three times, twice from Detroit Democrats saluting welfare proposals helpful to their constituents. Small wonder that Romney, his silvered temples glistening in the spotlights, skipped his usual oratorical flourishes and droned with increasing rapidity through his report on "the state of the state."</p>
<p>After one year as governor, Romney was able to report that the state of the state was remarkably good. "During 1963," he proudly declared, "Michigan did more to put its house in order and prepare for the future than in any [other] single year in this century." A new state constitution was adopted, replacing an antiquated document that had been tortured out of shape by a century's piecemeal amendments. Congressional districts were reapportioned to end a bitter wrangle of many years' duration. Unemployment-compensation laws were tightened and benefits increased. Best of all, Michigan's economy, spurred by the national appetite for new automobiles, reached an all-time high, new business investment was rising, and unemployment was at its lowest level in eight years. Tax receipts increased so steeply that the $85-million deficit Romney inherited from his Democratic predecessor had turned into a surplus that should reach $38 million or more by the end of the current fiscal year. This treasury overflow, in turn, made it possible for Romney to offer proposals for Michigan's further betterment that would require a $622-million general-fund budget in fiscal 1965, highest in the state's history, but no new taxes. "It will be a tight budget," the Governor promised, and the state would "spend less than we will have available."</p>
<p>But the indifference of the legislators to George Romney's good news about the restoration of Michigan's fiscal and economic well-being was a measure of the recent decline in his political stature. Another measure is the fading of Romney-for-President talk. This talk had budded while Romney was still St. George of the Compacts leading an assault, as president and chairman of American Motors, against "gas-guzzling dinosaurs" in the nation's garages. It had reached full flower when Romney defeated a handsome young war-hero incumbent, John B. Swainson, to give Michigan its first Republican governor in fourteen years. Now such talk is little ,more than a mumble. Romney, who never openly acknowledged any presidential aspirations in the first place, has become one of the darkest of the dark horses in the Republican party's overcrowded stable. There is nothing overt that he can do to revive national interest; even the mild admission that "like any red-blooded American" he would accept a draft sent his most ardent Michigan supporters into such an uproar that Romney, with realism as evident as his good health, reassured them: "I'm more likely to die before November than I am to be drafted for the presidential nomination." He has philosophically turned to a more reachable goal-election to another two-year term as governor of Michigan.</p>
<p><strong>He can regulate the hairdressers</strong></p>
<p>But a nominee or not, George Romney will seek to influence the course of the Republican party in this election year by speaking out on national issues. He can hope to make his influence felt because he is governor of a major industrial state with twenty-one electoral votes, and because he is George Romney, a unique figure on the U.S. political scene. By turning to public service, Romney is living the ambition of more than one energetic American businessman who has reached the top and made a comfortable fortune at a relatively early age. For Romney--able, earnest, well meaning though he is--the experience has had a sometimes nightmare quality.</p>
<p>Michigan seems on the surface the ideal state for business leadership; it is, after all, the center of one of the nation's biggest industries. But the onetime head of American Motors has had to face hostility on all sides--from labor, which in Michigan is often indistinguishable from the Democratic party; and from important parts of the business community, which has never felt entirely comfortable with him. Sustained by his Mormon faith, Romney has borne frustration cheerfully for the most part, although his occasional displays of temper please his enemies. There are indications that he is becoming more at home in the political jungles of Michigan. Serious problems lie ahead, however, including the possibility of a United Auto Workers strike. A long work stoppage in the auto industry could seriously hurt the entire national economy. Romney would find himself in the middle of a crisis--but, as in so many other situations in which he has been trapped, with powers to act severely limited.</p>
<p>"Being governor of Michigan," the ex-businessman says, "is like being the quarterback of a team chosen by your opponents." Michigan's new constitution will remove or reduce many of the handicaps under which Romney and previous governors have suffered, but it has not yet taken full effect and the state's government will remain sadly diffused for some time to come. The Governor is far from having a corporation president's clear-cut powers. He has had to work with a legislature dominated, through gross malapportionment, by diehard conservatives from sparsely populated rural areas "out state." Even within the executive branch the Governor's power has been limited and divided. Seven elective officials have shared administrative duties with him. None of them is responsible to him--and all of them are Democrats. Much of the state government's business has been conducted through 120 independent boards, commissions, and agencies run by functionaries whose appointive terms in most cases are longer than the Governor's. Romney has obtained control of only a handful of these bodies, including the Board of Cosmetology, which regulates hairdressers.</p>
<p>It would tax the powers of a consummate politician to govern effectively under such conditions. G. Mennen "Soapy" Williams, smart as he was, served six terms and still wound up with a deadlock. George Romney has accomplished much for Michigan though he was ill prepared by temperament and experience for the rough-and-tumble realities of political life. As a businessman he was used to putting all his cards on the table, and he had come to expect the same open dealing from those he faced. As the highly effective leader of nonpartisan civic movements, Romney associated with fellow citizens who shared his single-minded devotion to the public weal. But as governor he finds himself dependent on politicians, Republicans and Democrats alike, who are naturally concerned with their own political fortunes.</p>
<p>The worst blow he has taken was the failure of his fiscal-reform program last November. For years Michigan has operated with a patched-up, blowout-prone tax structure, which discouraged business expansion while sometimes leaving the state in near bankruptcy. Governors Williams and Swainson both proposed basic overhauls of the fiscal setup; the Republican legislators balked their plans for a state income tax time after time. Romney, too, campaigned on a promise of fiscal reform. For him, as for his Democratic predecessors, "reform" meant an income tax, but one based on a flat rate "like tithing;" and chances for getting it passed looked better than ever before. As a Republican governor working with a Republican majority in the legislature, Romney got G.O.P. votes that Swainson and Williams had never received. But the Democrats callously deserted "reform" to join with conservative Republicans in killing Romney's proposals.</p>
<p><strong>A steppingstone to higher office</strong></p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/03/t_john_lesinski.jpg"><img class="alignleft size-medium wp-image-8613" title="t_john_lesinski" src="http://fortunefeatures.files.wordpress.com/2012/03/t_john_lesinski.jpg?w=186&h=300" alt="" width="186" height="300" /></a>George Romney remains an attractive human being, and a formidable political campaigner. He won only a narrow victory in 1962, his first time out, but a recent Detroit <em>News</em> poll showed him leading his most likely Democratic opponent, able Congressman Neil Staebler, by a commanding three-to-two margin. Square-jawed, cool-eyed, ruggedly handsome, Romney has the physical presence to dominate any group. His voice is deep and resonant, his manner friendly but reserved. He comes across on the television screen as a forceful performer and he delights in the lapel-grabbing, hand-pumping rigors of personal campaigning.</p>
<p>His is a model family life. He and Lenore have two sons, two married daughters, and six grandchildren, and each Sunday as many of them as can make it gather at the $150,000 Romney home in suburban Bloomfield Hills for a day of church and family activities into which no political or other business intrudes. The Governor starts most days at 5:30 A.M. with a brisk run or a game of "compact golf" (three balls for six holes) regardless of weather or temperature; he generally is in bed by 10:00 P.M., and following his Mormon upbringing he does not smoke and does not drink wine, hard liquor, coffee, or tea.</p>
<p>The list of people to whom Romney is often compared is impressive. It includes Warren G. Harding, because like Harding he looks like a President; Charles de Gaulle, because of his mystical sense of leadership and righteousness; Billy Graham, because of his evangelical fervor; Dwight D. Eisenhower, because of the charisma that crowds sense and the occasional vagueness of his pronouncements ("They both talk a lot and you're not always sure what they're saying," explains a friendly critic).</p>
<p>His opponents in the legislature and in the executive branch fancy that he tries to run the government of Michigan as he used to run American Motors. They complain that he is more inclined to tell everybody what he is going to do than to listen to their opinions. "He's not the kind of guy who'll sit and chin things out with you," T. John Lesinski says. Even a loyal aide admits: "There's no dialogue." He has been reluctant to compromise on some issues, and too quick to give up the fight on others. Many Republican hearts still rankle with resentments left over from the days when Romney organized the nonpartisan Citizens for Michigan movement; in those days Romney openly and frequently criticized both political parties.</p>
<p>Some opposition springs from the bafflement a hard-bitten secular world feels in the presence of a genuinely religious man who keeps the Sabbath holy, gives more than a tenth part of his income to his church, and then tops all that by fasting and praying before making a difficult decision. Some of his close friends speculate that what Romney would really like is membership in the Council of the Twelve Apostles, who with the First Presidency are responsible for running the Mormon Church and its tremendous business affairs. "Romney might make a pretty good President," goes a current Detroit joke, "but I hate to have anyone use the White House as a steppingstone to higher office."</p>
<p>He has stated some general views on national issues. On Negroes, Romney says: "My attitude is that a Negro is a child of God just like I am and my attitude is that the Negro under the Declaration of Independence and the Constitution of the United States is entitled to every right and every opportunity that I am entitled to as a citizen." He believes in pay-as-you-go government. He is worried by the growth of federal power, and blames it in part on the failure of the states adequately to meet the needs of their citizens. "I don't talk about states' rights," says Romney. "I talk about state responsibilities." For Michigan he has put forward programs in education, mental health, and welfare that might well have sprung from Democratic pens. He engaged in a bitter wrangle for months with the federal Department of Health, Education and Welfare over its effort to dictate the way Michigan organized an aid-to-dependent-children program.</p>
<p>Romney's best-known economic views concern what he calls the "excess concentration of power." He has long argued that big unions and great corporations have grown so powerful that only the federal government can regulate them, with the rights of individual citizens being endangered in the clash of giants. He would curb the power of both unions and corporations through new antitrust laws--e.g., to force corporations that reach a certain market dominance to breed new and separate corporations, thus increasing competition and strengthening the economy. Underlying all this is Romney's allegiance to the Mormon tenet of individual responsibility, as well as his deeply held belief that man is on this earth to serve God.</p>
<p><strong>Up from Mexico</strong></p>
<p>Religion and the Church of Jesus Christ of Latter-day Saints have molded the Romney family history for generations. The Governor's great-grandfather, converted by one of the first Mormon missionaries to reach England, brought his family to America in 1841 and joined the persecuted Mormon hegira to Utah. After the U.S. began prosecutions for polygamy, Romney's grandfather, who had taken four wives and fathered thirty children, fled in the mid-1880's with his numerous family to a Mormon enclave in Chihuahua, Mexico. The family prospered in Mexico for a generation, and there George Romney was born in 1907, the son of monogamous Gaskell and Anna Pratt Romney, both of them U.S. citizens. When George was five, Mexican revolutionaries drove the family back to the U.S., and they went to Los Angeles after a brief period as refugees living on Army rations in EI Paso. For the next decade Gaskell Romney moved frequently and failed in business and farming five times before settling down to a modestly prosperous career as a builder in Salt Lake City. In 1926, George left school to follow in the footsteps of his father, grandfather, and great-grandfather as an unpaid missionary. He worked as a lather to earn $700-$630 after tithing&mdash;toward his expenses and was sent to Great Britain for two years to carry the Mormon doctrine door to door through Scotland and preach it from soapboxes in Hyde Park.</p>
<p>Romney returned to the U.S. to resume his education and his pursuit of Lenore LaFount. He had courted her assiduously for years--even sitting behind her when she went to movies with other boys--and now he enrolled at George Washington University because Lenore was living in Washington while her father served on the Federal Radio Commission. Romney attended classes at night and worked during the day for Democratic Senator David I. Walsh of Massachusetts, first as secretary and later as legislative aide, dealing primarily with the Hawley-Smoot tariff bill.</p>
<p><strong>Young man in a hurry</strong></p>
<p>In 1930, Romney left Walsh and college, still two years short of a degree, and went to work for the Aluminum Co. of America. During a year's apprenticeship he was sent to sell Alcoa products in Los Angeles, where Lenore by now was filling bit parts in the movies. On July 2, 1931, culminating what Romney calls "the best selling job of my life," he and Lenore were married in the Salt Lake City Mormon Temple "for time and all eternity." Soon afterward Alcoa assigned Romney to Washington to keep abreast of developments affecting its interests. This meant knowing people, and the Romneys entertained a great deal, serving liquor but not touching it, at the home they built--much of it out of aluminum--in fashionable northwest Washington.</p>
<p>When he was passed over as too young for the top Alcoa job in Washington, Romney began to look for a spot where youth would not be a handicap to his ambitions. He took a job in 1939 as manager of the Automobile Manufacturers Association's Detroit office at $12,000 a year. He moved up in 1942 to head the A.M.A. and also the Automotive Council for War Production, which helped the government make full use of the facilities of the council's 645 member companies; he was kept out of the Army by family responsibilities and essential classification.</p>
<p>When the war ended Romney joined Nash-Kelvinator as assistant to President George Mason at $36,000 a year. By 1953 he was executive vice president, helping Mason put together the merger with Hudson that created American Motors. When Mason died suddenly in 1954, Romney was his logical successor. American Motors was deeply in the red and threatened by corporate raider Louis Wolfson. Romney charmed Wolfson into suspending his raid, put his chips on the compact Rambler, closed down inefficient Michigan plants to concentrate production in Wisconsin, and pulled American Motors solidly into the black in just three years (see "Will Success Spoil American Motors?" FORTUNE, January, 1959).</p>
<p><strong>The man who scorned politics</strong></p>
<p>Romney, in those days, was a devoted nonpartisan, concerned with getting things done for citizens by citizens. He talked of "voluntary cooperation" and "practical consensus," and he was scornful of both political parties. "We have a Democratic party that is increasingly dominated by union leaders and a Republican party that is still largely dominated by big business leaders," he said in one 1959 speech. He saw no "basic differences" between the parties.</p>
<p>His views grew as naturally from Michigan soil as is huge annual crop of sour cherries. The state, rich in agriculture and industry, has had more than its share of problems; those not created by bitter factionalism were compounded by it. Even its geography invites division. Michigan comes in two parts: the Lower Peninsula shaped like a mitten with the thumb jutting into Lake Huron, the Upper Peninsula shaped like a battered cap and wholly separated from the Lower by the Straits of Mackinac.</p>
<p>The geographical fissure is as nothing beside the state's urban-rural estrangement. For eighty years after the Republican party was formed in 1854, Michigan was a one-party state. Not one Democrat was elected to the state Senate between 1918 and 1930 and in four of those years there was none in the House either. Two-party government arrive with the New Deal and the subsequent unionization of the auto industry. The U.A.W. formed an alliance with the Democrats to dominate the polls in Detroit and other populous manufacturing cities of the state. The "outstate" counties remained staunchly Republican, and the wedding of rural voters and business interests--notably those of the auto manufacturers--produced an ultraconservative political force bitterly opposed to the welfare-oriented Democrats.</p>
<p>All this potential for strife was realized in the state government. Michigan's constitution, dating from 1850, gave Republicans control of the state legislature, but superior numbers statewide gave the Democrats the governor's chair from 1948 to 1962. Stalemate and irresponsibility resulted. In 1959, "Soapy" Williams, who wanted an income tax, and the Republican legislature, which refused to countenance one, deadlocked so thoroughly that for a time the state could not pay its employees. Williams ended the "pay less paydays" only by fiscal legerdemain.</p>
<p><strong>"Con-Con" for Michigan</strong></p>
<p>During Michigan's cash crisis Romney decided it was time to apply a nonpartisan approach to the state's problems. He formed a "Citizens for Michigan" movement in which he was joined by five thousand of his fellow Michigan citizens--Republicans, Democrats, auto executives, labor leaders, farmers, union members, housewives. They quickly concluded that Michigan's problems were too many and too interrelated to attack piecemeal. What was needed was a thorough overhaul of the state constitution--a complex course of action often attempted, never successfully, since the last constitutional convention in 1908.</p>
<p>Before getting his nonpartisan crusade well started, Romney nearly succumbed to partisan temptation. Michigan Republicans recognized him as a hot political property, and they suggested that he run for the Senate in 1960. Early readings were that Romney could almost certainly win, and he considered making the race. But first he consulted his Citizens for Michigan associates and decided not to run. "I reached the conclusion," said Romney, "that dealing with basic issues was more important than running for office."</p>
<p>Romney continued selling Ramblers--American Motors achieved a record 6.4 percent penetration of the auto market in 1960--and pushing for Michigan's reform. The first step was a constitutional amendment to allow the calling of a constitutional convention--"Con-Con"--by simple majority vote. Both old-guard Republicans and the U.A.W. opposed the change, but Romney stumped the state and organized the members of Citizens for Michigan in a rousing get-out-the-vote campaign. The amendment passed in November, 1960, by 353,000 votes. The next step was to call the constitutional convention. Again Romney led his C.F.M. legions into battle. Against strong opposition--this time mainly from the rural and entrenched-interest forces, which had dominated the state legislature for so long--the calling of a convention was approved on April 1, 1961, by only 23,000 votes.</p>
<p><strong>The difficult art of compromise</strong></p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/03/clyde_geerlings.jpg"><img class="alignright size-medium wp-image-8614" title="clyde_geerlings" src="http://fortunefeatures.files.wordpress.com/2012/03/clyde_geerlings.jpg?w=300&h=285" alt="" width="300" height="285" /></a>Again partisan politics intruded. Delegates to Con-Con were elected by parties on the same unfairly apportioned basis as the state legislature. The Republicans put up good candidates--including George Romney--and worked hard to elect their delegates. The Democrats, who settled for party hacks in too many instances, carelessly failed to get excited. The constitutional convention became a lopsided affair: ninety-nine Republicans to forty-five Democrats.</p>
<p>Romney himself was the first victim of partisanship. He wanted to be named president of Con-Con when it opened at Lansing in November, 1961. But ultraconservative Republicans--known in Michigan as the "Neanderthals" or "button-shoe Republicans"--were determined to name one of their own. The Republican caucus deadlocked into Romney and anti-Romney factions. His supporters got together with the button-shoe forces and agreed on a compromise president. Romney, a Democrat, and a conservative were to be vice presidents. In this trying period Romney grew incensed at what he regarded as a broken agreement. Accounts of his "demonstration" vary, but some of those present recall that he got red in the face--"You could see the veins pop out"--and stamped his feet. (Friends admit: "He got <em>intense</em>.") He first declared he would accept no office at all, but later was prevailed on to take the lesser post.</p>
<p>For months Romney spent his mornings at his American Motors desk, ate a box lunch (favorite sandwich: peanut butter and jelly) on the eighty-four-mile drive to Lansing, spent the afternoon at Con-Con, and was driven home in the late evening; he usually changed into pajamas for the ride and slept on the reclining seat of his Rambler Ambassador. It was a killing schedule, made no easier by the partisan flurries that swirled around him as Republicans talked more and more openly of nominating him for governor in 1962.</p>
<p>After two months of open interest and twenty-four hours of fasting and prayer, Romney resigned as chairman and president of American Motors in February, 1962 (but remained a vice chairman on leave until after the election), and announced that he would run for governor. "Our state today finds itself in a sorry and tangled mess," Romney said. "And the responsibility for that must be laid, in part at least, at the doors of too many partisan politicians of both parties acting like narrow partisans first and Michigan citizens last."</p>
<p>By this time the polarization of Con-Con was complete, but not along party lines. Democrats and button-shoe Republicans formed a coalition--the Democrats unhappy that the convention was not going further in its reforms, the Republicans convinced it was going too far. Aware that Con-Con's work was jeopardized, Romney moved to break up the coalition and form one of his own. The Democrats seemed unapproachable; they were unwilling to do anything that might enhance the prestige of an avowed Republican candidate. He therefore turned to the conservatives. He agreed to give sparsely settled rural areas an edge in the Senate by accepting an apportionment formula that makes nineteen acres equal to one citizen. In a series of secret meetings with D. Hale Brake, the most influential of the conservatives, he threshed out compromises on a variety of other disputed points, including House apportionment, earmarking of funds, and election of state officers. Romney had to trade off a number of cherished reforms, but he preserved others. And he achieved a coalition capable of agreeing on a constitution that, while far from perfect, is superior to the old one. Inevitably, Romney was accused of capitulation to the old guard. Snarled one Democrat: "If Romney bought this deal he'll have to wear his pajamas all the time because D. Hale Brake and the farmers have traded him out of his pants."</p>
<p><strong>"This is what's wrong with Michigan"</strong></p>
<p>The vote on the new constitution was not scheduled until April 1, 1963, and Romney meantime plunged into his campaign for governor. He drove 37,000 miles in a blue-and-white Ambassador, flew 13,000 miles in chartered planes. Lenore turned out to be just as good a campaigner as her husband; she visited every one of Michigan's eighty-three counties and gave more than 200 speeches. "I'm a citizen who is a Republican, not a Republican who is incidentally a citizen," Romney argued. The word "Republican" did not appear on his literature or billboards. What did appear was Romney's handsome face--and he was recognized wherever he went. "Hello, I'm George Romney, I'd like your support," he said hundreds of times a day in shopping centers, at street corners, at labor meetings--which he often invaded uninvited--and anywhere else that he could seize a voter's hand. When someone refused to shake hands with him, Romney angrily shouted: "See what I mean about partisanship? This man won't even shake hands with me! This is what's wrong with Michigan!"</p>
<p>Romney coolly modified John Kennedy's slogan--as did William Scranton in Pennsylvania--and cried that it was time to "get this state rolling again." He called for disinterested citizens to end the "monopoly" of power groups, whether of the left, center, or right. He promised an end to "executive-legislative stalemate" and thoroughgoing fiscal reform. Said Romney, "I believe in the deathless freedom of the individual, and the sacred right of individual choice."</p>
<p>His efforts to disengage himself from the Republican label did not endear him to the Republican professionals. But his troubles did not compare with those afflicting Governor Swainson. "Romney didn't win the election. Swainson lost it," says a Democratic strategist. Swainson had inherited twelve years of Democratic rule, and had to defend it all. He was hampered by the charge that he was the tool of the U.A.W. and by his veto of two bills important to suburban areas. Romney was elected by 81,000 votes, the only Republican running statewide who won.</p>
<p><strong>"A creature first of God"</strong></p>
<p>On January 1, 1963, George Romney was sworn in as governor at the capitol in Lansing. His inaugural message drew on his spiritual heritage and looked to a future of great temporal achievement. "Successful conduct of the people's government must be based on a deep belief in a Divine Creator, and the strong conviction that there is nothing equal to spiritual faith in the day-to-day conduct of either personal or governmental affairs," the new governor declared. "Man is a creature first of God and then of society."</p>
<p>On this lofty plane Romney went to work. The first job was to win acceptance for the new state constitution at the April 1 election. He darted all over the state drumming up support for it. Lenore also took to the trail again and spoke at 137 meetings. Citizens for Michigan had fallen apart and the constitution had become a bitter partisan issue. The Democrats and the U.A.W. launched an all-out attack on the document. They argued that more meaningful reform could be had simply by doctoring the old constitution with a few amendments. Within the Republican party there was also dissent because the outstate counties opposed any weakening of their power. But Romney did a masterful job of selling, and the new constitution was adopted by 7,500 votes.</p>
<p><strong>And some ride in Imperial comfort</strong></p>
<p>Meanwhile Romney had a state government to run--or thought he had. Soon after his inauguration he complained that the governor had less power to "get this state rolling" than he had supposed. He had no real control over any office but his own. As an example of executive frugality he gave up the traditional governor's limousine and rode in a black Chevrolet sedan (fitted with a reclining seat like a Rambler's), but the attorney general, secretary of state, treasurer, and other Democratic members of the administrative board continued to enjoy solid Imperial comfort. Other efforts to shake the Democratic officeholders out of familiar ways were rebuffed with partisan ferocity. On several occasions he engaged in angry debates with board members; each time his display of "intensity" was reported to the press.</p>
<p>In the midst of such frustrations, Romney looked for support to his legislature. Both houses were controlled by Republicans--twenty-three to eleven in the Senate, fifty-eight to fifty-two in the House--but many of them were not necessarily his kind of Republican. Fortunately, Romney's demands were modest--having emphasized frugality so much in his campaign, he offered few new programs--and the legislature in its first session carried out his wishes fairly well. Some proposals it trimmed and some--such as a minimum-wage bill--it turned down, but Romney was later able to claim that 80 percent of his program had got through. Part of it&mdash;e.g., congressional redistricting, which is again under attack in the federal courts--may not stick, but his was a better legislative record than any other recent governor had been able to achieve with the Michigan legislature.</p>
<p><strong>The end of fiscal reform</strong></p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/03/lenore_romney.jpg"><img class="alignleft size-medium wp-image-8615" title="lenore_romney" src="http://fortunefeatures.files.wordpress.com/2012/03/lenore_romney.jpg?w=177&h=300" alt="" width="177" height="300" /></a>Romney did not attempt to put his fiscal-reform program through in the regular session but decided to call a special session at which the legislators could concentrate exclusively on tax bills. When the legislature met in September, Romney unveiled a proposal that reduced revenues by $306 million and restored exactly $306 million by new taxes. Under his plan, food and prescription drugs were exempted from the sales tax at a loss in revenues of $92 million; the industry-discouraging "business activities tax" on gross revenues was repealed with a loss to the state of $78 million; and general property taxes were reduced by $93 million. These and other reductions were to' be offset by a flat-rate 2 percent income tax, which would raise $216 million, a 3 ½ per cent corporate-income tax on profits ($81 million), and a 5 ½ percent tax on the income of banks and other financial institutions ($9 million). "This, as is plainly evident," said Romney, "is tax reform without tax increase."</p>
<p>Former Governor John Swainson hailed the program and called for its passage. Other Democratic leaders and moderate Republicans also saluted it. The old guard was not impressed. Said Senator Lloyd Stephens: "If a man's got principles he's got to have the guts to stand up for them. I'm not going to go for any income tax just because a Republican proposed it."</p>
<p>It seemed clear to Romney that the Democrats would come along. If he could tailor his program to win a few more Republican votes, his program would pass. But the chairman of the Senate tax committee was Republican Senator Clyde H. Geerlings, who boasts that he has never introduced a bill calling for an appropriation for his southwest Michigan district. Geerlings became the leader of an opposing faction of button-shoe Republicans and Democrats similar to the one that had plagued Romney at Con-Con. The Democrats, besides disliking some specifics in Romney's package, were not reluctant to forsake long-held positions in favor of reform if their defection meant dimming the Governor's luster. Romney, it turned out, had not taken all the pains needed to retain Democratic support. When loyal Senate Majority Leader Stanley Thayer conferred with Swainson on ways to recapture Democratic support, Romney publicly stepped away from his efforts, thus embarrassing his own forces while solidifying the opposition. Romney finally sought a <em>detente</em> with the Democrats in a stormy three-and-a-half-hour meeting in his office, but it was too late.</p>
<p>The legislature ended its special session in mid-November--meeting its self-imposed deadline of adjournment in time for the deer-hunting season--with Romney's tax program dead, killed by the coalition of Democrats and Republicans. In the Senate his bills got out of the tax committee over Geerlings' strenuous objections, but were promptly shunted aside with just one Democrat supporting Romney. In the House the program did not get to a direct vote. The closest it came was on a resolution to "tie" each of its sections to every other section; the resolution failed by twelve votes to get the majority needed to pass it. Only seven Democrats voted with Romney.</p>
<p><strong>The chanciness of partisanship</strong></p>
<p>Romney has lately given evidence of growing political sophistication. He has retained former Congressman Robert J. McIntosh, a most knowledgeable and attractive professional, as his legislative counselor, and he is holding regular breakfast meetings with leaders of the House and Senate--not, as formerly, in the impersonal meeting rooms of the Jack Tar Hotel, but at the home he rents (Michigan has no governor's mansion at Lansing), where Lenore can add her charm to his. He is, furthermore, taking a more active interest in the problems and fortunes of the Republican organization in Michigan, and newcomers to party work are finding a welcome they've not had before. His growing partisanship, while good for the party, may make his reelection more chancy in a state where over-all numbers favor the Democrats.</p>
<p>But if he can win a second term in November and continue to sharpen his political skills, he will have an unprecedented opportunity really to govern Michigan, Reapportionment under the new constitution will eventually give the legislature a more representative cast (which may, of course, turn out to be Democratic); the 120 independent executive agencies will be reduced to no more than twenty and will be made more responsive to the governor; the lieutenant governor will be of his own party; and instead of seven other elective officers sharing his executive power, there will be only two. By the time he has served another term as governor of Michigan, George Romney may have had a chance to prove what his first term is leaving inconclusive-that he is both a good governor and a good politician.</p>
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		<title>The Ups and Downs of the Fuller Brush Co. (Fortune, 1938)</title>
		<link>http://features.blogs.fortune.cnn.com/2012/02/26/the-fuller-brush-co-fortune-1938/</link>
		<comments>http://features.blogs.fortune.cnn.com/2012/02/26/the-fuller-brush-co-fortune-1938/#comments</comments>
		<pubDate>Sun, 26 Feb 2012 14:00:49 +0000</pubDate>
		<dc:creator>Sierra Jiminez</dc:creator>
				<category><![CDATA[Fortune Classic]]></category>

		<guid isPermaLink="false">http://features.blogs.fortune.cnn.com/?p=8538</guid>
		<description><![CDATA[<p><em>Editor's note: Every Sunday, Fortune publishes a favorite story from our magazine archives. This week we turn to a story from 1938, which chronicles the highs and lows of the Fuller Brush Co. The Great Bend, Kan.-based cleaning-products maker was founded in 1906 and became known for its door-to-door salesmen, who belted the  familiar greeting, "I'm your Fuller Brush Man." Earlier this week, Fuller Brush filed for bankruptcy less than two <a href="http://features.blogs.fortune.cnn.com/2012/02/26/the-fuller-brush-co-fortune-1938/">MORE</a><img alt="" border="0" src="http://stats.wordpress.com/b.gif?host=features.blogs.fortune.cnn.com&#038;blog=916416&#038;post=8538&#038;subd=fortunefeatures&#038;ref=&#038;feed=1" width="1" height="1" />]]></description>
			<content:encoded><![CDATA[<p><em>Editor's note: Every Sunday, Fortune publishes a favorite story <a href="http://features.blogs.fortune.cnn.com/tag/fortune-classic/" target="_blank">from our magazine archives</a>. This week we turn to a story from 1938, which chronicles the highs and lows of the Fuller Brush Co. The Great Bend, Kan.-based cleaning-products maker was founded in 1906 and became known for its door-to-door salesmen, who belted the  familiar greeting, "I'm your Fuller Brush Man." Earlier this week, Fuller Brush filed for bankruptcy less than two months after saying it had "completely rebooted itself." This time, can Fuller Brush recover from its fall?<br />
</em></p>
<p><strong>Playing the law of averages, its sales problems get tougher as times get better, and vice versa. Last year $ 10,000,000 worth of brushes for a net profit of $208,000.</strong></p>
<p><em>Do you know of a good man who would appreciate an opportunity to make profits of $25 to $30 a week and a chance of advancement? Write Box &ndash;</em></p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/02/fuller_brush_salesman.jpg"><img class="alignright size-medium wp-image-8559" title="fuller_brush_salesman" src="http://fortunefeatures.files.wordpress.com/2012/02/fuller_brush_salesman.jpg?w=222&h=300" alt="" width="222" height="300" /></a>This question, well considered, well worded, from time to time turning up among the want ads of papers in a hundred cities means that the Fuller Brush Co. wants men for a business that last year grossed $10,000,000 and this year will gross more. It is a business of house-to-house sales, and few businesses can match the sheer compounded merchandising ingenuity of so-called direct selling. Five thousand one hundred and ten men were selling Fuller brushes in January, 1938, and the expense of maintaining such a force might well enormous. For the Fuller Brush Co., the cost is negligible. This whole force is made to maintain itself almost entirely by an unbroken line of calculated self-interest through unit sales managers, of whom there are seven for the U.S., plus 150 branch managers, 600 field managers, and more than 4,000 "dealers"--meaning the canvassers who carry a sample case from house to house, a company word used loosely since 1929 but definitely adopted about a year before the passage of the Social Security Act made the distinction important.</p>
<p>The Fuller Brush line means about seventy-five twisted-in-wire brushes of various shapes and sizes, from a dental-plate brush "approved by Dental Authorities" to a bathroom-bowl brush that "gets under the rim and into the trap," and a Fuller Friction Shower--that is, a brush with a rubber-hose attachment that is hitched to a faucet, or if you do not have a faucet handy, to a portable tank (i.e., pail) with the result that "eighteen streams of water bubble through the brush and give a cooling refreshing bath, every drop as clean as the water you drink." It means dry mops and linoleum (wet) mops and a launderable dry mop that fits on a flatiron-shaped frame with a swivel handle so that the "mop lays flat on floor." It means fiber brooms and mixed hair and fiber floor brushes. It means waxes and polishes. It means Correct Shape, Professional, and Junior toothbrushes, and hand brushes and hairbrushes and nailbrushes and combs and a gadget to clean combs. It means a venetian-blind brush, a radiator brush, and a pointed-spoke brush.</p>
<p>Most people have seen some of these brushes and many people, more or less mesmerized, have found themselves looking at all of them. On a flood of jokes, probably not exceeded since Ford's Model T went to town, Fuller's impossibly cockeyed brushes (a tribute to their variety and special designing) and the Fuller Man shown monotonously surprising the lady of the house in a state of nature (a tribute to persistent, ubiquitous sellers) have become a part of the public consciousness. Brushes are objects of little intrinsic interest. They are old, familiar, and intimately associated with drudgery. Anybody can make them, and making brushes is not the Fuller story. If Alfred C. Fuller had confined himself to making brushes he might have prospered modestly and built up a nice little business but nobody would ever have heard his name. The story is not even Mr. Fuller's story, though that has the interest, a little spoiled by familiarity of the old popular favorite, poor boy makes good. The story of Fuller brushes is primarily a selling story, a story of how to sell. It is also a first-rate study in normal and subnormal psychology; and, whether appalling or inspiring, a fine demonstration of one modern way to make a practical, profitable use of the substance of things hoped for, the evidence of things not seen.</p>
<div id="attachment_8560" class="wp-caption alignleft" style="width: 178px"><a href="http://fortunefeatures.files.wordpress.com/2012/02/fuller_brush_salesman_indoors.jpg"><img class="size-medium wp-image-8560" title="fuller_brush_salesman_indoors" src="http://fortunefeatures.files.wordpress.com/2012/02/fuller_brush_salesman_indoors.jpg?w=168&h=300" alt="" width="168" height="300" /></a><p class="wp-caption-text">Your Fuller brush man, madam</p></div>
<p>Though the real story is how Fuller brushes are sold, it cannot be clearly told apart from the origin of Fuller brushes. When Alfred Fuller made his first brushes, twisting them in a secondhand vise, he made them to be sold exactly as Fuller brushes are sold today. Going from door to door or kitchen to kitchen in Somerville, Massachusetts, he found out who wanted brushes and what kinds of brushes were wanted. He took orders for them and went home and made them. This was not a brilliant or original inspiration. Brush- and broommaking as a one-man business operating on a local scale was common, and if the more usual practice was to make the brooms and brushes first and then peddle them, Mr. Fuller's different procedure may very well have been due to the fact that he didn't know the business and wanted to find out how many brushes he was likely to need before he made them. When he found out, he made them as well and carefully as he could (he must have been good with his hands and quick at picking up the simple principles) and brought them around and got his money.</p>
<p>In 1906 it was still generally believed that the world would beat a path to the place of business of the man who made a better mousetrap. This philosophy, embellished with many copybook maxims, supported the instinct of a competent workman. Mr. Fuller, using the best materials, made the best brushes he could, counting on the quality that would outwear just any old brush to convince his customers that it was cheaper in the long run to buy something good. If the soundness of the two policies of making as good a brush as possible and taking orders for it from house to house seemed tentatively established when Mr. Fuller's balance sheet as of December 31, 1912, listed total assets of about $20,000, $5,000 being the value of his plant, they must have assumed the proportions and validity of twin laws of nature by 1923 when the finished main structure of the Hartford plant was valued at $685,000 and total assets had risen to $4,000,000. Fuller's merchandising method and quality product were a gold mine and the sky seemed to be the limit. In 1923 total retail sales went to $14,900,000. Then something happened.</p>
<p>In terms of results, what happened was that in 1924 sales were off a few thousand dollars. In 1925 they were off not a few thousand, but two million. A slight recovery took place in 1926 and 1927. In 1928 a precipitate new drop wiped out the recovery and put the company where it had been in 1922. Thus even before the depression broke on all business, Fuller Brush was on the way down. Nineteen thirty-two saw the first and only deficit. In 1933 the volume of sales went below $5,000,000.</p>
<p>In terms of causes, what happened probably involved a number of factors. Undoubtedly, good times with plenty of jobs made it hard to get good men to do canvassing and a marked decrease in the number of salesmen was a big factor. Increased house-to-house selling of such things as silk stockings--much of it inspired by Fuller's success--was getting a share of the housewife's money. Perhaps cheap stuff in the chain stores--which did not offer competition to Fuller quality, but which could of course be used as a substitute&mdash;helped to account for it. Whatever it was, Fuller did not take it lying down. Fuller executives took salary cuts. In the case of Mr. Fuller himself the cut amounted to 50 per cent. Severe executive shake-ups threw out high-priced talent of the goldmine days. Commissions to salesmen were raised and bonuses added. Large-scale magazine advertising started in the gold-mine days had been kept up, but since it did not appear to be helping, it was dropped in favor of radio. Radio did not appear to help.</p>
<p>Viewed retrospectively it seems perfectly plain why none of these things helped. It seems plain that, whatever the contributory factors were, as early as 1925 the Fuller market, even if the sales force held up, could not have been progressively expanded on the spectacular scale of the decade before. There were limits to the high-priced field. Now, in the bad year of 1932, the salesman's position was clearly hopeless.</p>
<p>A Fuller broom cost $1.95. It was worth it. It would outwear a number of cheaper brooms. Unfortunately housewives in sufficient numbers could not or would not buy it and if housewives could not or would not buy Mr. Fuller's brushes, Mr. Fuller's business was finished.</p>
<div id="attachment_8561" class="wp-caption alignright" style="width: 227px"><a href="http://fortunefeatures.files.wordpress.com/2012/02/fine_and_dandy.jpg"><img class="size-medium wp-image-8561" title="fine_and_dandy" src="http://fortunefeatures.files.wordpress.com/2012/02/fine_and_dandy.jpg?w=217&h=300" alt="" width="217" height="300" /></a><p class="wp-caption-text">Al is fine and dandy. His sales are 40 percent above last year's</p></div>
<p>It will be seen that the mousetrap theory needed qualification. Even when it was brought to them at home people did not want it just because it was good. It had to be cheap too. So Fuller cut prices and, with what misgivings it is easy to imagine (for when sales were most urgently needed, the incentive to sell was being reduced), announced a cut in the salesman's basic commission from 40 per cent to 25 and 30 per cent. To make it go down all the Hartford executives and particularly Mr. Fuller himself went into the field to appeal to organization loyalty; to represent the move as in the salesman's own interest since he would now find customers tumbling over themselves to take advantage of prices marked off 25 to 33.3 per cent; and to promise that this rush of buying would make as much or more money for everyone.</p>
<p>The decision proves now to have been a wise and courageous one. In a sense the Fuller merchandising system triumphed, and when the system's everyday working is presently analyzed, this use to which it was once successfully put should not be forgotten. It paid, or at least it absorbed, the frightening expenses of a drastic new departure in policy, went more or less unswervingly ahead, and beyond any reasonable doubt saved the company. Everyone must have drawn a long breath as the sales turned up in 1934 and the benefits of the change, until that moment existing only in theory, became indubitable fact. From 5,000 brooms a period (Fuller uses a thirteen-period year) sales jumped to 50,000 a period in 1935. Manufacturing economies made feasible by increased production were now effected. It was soon possible to reduce prices again, and immediately the sales rose. In 1937 the broom sold 80,000 a period. Meanwhile total sales went over $6,000,000 in 1935, over $7,000,000 in 1936, over $10,000,000 last year; by the middle of August, 1938, were running a million and a half ahead of the same period for last year.</p>
<p>The organization of the Fuller Brush Co. begins at the Hartford plant. Put up in 1922 before the beauties of stark functionalism were fashionable, it has the earnest, aspirational air of a very large high school. Since the brushmaking is of little interest or significance this is not inappropriate. Brushes and mops are made on the first and second floors. Behind is storage space for part of the immense inventory (averaging $2,113,000 last year) and a separate new broom factory. On the third floor, reached from an elevator landing in the front tower through a hall containing a white marble copy of the Uffizi boar on a pedestal, the executive offices are high, spacious, somber rooms, many of them with oil paintings. Here Mr. Fuller sits under enlarged sepia photographs of his present associates, taken when they were somewhat younger; and a painting of Mr. Marsh, an early associate who died in 1921. The subjects of the photographs are distributed along the hall. Two of them, Mr. Frank W. Adams, first Vice President, and Mr. Wallace E. Campbell, secretary, with Mr. Fuller himself work closely with the sales organization and try among them to visit every branch every year. The educational director, Mr. Elmer Kauffman, from an office at the top of the tower with a good contemplative view of the Hartford insurance skyscrapers a mile or so away, supplies general inspiration and weekly texts for the salesmen's meetings.</p>
<p>These four take charge of the whole retail sales end of the business. Under Mr. Adams as general manager come the seven unit managers distributed around the country whose intermediate position between the Hartford executives and the field is indicated by the fact that, though about half of their money is from a commission on the total sales of the unit, they get also a basic salary. Under each of the unit managers are twenty to fifty branches under branch managers who work entirely on a commission--averaging 8.5 per cent on all branch sales. Under the branch managers come the field managers, averaging 5 per cent on the sales of their sections of about ten dealers each. The dealers, who are actually salesmen with sample cases, get a basic 33.3 per cent, which they pay to themselves by retaining it from the retail price. This is the organization in outline.</p>
<p>WHAT MAKES IT GO</p>
<div id="attachment_8562" class="wp-caption alignleft" style="width: 235px"><a href="http://fortunefeatures.files.wordpress.com/2012/02/alfred_c_fuller.jpg"><img class="size-medium wp-image-8562" title="alfred_c_fuller" src="http://fortunefeatures.files.wordpress.com/2012/02/alfred_c_fuller.jpg?w=225&h=300" alt="" width="225" height="300" /></a><p class="wp-caption-text">Alfred C. Fuller, Nova Scotia farm boy</p></div>
<p>The key man in this organization is the branch manager. He signs up the applicants for jobs and appoints the field managers who direct the sections of salesmen. It is up to him. If he cannot sign selling salesmen, if he cannot pick out field managers who have what it takes to keep the salesmen pepped up and rarin' to sell, he won't make any money. The company will give him through the unit managers every benefit of its experience and advice--or if he shows signs of slipping and so affecting the unit manager's commission adversely, the unit manager will give him the benefit of his personal descent for a combined showdown, warning, and go-to-it-old-man-I-know-you-can-do-it super pepping-up. The company will pay the rent of the branch manager's office--actually a good way of making certain that be locates himself where the company thinks he ought to be located, and in a style neither too mean nor too wastefully elaborate. It will meet the branch manager a shade more than halfway if he wishes to advertise "specials" (items temporarily reduced, different ones four times a year) in local newspapers--the company will pay half and supply the mats. Everything else he must do for himself. Office help and other not inconsiderable expense (he may pay out a quarter or even a third of his receipts) of prizes to foster healthy rivalry among his dealers, of entertainments to reward me successful and cheer up the unsuccessful, the branch manager himself, with the help sometimes of contributions from field managers, pays for. It was he who found it necessary to put that advertisement in the help-wanted columns, so he paid for that. After all, he is the one who cannot afford to leave territory uncovered; who wants, in the interests of his own profit, a full complement of dealers all selling brushes as hard as they can all day every day. By finding the means to arrange this he is sure of a good living--a number of managers make $10,000 a year.</p>
<p>While it is true that the unit manager may occasionally be called on to do for the branch manager what the branch manager and his field managers spend most of their time doing for the dealers, the typical branch manager is so fully charged with enthusiasm and fervor that more could hardly be got into him. He may be helped with a constant flow of new ideas and timely suggestions from above, but he is the key man in the Fuller system. And the company's success, like the unit manager's success and his own success, depends upon his being a particular sort of person, really a religious sort of person, with a fanatical faith in the creed of bigger and better sales. He too needs more than the motivation of profit and self-interest, but as in the psychology of saints and heroes (and it might as well be admitted that he has, in a humble or rudimentary form, what they have) an element of self-hypnosis is involved. He could not support the rigors of acting as an inexhaustible human dynamo unless he had the means of automatically recharging himself. He could not function at all if his sincerity were less than perfect. Doubts about the holiness of quotas and the sanctity of selling must not trouble him. Self-consciousness should not hold him back from any useful excess. He must not only be adept at applied psychology and instinctively expert in the great art of taking mental hold of the half-discouraged, the desperate, the nervous young and the helplessly inexperienced old, and putting into them by main force of personality the heart and courage to sell brushes. He has to have the liking for people and the love of ingenuous fun that feels only zest in leading forty dealers toward the right frame of mind by singing with them to an evident tune:</p>
<p><em>Selling yesterday,</em><br />
<em>Selling the day before.</em><br />
<em>Going to sell today as I never sold before.</em><br />
<em>For when I'm selling</em><br />
<em>I'm happy as can be,</em><br />
<em>For I'm a member of the Fuller family.</em><br />
<em>Loyalty, Loyalty, one Company for the</em><br />
<em>Whole of us.</em><br />
<em>Would to God that there were more of us,</em><br />
<em>For the few of us can't do it all alone.</em></p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/02/cost_breakdown.jpg"><img class="alignleft size-medium wp-image-8563" title="cost_breakdown" src="http://fortunefeatures.files.wordpress.com/2012/02/cost_breakdown.jpg?w=300&h=173" alt="" width="300" height="173" /></a>The job of branch manager requires quite definite qualities, and since these qualities shape a man's manner and mark his face brand} managers rend to look alike. Even great differences in actual physical appearance are obliterated by similarities of expression, by a typical optimistic shine of the eye, and perhaps by the more rarefied still, but real, presence of what is unabashedly known as the Fine and Dandy spirit. This spirit--whose importance will be considered later--is again reflected in a standard of dress--shirt patterns and cut of suits somewhat more cheerful than is general with men or comparable position and earnings in other fields. Especially marked is a characteristic grooming fairly to be called immaculate, a pleasant; appropriate look of recent vigorous use of the "Gelltleman's Personal Set"--manicure brush, clothes brush, scalp and shampoo brush, pocket comb, deluxe hand brush, hatbrush--and perhaps even the palm brush, an odd round object completing the set, described briefly in the catalogue as "Used like a cake of soap. Handy anywhere."</p>
<p>This, then, is the man who makes the Fuller Brush Co.'s merchandising scheme work. Invariably he began as a dealer and reached his present position only after some years or selling and some experience as a field manager. He knows exactly what he wants; and he has the instinct, the experience, and the judgment to go about getting it, if getting it is humanly possible, from the material available to him. To maintain a dealer force of about four and a half thousand, it is necessary to persuade 12,000 new men every year that selling brushes is a livelihood and a career. The branch manager would like it better if he could get these new men through his present dealers, and in some branches a large percentage of the new men are brought in this way. The manager in that case knows something about the man and the man already knows the proposition and thinks it would suit him. In general, however, this convenience is the exception, not the rule, and with so large a turnover the main point is that men, almost any men, be brought in somehow.</p>
<p>No branch manager ventures to say exactly what sort of man will make a good dealer. The unlikeliest sorts might almost be said to be the most promising, and previous experience in canvassing is not necessarily a recommendation. At a manager's dinner for sales leaders (men who had sold $100 worth or better the preceding week) given by a typical branch appeared a former sheepherder, a bricklayer, a chauffeur. The company knows of spectacular instances of success enjoyed by former clergymen, dentists, or college professors. Consequently the branch manager, not unaware that most of the men he interviews were led by the advertisement to hope that a salaried job was waiting for them, and all too aware that they will not like the line of work he has to offer, doesn't really worry about that. The intelligence or experience that could not be misled by ingenuous hope or ambiguous wording is not necessarily desirable. Put bluntly, in a phrase that has become a manager's axiom, the manager prefers men who are just dumb enough to do what they are told. The statement is neither cynical nor contemptuous. During the sixth period of 1938, 2,316 dealers who stuck to the job and did what they were told averaged $276 in total sales each meaning a profit in commissions for them of $29.04 a week. The remaining 2,267 dealers, who accounted for the rest or the total sales volume, averaged $146 for the period, or $12.15 a week. Here, obviously, is where the huge turnover is taking place, since men who don't make more than that would have an easier time on relief. From the manager's standpoint, at least, these are the ones who don't do as they are told, who give up, let down, or quit. Their averages do not affect the manager's conviction that the thing he offers, even if it is not what the candidate hoped, is a good thing. This, no doubt, gives the manager that confidence which even he may need when he sees discouragement flood the face confronting him as a regular job and regular salary vanish into a possible 33.3 per cent commission unreally held out somewhere beyond a hideous ordeal of rebuffs and humiliations through day after day of lugging around a line of merchandise that most people put off buying as long as possible.</p>
<p>What the applicant for this opportunity does not know is the way the law of averages works. In the company's experience certain averages over the period of about a year always hold. If a man will follow his instructions exactly, visiting the 2,500 homes that make up his block of territory every three months, he will find that he has sold $700 worth of Fuller brushes. (A recent FORTUNE survey supports the company's contention. Every sixth person interviewed bought regularly from house-to-house salesmen.)</p>
<p>Though a mathematical truth is here operating with much the actuarial precision of the insurance companies' mortality tables, it will not work out in every new man's case for the good reason that many new men will not give it time to work out. There is only one chance in three or four that the signed-up salesman will last a year--or, indeed, more than a few months. However, to the man who does last a year, this turnover is very advantageous. A year of selling makes him a real veteran, a so-called Service Man with a special pin and a chance for more commission. At the end of the first period in 1938, 2,783 of the 4,350 Fuller dealers had been working less than six months. Dealers who had worked two years or more numbered 611. Of these 192 had worked five years or more. Since the organization has places for 600 field managers and for at least 150 branch managers, a Service Man's chance of becoming a field manager fairly soon (300 of them had two years' service or less in 1938) is good, and, given some years' experience and the necessary aptitude, he will probably be a branch manager.</p>
<p>ONE OF 12,000</p>
<p>The branch manager's job is to make the prospective dealer see this and his first step is to eye his man with an air of shrewd goodwill. This is genuine. Not only is goodwill natural to the type of man who is a branch manager, but nature has generally been reinforced, at least in the Eastern Unit, by the signing of a pledge (of deplorable doggerel, but high ethical content) which says that, being now a member of the Fine and Dandy clan, he promises to make himself a worthwhile man. In order to do this he has been advised:</p>
<p><em>Oh, man in your plenty and man in your pride,</em><br />
<em>Don't add to the burdens of those who are tried,</em><br />
<em>Be gentle, be thoughtful, be kindly of heart,</em><br />
<em>Don't grow bitter and scornful because you are smart.</em><br />
<em>Be fair with your brothers in all that you do,</em><br />
<em>Send them on feeling better for having met you.</em></p>
<p>Recommending such thoughts to himself and finishing his preliminary survey, the manager in an abrupt but friendly way asks the applicant, who may as well be called Bill, how much money he needs to live on. Bill, who has not had a chance to rid himself of negative thoughts by absorbing the Fine and Dandy spirit, will probably set as modest a figure as possible. He hopes forlornly that a figure low enough may tempt the manager to let him have a salaried job. This enables the manager to ask cheerfully how $30 a week would look to him. It looks pretty good; but of course it won't be long now before Bill smells a rat. Probably he will blurt out the direct question about whether it's commission selling or not. This is an important moment for the manager. To be able to retort "Why? Wouldn't you take $30 for that kind of work?" and have it do what it must do to Bill is perhaps the height of the manager's art.</p>
<p>An hour ago Bill may have been perfectly sure he wouldn't--first, because he was just sure he couldn't; second, because he just wouldn't--meaning he wouldn't stoop so low as to try. Fixed now with the manager's eye--the eye that so patently considered him with penetration, saw all his good qualities, and showed that it liked them--he has trouble in saying, "No, I wouldn't." The atmosphere is charged with the hearty compulsion to say, "Yes, I would take it." Not always, but much more often than you would expect, a first-rate branch manager gets this only half-voluntary "Yes, I would." While it is to the manager's financial profit to get it, there is reason to suppose that the satisfaction he feels when he hears it is actually worth more than money to him. He believes that he is building character.</p>
<p>There now remains the matter of Bill's "references," meaning a definite recourse for the company to take care of the sample case lent to Bill, and of his first order, which will be shipped to him before the money is received. This never happens again. He will get his second order only after payment for the first has been turned in. Ideally the company would like a cash deposit of $200; but the manager will use his judgment, take what he can get and even let Bill off altogether on the hunch that he can be trusted. If such hunches of the manager's were not as good as gold he would long ago have given up having hunches.</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/02/fuller_brush_salesmen.jpg"><img class="alignright size-medium wp-image-8564" title="fuller_brush_salesmen" src="http://fortunefeatures.files.wordpress.com/2012/02/fuller_brush_salesmen.jpg?w=226&h=300" alt="" width="226" height="300" /></a>Bill is now ready for his training. He will be given leaflets and selling manuals to study and there will be practical instruction by the field manager to whom he is assigned. This practical instruction means an hour on two successive afternoons in the office learning the names of the forty articles in his sample case; and then actual house-to-house work accompanied by the field manager until he grasps the not very complicated procedure. Essentially this procedure consists of three steps; each reduced to a series of things to do and things to say. It is important to learn them thoroughly and to follow them exactly. If they presuppose for their success a low level of intelligence on the part of the prospective customer, they are only reflecting the vast accumulated experience of the company. They cannot possibly succeed with every housewife, but neither could any other conceivable formula and they will, in fact, save the dealer time and energy that he might waste in an unprofitable battle of wits with someone able to make a fool of him. If he does not get the right responses to his opening formulas he is well advised to let himself be eased out and go on to a house where he will get the right responses. The more calls he makes, the surer he is of selling something; and much time and prolonged effort spent in trying for a possible big order will not in the end make him as much money as the total of small orders--the average of all orders is $1.75--that the same time and effort are far more likely to produce.</p>
<p>With such points in mind, and what he should do and what he should say soundly drilled into him, the dealer painstakingly prepares for a selling expedition. Between five and seven in the evening--selected as hours when most people are at home if they are going to be home at all--he covers a manageable part of his territory--say fifty houses--and leaves at each a catalogue, called a Health and Beauty Manual around which is wrapped an "ad-folder"--a single sheet announcing special bargains and good for a free brush. Since this is an hour when people are tired or busy or both, he has no intention of trying to sell, or even show, anything. He wants to get the customer's name, and to make himself a sort of appointment which he can at least assume that he has when he turns up in the morning ostensibly to "redeem" the card by handing over the free brush. Last year 12,500,000 free brushes-"handy" brushes to clean vegetables, "dandy" scrubbers for aluminum, and utility brushes (a sort of bottle brush) were passed out. This giving something away is done with the idea of getting into the house and the dealer ought to be careful to get in before he gives. To help him be careful, the brush, like the Health and Beauty Manual, while free to the housewife, is not free to the dealer. The company sells both to him at a low cost. This small further sample of how to make a merchandising system pay its own way is completed equitably by offering the dealer fifty handy brushes for $1.40 with four toothbrushes thrown in. When he sells the toothbrushes at regular prices, he breaks even.</p>
<p>Though the handy brushes are gifts, entirely free, and the customer may have hers without buying anything, the dealer tries to get a run for his money. If the customer wants her gift, but not him, and standing in the door asks for it, he knows what to do. He indicates the inconvenience and even impossibility of opening his case on the steps or in the hall. Once allowed in, he begins, talking steadily, on a scientifically planned unpacking of his case, his movements and his formula speeches nicely synchronized. With everything spread out, he has already displayed and can usually manage to start demonstrating the sets for various purposes. A popular form of entertainment put on at company dinners and meetings is the celebrated six-minute demonstration done to rapturous applause by Elmer Kauffman, the Fuller educational director. Perhaps it is never quite equaled in the field; but the dealer has that law of averages to think of, and a good dealer will certainly not take more than twenty minutes. If he gets an order he promises delivery the following Friday evening, or Saturday morning if the customer can wait that long (as close to payday as possible). He sends in his order to his local warehouse (the company has fourteen strategically located), where, when they have made sure he has enclosed the money for his previous order, it is filled and sent to his home.</p>
<p>He is required to deliver orders in person and collect (a business he is likely to do with more feeling and tenacity than would be the case if a truck driver delivered for him), write thank you on the receipted bill, and in the words of his instructions, get away gracefully. That is all there is to it.</p>
<p>I'M FINE AND DANDY</p>
<p>In spite of the perfectly genuine opportunity offered, this kind of work is naturally and fundamentally distasteful to most men. The fact is reflected in the turnover and in the mentioned circumstance of good times, when other lines of work are open and it is hard to get enough salesmen. Not enough good men will sell house-to-house if there is any alternative. The branch manager has to combat lack of enthusiasm as well as he can, and he does it very well, mostly through the force of his own personality, but not without an indefinite amount of help from the already mentioned Fine and Dandy spirit. This spiritual elixir is something he not only administers to his salesmen but takes a lot of himself and no one from Mr. Fuller down would minimize its importance to the functioning organization.</p>
<p>The Fine and Dandy spirit, if it was not invented, was at any rate reduced to coherence by Albert E. Teetsel, Manager of the Eastern Unit. Listening to a speech by the late Rev. Dr. Stanley LeFevre Krebs, author of Cries from the Cross and other works, many of them dealing with the religion of business, Mr. Teetsel found himself caught by the term used incidentally in the course of some remarks on the advantages of being always bright, cheerful, and happy. The eventual result was the Fine and Dandy Club. Mr. Teetsel, who is known as Fine and Dandy AI, worked hard on it. He even succeeded in supplying the brooms for a scene in Joe Cook's musical comedy of the same name. "The psychological effect," Mr. Teetsel writes, "of the words Fine and Dandy or I'm Fine and Dandy, How are You? is to impress the party spoken to with the enthusiasm and cheerful outlook of the speaker." To maintain this effect all letters are concluded, all telephone conversations begun and ended, especially in the Eastern Unit, with the words. Mr. Teetsel will not, in fact, converse with a salesman or branch manager who forgets thus to preface whatever he has to say. In his own words: "We have Fine and Dandy signs in hotels, restaurants, clubs, trolley cars, banks, Y.M.C.A.'s, etc. and are using every possible means to advance and advertise this wonderful spirit. All our men have a Fine and Dandy sticker on the cover of their sample case and most of them have the spirit in their hearts, which is even more important."</p>
<p>The Fine and Dandy Club offers such attractions as arm bands, badges, Fine and Dandy caps, and pins. There are five degrees, distinguished by color (first degree, plain pin; second degree, red stone; third degree, green stone; fourth degree, blue stone; fifth degree, diamond), each representing successive periods of ten consecutive weeks of sales of $100 or more. At the end of the year those who have attained the fifth degree attend a banquet presided over by the sales managers and Mr. Fuller.</p>
<p>At least so far as the salesmen are concerned, the importance of such a spirit could clearly be as great as Mr. Teetsel says. It gives a spiritual unity to the endless competitive contests; to the fairly easily won prizes-small prizes like straw hats, socks, neckties tastefully patterned with the Fuller trademark, which any beginner can win; large prizes, lamps, furniture, radios, which high sellers can save up points to get; to the elaborately sporting bets about which branch will beat which branch and whether or not quotas will be exceeded; to the whole steady uproar of songs and fight talks, of slogans and mottoes in which the average salesman is allowed as little time as possible to reflect on discouragements or to wonder if all this is getting anywhere--for him, that is.</p>
<p>For the Fuller Brush Co. there is no doubt about all this getting somewhere. The brush industry is not large or important and it is at the moment in relative decline (in 1923 government figures gave it a total wholesale value of $50,000,000; in 1935 it was $42,000,000) but Fuller through its sales policies and volume is preeminent. There are manufacturers who make more than Fuller does of one Fuller item or another; but no one does as big a volume in as diversified a line. Since brush manufacturing falls into different divisions (toilet brush, industrial brush, and so on) and manufacturers tend to specialize, firms that might be supposed to be rivals are generally glad to accommodate each other. The Mohawk Brush Co., for instance, makes to Fuller's specifications its hardbacked Bristlecomb--a hairbrush that seems to combine benefit to the consumer in that it "permits the use of a rolling motion. Makes the bristles comb the hair and brush the scalp at the same time"; and benefit to the vendor in that obviously far fewer expensive bristles are required than in an ordinary brush. The regular Bristlecomb was Fuller's bestseller in sales value in 1937--$1,115,205.95 representing 449,335 regular Bristlecombs sold. In addition it sold 75,649 Military Bristlecombs for men, and 83,108 Junior Bristlecombs ("the most exacting mothers choose the Junior Bristlecomb because its bristles are medium stiff, and the rows are spaced wide apart to prevent tangling the hair"). This volume is a point of some interest, for Mohawk itself tried marketing the Bristlecomb with poor results. Apparently it took the Fuller sales organization to put the new brush over.</p>
<p>The most important fact about the brush industry is the existence of a potential market so large that it can amicably be divided up much as the missionaries of various denominations divided up China in the last century. But it is obvious that a vast amount of "educational work" will have to be done to make the public (a) do more cleaning (60,000,000 toothbrushes were sold in 1937; allowing one and a half per year per person, it must be concluded that some 90,000,000 people in the U.S. do not brush their teeth); and (b) believe that cleaning must be done with a variety of special instruments, rather than with old rags or other cheap and homely substitutes. As a result the greater part of the industry regards Fuller not with anxiety and suspicion, but cordially, as the advertising end of the whole business, with thousands of men out introducing tlle public to the idea of brushes and more brushes at no expense to the rest of them.</p>
<p>In the industry's genial acceptance of a free ride appears again the significant identification of Fuller with selling. Fuller means selling. Its success has been a major selling success of this century. Its problems have been selling problems, a fact appearing plainly in the breakdown of costs. Less than twenty-six cents of the Fuller dollar goes to manufacturing. There are no high costs in the form of experimental work and research laboratories and none of the ordinary problems of competition. Neither are Fuller problems financial. The selling system, which does business in effect for cash with no accounts of importance ever outstanding, has produced a plentiful supply of working capital and the company bas financed all its own expansion. The only stock ever offered the public was a $500,000 issue of preferred in 1921, a matter of convenience rather than of necessity, to pay (or the new plant. This was retired in 1927. Today about 60 per cent of the common and 12 per cent of a small issue of nonvoting preferred are held by Mr. Fuller or his family, and Fuller employees have most of the rest.</p>
<p>As for the selling problem, we have seen that Fuller sales are not a matter of high pressure skill, or good advertising. For the healthy expansion that has occurred since the black days of 1925-33, there are two other explanations. First--as the company itself believes--sales were greatly stimulated by price cutting. Second, however, the company has invoked the law of statistical averages, leaning heavily upon the principle that the more salesmen there are on the road, the bigger the sales volume will be. What share of the present volume is due to lower prices, and what share to the largest number of salesmen the company has ever had, would be impossible to determine. The interesting thing is that in good times an acute problem does arise because earnings are not attractive enough to reconcile the average man to this kind of commission work, if other work is to be had. The result is a peculiar paradox--when times are good and the public better able to buy, the Fuller sales problem gets tougher.</p>
<p>The company has not solved the problem of salesman turnover, but it has met it ingeniously with every possible device to maintain morale and sales enthusiasm. Statistically, in terms of the 12,000 new men every year, the success of these devices may seem doubtful; but practically, in terms of a larger selling body and mounting sales, the success is proved every day. Fuller Brush men, bursting with the Fine and Dandy spirit, may not implausibly climax the company's business future by accomplishing all that one of their most pleasing songs with no false modesty explains and to a familiar tune proposes:</p>
<p><em>We boost our brushes to the sky</em><br />
<em>Fuller Land, Our Fuller Land,</em><br />
<em>Our molto is "To do or die/'</em><br />
<em>A Fuller Land, Our Fuller Land.</em><br />
<em>We'll keep our sales at highest tide</em><br />
<em>We'll help the people to decide</em><br />
<em>To make this country far and wide</em><br />
<em>A Fuller Land, Our Fuller Land.</em></p>
<p><em><br />
</em></p>
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		<title>China after Marx: Open for business? (Fortune, 1985)</title>
		<link>http://features.blogs.fortune.cnn.com/2012/02/19/china-open-for-business/</link>
		<comments>http://features.blogs.fortune.cnn.com/2012/02/19/china-open-for-business/#comments</comments>
		<pubDate>Sun, 19 Feb 2012 15:00:59 +0000</pubDate>
		<dc:creator>Fortune Editors</dc:creator>
				<category><![CDATA[Fortune Classic]]></category>
		<category><![CDATA[Fortune Classics]]></category>

		<guid isPermaLink="false">http://features.blogs.fortune.cnn.com/?p=8501</guid>
		<description><![CDATA[<p><em>Editor's note: Every Sunday, Fortune publishes a favorite story from our magazine archives. This week we turn to a cover story from 1985, when a Communist newspaper declared Karl Marx irrelevant to China's plans for economic expansion. Today, 27 years later, many U.S. businesses are thriving in China but the relationship between the U.S. and China is not without strife. China vice president Xi Jinping, who is expected to become the <a href="http://features.blogs.fortune.cnn.com/2012/02/19/china-open-for-business/">MORE</a><img alt="" border="0" src="http://stats.wordpress.com/b.gif?host=features.blogs.fortune.cnn.com&#038;blog=916416&#038;post=8501&#038;subd=fortunefeatures&#038;ref=&#038;feed=1" width="1" height="1" />]]></description>
			<content:encoded><![CDATA[<p><em>Editor's note: Every Sunday, Fortune publishes a favorite story <a href="http://features.blogs.fortune.cnn.com/tag/fortune-classic/" target="_blank">from our magazine archives</a>. This week we turn to a cover story from 1985, when a Communist newspaper declared Karl Marx irrelevant to China's plans for economic expansion. Today, 27 years later, many U.S. businesses are thriving in China but the relationship between the U.S. and China is not without strife. China <a href="http://money.cnn.com/2012/02/15/news/international/china_xi_jinping/index.htm">vice president Xi Jinping</a>, who is expected to become the country's next leader, visited with President Obama and business leaders last week in Washington. His tone was somewhat defensive after Vice President Joe Biden told him that the two countries will cooperate "only if the game is fair."</em></p>
<p><strong>Companies are horrified to discover that the People's Republic is among the world's most expensive places to do business. But for those willing to pay the price--and put up with the bureaucratic guff--the payoff could be worthwhile.</strong></p>
<p>By Louis Kraar</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/02/china_after_marx_cover.jpg"><img class="alignright size-medium wp-image-8503" title="china_after_marx_cover" src="http://fortunefeatures.files.wordpress.com/2012/02/china_after_marx_cover.jpg?w=229&h=300" alt="" width="229" height="300" /></a>China fever is easy to catch. Upbeat music from the American movie <em>Flashdance</em> greets arriving executives at Peking Airport. The new Great Wall Hotel, a U.S. joint venture, resembles the Hyatt Regency in Dallas. American-style blue jeans and brightly colored ski parkas are beginning to replace baggy pants and Mao jackets. Offices and factories no longer shut down for two hours at midday so that everyone can take a nap, and Chinese negotiators, long famous for haggling endlessly over every detail of a deal, now are saying things like "Time is money."</p>
<p>There have been openings to China before, in fits and starts ever since Richard Nixon signed the 1972 Shanghai Communique, which established relations between the People's Republic and the U.S. What makes this one different--and more exciting to Western businessmen--is that China's leaders are not simply proclaiming their country open for investment, they're eagerly appropriating a lot of capitalistic methods for use in their own sluggish economy. The Communist party newspaper has declared Karl Marx irrelevant to much of what's going on in China today. Managers of state enterprises are fiddling with cash bonuses and other kinds of incentives, and many are confronting the need to market their products for the first time. As Chinese officials try out the profit motive on their own, they'll have a better understanding of what Western investors are looking for. At least they'll be talking the same language.</p>
<p>The People's Republic is still far from a capitalist's paradise. "Anyone coming here for quick gain is mistaken," says an experienced American in Peking. For all the government's intent to change, China remains a poor socialist economy that's tough and expensive to crack. No one, including Deng Xiaoping, the 80-year-old leader who is orchestrating China's swing away from doctrinaire Marxism, can be certain the new policies will stick. Deng is shrewdly installing younger men who think more or less as he does, but China has a history of sudden ideological swings.</p>
<p>Even with Deng in charge, the multilayered bureaucracy could thwart the economic reforms or slow their implementation. Peking recently announced that businessmen, who are often delayed at home waiting for visas, can pick them up on arrival at Chinese airports. But anyone who tries that will have a lot of time to listen to <em>Flashdance</em> music. Immigration officials at the airports profess ignorance of the policy. Chinese bureaucrats are also catching on to such Third World tricks as special taxes and petty bribery that make doing business costly. As a U.S. banker in Peking puts it, "Fleecing foreign capitalists is a fine art here."</p>
<p>For companies willing to pay the price, put up with the bureaucratic guff, and gamble that China will stay on course for a while, the payoff could be worthwhile. Since the 19<sup>th</sup> century, when merchants dreamed of selling "oil for the lamps of China," as the catch phrase of the time went, Westerners have been dazzled by the potentially huge Chinese market. It's still largely out of reach for most consumer products from the West, since the average annual income of China's more than one billion consumers is about $300. But that's bound to change fast since the economic reforms are designed, among other things, to put cash in the pockets of ordinary Chinese.</p>
<p>The market for industrial goods looks even more promising. By cutting down sharply on imports in recent years, China managed to build up almost $19 billion in foreign currency reserves. Now Peking plans to spend some of that hoard to buy equipment for antiquated industries-and China needs almost everything. After a two-week visit, Alexander Trowbridge, president of the National Association of Manufacturers, declared: "China represents an excellent opportunity for the U.S. investor."</p>
<p>Some Western manufacturers who missed getting into Taiwan, Singapore, and Asia's other dynamic newly industrializing countries when they were relatively cheap to enter see China as a second chance. If Peking's pragmatism endures, China could become a low-cost manufacturing center to rival its Asian neighbors.</p>
<p>The Western stake in China is still small. Peking claims that direct investment by all Western nations over the past five years has totaled some $3 billion-but that counts many pledged expenditures that may never materialize. Chinese planners want to attract $7 billion more over the next five years.</p>
<p>--</p>
<div id="attachment_8504" class="wp-caption alignleft" style="width: 264px"><a href="http://fortunefeatures.files.wordpress.com/2012/02/chinese_factory_workers.jpg"><img class="size-medium wp-image-8504" title="chinese_factory_workers" src="http://fortunefeatures.files.wordpress.com/2012/02/chinese_factory_workers.jpg?w=254&h=300" alt="" width="254" height="300" /></a><p class="wp-caption-text">President Reagan helped assemble a circuit board of Foxboro's joint venture in Shanghai, where smiling Chinese machinists surrounded a plaque with a signed photo of their temporary comrade.</p></div>
<p>Much of the cash plunked down in China so far has come from 27 oil companies exploring in the South China Sea, the world's last big undrilled petroleum area. Unless there is a major strike--and no one has come close yet--manufacturing investment will likely become more important in China than oil exploration. A few dozen adventurous American corporations have already plunged in, though their total direct investment commitment so far is only about $700 million, including that of 13 oil companies. R.J. Reynolds is building one of the largest cigarette factories outside the U.S. in Xiamen, southern China, a $20-million joint venture with a state tobacco company. American Motors has teamed up with a Chinese automaker to produce jeeps in Peking. Gillette is manufacturing razor blades in Manchuria. Massachusetts-based Foxboro Corp. is building industrial process control systems in Shanghai with a Chinese partner, while McDonnell Douglas plans to assemble airliners there. In a more unusual arrangement for China, 3M was allowed to go it alone. It has set up a small, wholly owned factory in Shanghai to make electrical tape and plastic electrical connectors.</p>
<p>IBM has put down a subsidiary in Peking. Though it doesn't plan to manufacture there initially, IBM thinks China could rapidly develop a voracious appetite for personal computers. When programmed to handle Chinese characters, they can be particularly useful as word processors. Boeing has established a sales subsidiary to peddle airliners, and United Technologies has a similar operation for helicopters. Fueled by such deals, trade between the U.S. and China is growing again after having shrunk for several years. It may reach $7 billion this year, $1 billion more than in 1984, but that's still only one-third of U.S. trade with the tiny island of Taiwan (pop. 19 million).</p>
<p>Both Japan and Europe have been reluctant investors in China, preferring to trade. Japan is China's largest trading partner, supplying 24% of the People's Republic's imports in 1984, and Western Europe is No.4, behind Hong Kong and the U.S. Only West Germany's Volkswagen has made a major investment--a joint venture to make cars for the Chinese market and engines for export. VW's stake could total $220 million.</p>
<p>Many investors have had trouble in China, and as pioneers the oil companies have the most horror stories to tell. Playing on their eagerness to explore, China enticed them to ante up all the costs of offshore oil exploration. Then the Chinese piled on the expenses. Companies are forced to pay California-scale wage rates for inexperienced and often inefficient Chinese rig workers, who must give most of their salaries to the government. Then comes what the Chinese term training-expense-paid trips (including pocket money) for Chinese delegations visiting the U.S. All this boondoggling is coming back to haunt Peking--there has been no stampede of bidders for new areas the Chinese want to open for exploration.</p>
<p>The government used the same tactic to develop several posh joint venture hotels in Peking. American investors put together the financing, but agreed that the Chinese government would own the hotels after ten years. Like the oilmen, the investors grabbed the one-sided deal because they were eager to get into China's room-starved hotel market. A California group led by C. B. Sung, a China-born American entrepreneur, backed the Great Wall Hotel, and the Jianguo Hotel is financed partly by San Francisco-based architect Clement Chen. While the investors struggle to get their money out in a decade, the Chinese have laid on a mounting array of taxes--some highly questionable.</p>
<p>--</p>
<div id="attachment_8506" class="wp-caption alignleft" style="width: 310px"><a href="http://fortunefeatures.files.wordpress.com/2012/02/auto_factory.jpg"><img class="size-medium wp-image-8506" title="auto_factory" src="http://fortunefeatures.files.wordpress.com/2012/02/auto_factory.jpg?w=300&h=232" alt="" width="300" height="232" /></a><p class="wp-caption-text">A few feet from this line producing a ten-year-old design called the Shanghai car, Volkswagen is assembling up-to-date Santanas from knits.</p></div>
<p>China has begun to offer more reasonable terms for manufacturing projects. As a U.S. official in Peking says, "Investors won't come to China for love but for money." The Chinese wooed Foxboro because they clearly wanted technology from the U.S. company. Even so, the negotiations dragged on for nearly three years. A Foxboro executive recalls, "We were dealing with people who had been in commercial isolation for 30 years. They really didn't understand how to do business or what motivated us." The Chinese, for instance, were slow to grasp that the U.S. company had to make a profit and would get no subsidy from Washington.</p>
<p>Foxboro, which owns 49% of the $10-million venture, persuaded its Chinese partner to keep the labor force lean and control overhead costs by providing an existing building at a price that a Chinese rather than a foreign enterprise would pay. Begun in 1983, the joint venture is not yet profitable, but general manager Donald N. Sorterup says he's satisfied with progress. "You don't come to China," he says, "unless you're a risk taker."</p>
<p>Nor has American Motors had a smooth ride. The company took four years and three months to negotiate its way into China. Then the U.S. automaker had to accept a notoriously inefficient state-owned enterprise as its partner in a $51-million joint venture. The Beijing Jeep Corp.--one-third owned by AMC--got rolling early in 1984 and by December was 20% ahead of the production schedule the government had set for it. At that point the factory ran out of materials and had to shut down for the month. Tod Clare, AMC's vice president for international operations, says the company decided not to "try struggling" to get more steel and electricity out of the government.</p>
<p>Still, AMC has shown what a shot of efficiency can do for profits. The U.S. company was given an antiquated plant in which its partner was turning out a boxy local model jeep. The joint venture continued making the old jeep, which retails for $5,500, but it boosted productivity by cutting the 10,000 workers to 4,000. Though the U.S. managers who run the plant won't confirm the number, Chinese sources say the joint venture made a $10-million pretax profit its first year. In October, Beijing Jeep plans to begin assembling a version of AMC's Cherokee, a plush four-wheel-drive station wagon, from kits of U.S. parts: In three to four years AMC hopes that jeeps built in China with many local parts will be internationally competitive in price and quality. Chinese wage rates, averaging less than $3 a day, may help.</p>
<p>Companies are horrified to discover that the People's Republic is among the world's most expensive business centers. Maintaining a manager in Peking can easily run to $250,000 a year, roughly 40% more than it costs in London. Foreigners are charged outrageous prices. Scarce apartments rent for $6,000 monthly--and the rent has to be paid a year in advance. A spartan little room in the government-owned Beijing Hotel, which provides crude furniture and minimal service, will cost nearly $50 a day starting next month. A light meal without drinks is about $9. When they travel in China, foreigners pay more than twice as much as Chinese for plane tickets. There's not much to do after work or on weekends at any price. Quite a few expatriates spend their free time drinking in each other's homes while griping about conditions.</p>
<p>Since so little office space is available, most companies have no choice but to rent space in hotels. Last year the hotels raised rates by as much as 115%, even for tenants who already had leases at lower rates. The first Chinese office building designed for businessmen is due to open this year. It will offer space at about double the cost of prime office suites in Hong Kong and four times that in Paris.</p>
<p>There are a lot of little rip-offs too. The Jianguo Hotel claims it loses about 5% of the food it imports because Chinese health inspectors say they must run laboratory tests--on such products as Swiss chocolate bars. A prestigious U.S. tourist agency can get cooperation from the state-owned China Travel Service only by giving its officials Japanese cameras and other gifts.</p>
<p>--</p>
<p>A more serious problem for investors is getting their profits out. "Nothing in their laws says you can't do it," says Foxboro's Sorterup. "If it weren't allowed, no one would come here to invest." The way things actually work, profits can be sent home only if the joint venture brings foreign exchange into China by exporting. AMC, for instance, won't take home any of its profit until it starts exporting vehicles.</p>
<p>Volkswagen struck a more complicated deal. It formed a joint venture with the Shanghai Auto Works, which turns out a car that looks like a 1947 Dodge. (If the door of a Shanghai car doesn't quite fit, a worker slams it with a wooden mallet.) On a nearby assembly line, Chinese workers put together the sleek, modem VW Santana from components shipped from West Germany. Alongside the 60-year-old Shanghai auto plant, Volkswagen is building an engine plant, which will send most of its output back to Europe. These exports are supposed to provide enough foreign exchange to cover VW's share of the joint venture's expected profits.</p>
<p>--</p>
<p>Problems will ease for Western businessmen if the new profit-consciousness permeates China's system. Even if Deng is only partly successful in implementing the new economic reforms, he has already created a more rational climate for international business. The handful of Chinese managers allowed to test capitalist techniques since last spring are exhilarated by their new freedom. Says Wang Rong Sheng, 37, a Communist party member and assistant manager of Shanghai Radio Factory No. 2, "Previously the role of this factory was like a gear in the whole state machine. We didn't care about the market, but just gave products to the state. Now we have to do market research and see if products can make a profit."</p>
<p>The danger is that the inexperienced Chinese will foul up their pursuit of a market-economy. For one thing, if Peking really does allow inefficient factories to fold, it will have even more trouble in the short run than it's having now providing jobs for millions of city dwellers. Inflation could sabotage the reform effort, too, by breeding unrest among workers. Many Chinese have already blown their savings on shopping sprees, convinced that new government policies are bound to force prices up rapidly. Chinese leaders have promised that prices will rise gradually, in sync with pay increases, a balancing act few Western nations have managed to master. Another threat to economic reform is the horde of poorly educated Communist party officials who are losing their dominance over factories to profit-minded managers. As an American specialist on business in China says, "If there isn't a leap forward and people are thrown out of work, the party hacks will have their tum again."</p>
<div id="attachment_8505" class="wp-caption alignright" style="width: 310px"><a href="http://fortunefeatures.files.wordpress.com/2012/02/office_worker.jpg"><img class="size-medium wp-image-8505" title="office_worker" src="http://fortunefeatures.files.wordpress.com/2012/02/office_worker.jpg?w=300&h=213" alt="" width="300" height="213" /></a><p class="wp-caption-text">Offices are still spartan, but computers are starting to pop up in China. This IBM PC is at Shanghai-Foxboro.</p></div>
<p>Perhaps the most hopeful sign that Peking wants to do business is the reemergence of Chinese who have commercial experience. They were banished to farms and factories during the Cultural Revolution, the decade of leftist madness that ended in 1976 and deprived China of an entire generation of educated managers. Xu Zhaolong, 67, who owned a chemical factory in Shanghai before the Communists took over, is among those who have managed a comeback. He is president of China International Trust &amp; Investment Corp., a state-owned investment bank known as Citic that has $300 million in working capital. It often teams up with Western corporations. "Investors feel more comfortable when we participate," says Xu. United Technologies uses a Citic subsidiary as its agent to sell helicopters in China. And Citic has a 10% share of a Beatrice Cos. joint venture that makes snacks and soft drinks in Canton. The organization is putting some money abroad, including $40 million into timberland in Washington State. Now Citic is shopping for a copper mine in Canada or Latin America to supply China. President Xu remarks, "I have a feeling we will make our way under socialism, but using methods of capitalism."</p>
<p>A group of former Chinese capitalists in Shanghai act as informal consultants to foreign corporations seeking guidance through the bureaucratic maze--for a fee. (Three of them posed for the cover of this issue.) "You have to know the way and the people," says Chen Wuqing, 62, an MIT graduate who is now general manager of Shanghai Patriotic Construction Co., a private enterprise conglomerate. It got started in 1979, when China decided to mobilize former capitalists by unfreezing their local bank accounts. Some 1,200 "subscribers" --as Chen terms investors--put about $33 million into the company, which now claims a net worth of $72 million." We pay subscribers bank interest rates, about 8%, plus a little incentive," says Chen, "but we don't call it a dividend."</p>
<p>Patriotic Construction built a couple of apartment buildings in Shanghai, where it also started restaurants and invested in 60 small factories. The company has seven joint ventures with Hong Kong companies to make such products as sweaters and toys. The Shanghai group even owns 25% of a cruise ship that plies between Hong Kong and Shanghai. Chen and his colleagues feel free to drive around Shanghai in foreign cars, including the Rolls on the cover and a Cadillac. Says Chen: "If there's another period of extreme leftist policy, I think that's the end of China. We lost ten to 15 years while countries like Singapore moved ahead."</p>
<p>But even Chen warns that Western businessmen should not expect China to be as freewheeling as its Asian neighbors: "We're moving cautiously. If we make a mistake, the open door will slam shut again." Describing the present "open door" policy, Chen holds his hands up to indicate a slight crack. Few international businessmen trying to get into the market would argue with that cautious appraisal. At best, China is exciting because of its long-term potential--if Deng's reforms work.</p>
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		<title>The Simplot Saga: How America's French Fry King Made Billions More in Semiconductors (Fortune, 1995)</title>
		<link>http://features.blogs.fortune.cnn.com/2012/02/12/simplot-steve-appleton/</link>
		<comments>http://features.blogs.fortune.cnn.com/2012/02/12/simplot-steve-appleton/#comments</comments>
		<pubDate>Sun, 12 Feb 2012 14:00:09 +0000</pubDate>
		<dc:creator>Sierra Jiminez</dc:creator>
				<category><![CDATA[Fortune Classic]]></category>

		<guid isPermaLink="false">http://features.blogs.fortune.cnn.com/?p=8428</guid>
		<description><![CDATA[<p><em>Editor's note: Every Sunday, Fortune publishes a favorite story from our magazine archives. This week, we look back at the wild and wooly tale of billionaire J.R. Simplot and the Idaho chip manufacturer he backed, Micron Technology. Micron's CEO Steve Appleton died when a small plane he was piloting crashed earlier this month in Boise. Fortune Managing Editor Andy Serwer wrote the piece in late 1995 and he remembers that <a href="http://features.blogs.fortune.cnn.com/2012/02/12/simplot-steve-appleton/">MORE</a><img alt="" border="0" src="http://stats.wordpress.com/b.gif?host=features.blogs.fortune.cnn.com&#038;blog=916416&#038;post=8428&#038;subd=fortunefeatures&#038;ref=&#038;feed=1" width="1" height="1" />]]></description>
			<content:encoded><![CDATA[<p><em>Editor's note: Every Sunday, Fortune publishes a favorite story <a href="http://features.blogs.fortune.cnn.com/tag/fortune-classic/" target="_blank">from our magazine archives</a>. This week, we look back at the wild and wooly tale of billionaire J.R. Simplot and the Idaho chip manufacturer he backed, Micron Technology. Micron's CEO Steve Appleton died when a small plane he was piloting <a href="http://money.cnn.com/2012/02/03/technology/micron_ceo_died/index.htm" target="_blank">crashed earlier this month </a>in Boise. Fortune Managing Editor Andy Serwer wrote the piece in late 1995 and he remembers that Appleton, then 35, seemed to have a need for speed. A picture in the article shows Appleton without a helmet making a jump on a dirt bike. Appleton's tragic death is a sad chapter in Micron's incredibly cinematic story.</em></p>
<p><strong>Micron Technology is one of the Big Board's most active stocks. Behind it is the most active octogenarian spud farmer in Idaho.</strong></p>
<p>By Andrew E. Serwer</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/02/1995_simplot_cover.jpg"><img class="alignright size-full wp-image-8452" title="1995_simplot_cover" src="http://fortunefeatures.files.wordpress.com/2012/02/1995_simplot_cover.jpg" alt="" width="240" height="294" /></a>FORTUNE -- The cream-colored Lincoln eases down a dirt road along an Idaho feedlot. Cowboys spot the car's MR. SPUD license plates and yank the reins of their horses to stare. At the wheel is their boss, John Richard (J.R.) Simplot, the remarkably vital 86-year-old billionaire. The old man stares right back at the cowpokes and nods with approval. Why shouldn't he like what he sees? He owns everything in sight: the Bunyanesque feedlot, the huge complex of potato-processing plants, and, beyond, miles and miles of farmland. "It's a big moose," he says. "Awesome."</p>
<p>As with any megafortune, Simplot's wealth was built from a few simple but revolutionary ideas, much sweat, and a generous glossing of luck. The details of his experience, however, are singular in the extreme. To begin with, Simplot is really the last man to have hewed a great fortune from the preindustrial West: Starting in the 1920s in southern Idaho's Snake River basin, he built a potato-based agricultural empire that, among other things, supplies McDonald's with more than 50% of its French fries. Now, amazingly, he is emerging as one of the single biggest winners in semiconductor technology. Through mind-boggling gains in the stock of Micron Technology, his high-tech fortune has suddenly ballooned to the point where it is clearly exceeded only by Bill Gates' and Paul Allen's. Besides being a wild ride full of bigger-than-the-sky personalities, intrigue, and potfuls of instant money, his life begins to look like a metaphor for the history of American business in this century-a man makes a fortune practically in the era of Manifest Destiny and then makes another in the age of the Internet. It seems impossible.</p>
<p>But it's true. Simplot's stake in Micron, the Boise chipmaker, has grown more than $2.5 billion, to $3.4 billion, in 24 months. That's $5 million every working day. You may have noticed Micron on your newspaper's business pages. Its stock nearly always on the NYSE most active list-in fact, only Teletonos de Mexico, Ford, and Compaq have had more shares change hands this year than Micron. Depending on the vagaries of the equity markets--and lately Micron and other tech stocks have fallen somewhat--the value of the 21% of Micron that Simplot owns or controls is on par with the stockholdings of Intel's (<a href="http://money.cnn.com/quote/quote.html?symb=INTC" target="_blank">INTC</a>) Gordon Moore, Oracle's (<a href="http://money.cnn.com/quote/quote.html?symb=ORCL" target="_blank">ORCL</a>) Larry Ellison, or H-P's (<a href="http://money.cnn.com/quote/quote.html?symb=HPQ" target="_blank">HPQ</a>) David Packard and William Hewlett.</p>
<p>Unlike those men, though, Simplot never finished the eighth grade, and he accumulated half his fortune after the age of 84. (Actually, his Micron stock would be worth over $4 billion except that the company's shares are down 25% since September. But, hey, they're up more than <em>sevenfold</em> since November 1993.)</p>
<p>Like most overnight success stories, Micron's took years of toil, blind faith, and, for a long while, good money after bad. Simplot was there almost from the beginning. He didn't just sneak in two years ago for the joy ride, nor was he some passive Dutch uncle. He bankrolled Micron, propped up the company when it was on the brink, and helped push it over the top. Today, Micron is a major provider of chips to Compaq and other PC makers. It's also incredibly profitable.</p>
<p>There is bickering in Boise over who really deserves credit for the success of the memory chip manufacturer. Simplot, of course, wasn't the technical brains, nor was he the day-to-day CEO. But he was the sugar daddy. "Fella," Simplot says, "Micron is my baby."</p>
<p>Simple words, but perhaps irksome to one of the company's founders and a former CEO, Joe Parkinson, who clashed with Simplot over financial and fiduciary matters at Micron. These differences came to a head last year, FORTUNE has learned, after the CEO and Simplot locked horns over whether Simplot was divulging what Parkinson considered inside information. Parkinson asked Simplot to cease. He also made a motion that Simplot be removed from the board. When Simplot said Parkinson's charges were groundless and didn't step down, Parkinson resigned. Micron apparently felt no ill effects. The board installed as CEO a then 34-yearold named Steven Appleton, who had started out working in the company's clean rooms at $4.46 an hour.</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/02/jr_simplot_potatoes.jpg"><img class="alignleft size-medium wp-image-8453" title="jr_simplot_potatoes" src="http://fortunefeatures.files.wordpress.com/2012/02/jr_simplot_potatoes.jpg?w=242&h=300" alt="" width="242" height="300" /></a>Micron's boom has benefited Boise tremendously. In fact, you could say this town of 347,773 is in the midst of a Chip Rush. Boise is now the fifth-fastest-growing city in the U.S., thanks largely to Micron and no thanks to other local businesses, like Morrison Knudsen, which has imploded, and a Hewlett-Packard disk-drive and printer plant that has cut its work force. Micron has created 8,000 jobs and dozens of millionaires, and upon a lucky few has bestowed truly huge fortunes. The latter group includes members of Micron's board, ranchers, farmers, and developers- friends of Simplot's. They are powerful landowners--the state's elite who each now happen to own $50 million to $100 million of Micron stock. Some mornings you can find them at Burns Bros. truck stop off Interstate 84 having breakfast at 6 A.M. Last one in gets stuck with the tab.</p>
<p>And Simplot is their aged king. Up in the private card room of the Arid Club--where none of the new women members dare tread&mdash;J.R., or Jack, as they sometimes call him, holds court. Every afternoon he drives his Lincoln five blocks over from his office in downtown Boise, parks in the handicapped spot out front ("No cripples here anyway"), and unlocks a special door that leads directly upstairs. "Hey, boys," he says, walking in, a little stiffly now after his second hip replacement surgery last April. "How about a game?" And the boys oblige, gin rummy or bridge, for a couple of hours.</p>
<p>At an age when most of us would be thrilled to push a shuffleboard stick, Simplot is the <em>éminence grise</em> behind his private Simplot Co.--which has potato, ranching, chemical, and mineral interests--as well as Micron. Both do close to $3 billion in annual sales. Yes, his hearing and memory are diminished--he's not great on the phone. Yes, his driving is a little shaky--he parks wherever he chooses, which drives truckers at his plants crazy. And, yes, he looks better in a hat. But his range of mental and physical activity is amazing. He neither smokes nor drinks and is an unflappable optimist.</p>
<p>Simplot just returned from a two-week trip to Australia to inspect 11 food plants he recently bought for $300 million. He plays golf--21 handicap--and skis. He recently addressed the Federal Reserve Bank. Accompany J.R. through one of his potato-processing plants and you soon find yourself trailing him across slop-slippery floors, up and over metal scaffolding blasted by starchy steam, and underneath clickety-clack packaging lines. "J.R.," says everyone who knows him, "is incredible."</p>
<p>Officially, Simplot retired in April 1994, but each morning he drives the Spudmobile down from his home in the foothills&mdash;you can't miss the 50-by-30-foot American flag on the 100-foot pole out front. He takes an elevator up to the 13th floor of the Capital Centre building on Main Street. There, in an office filled with pictures of family and the requisite Remington-style bronzes, he meets with the men who run Simplot. He'll query them about cattle and potato prices, but clearly his new love is technology and Micron. "Fella, we got something special in Micron. We're leading the world. It's real. It's not just a bunch of bullshit. <em>We're rolling out the chips</em>," he says, eyes widening.</p>
<p>Simplot has a growly, rolling, almost theatrical delivery--George C. Scott would do well as a movie version--that tends to rise in a crescendo at the end of sentences. It could be a radio voice, which isn't surprising, since one of his best friends was the late broadcaster Lowell Thomas, whom he met years ago at Averell Harriman's cottage at Sun Valley. Simplot stretches his solid 5-foot 10-inch frame and pulls out a little wallet-size display of Micron's chips. "On this little chip we can get 16 million bits of information. That's 1,000 to 2,000 pages of information, and we can get it off the chip <em>in a millionth of a second</em>."</p>
<p>Okay, but what's the connection? How is it that an 86-year-old farmer got mixed up in megabits? First, calling Simplot a farmer is like calling Bill Gates a college dropout. And second, a look at Simplot's career shows that he has always harnessed the power of machines and technology to make quantum leaps in business. Simplot was born in Dubuque, Iowa, in 1909 and moved to Idaho when he was an infant. His family settled on the south bank of the Snake River and cleared the land to farm. At 14, he left home, dropped out of school, and built his first machine. It was a giant boiler for cooking up scrap potatoes and horse meat--from wild horses he shot out on the desert--to feed his hogs. The boiler helped him prepare mass quantities of food through a tough winter, and in the spring he sold his pigs for a profit of some $7,000, a small fortune at the time.</p>
<div id="attachment_8454" class="wp-caption alignright" style="width: 310px"><a href="http://fortunefeatures.files.wordpress.com/2012/02/steve_appleton.jpg"><img class="size-medium wp-image-8454" title="steve_appleton" src="http://fortunefeatures.files.wordpress.com/2012/02/steve_appleton.jpg?w=300&h=277" alt="" width="300" height="277" /></a><p class="wp-caption-text">Steven Appleton started out working in Micron's clean rooms and became CEO at age 34.</p></div>
<p>The next machine that grabbed Simplot's attention was an automatic potato sorter. Then still in his teens, Simplot and a partner ordered one of these machines. Simplot owned a 50% share and won the other half in a coin toss. That machine gave him a monopoly on the fast sorting of potatoes in Idaho, and Simplot was on his way to his first million. Another technological breakthrough: food dehydration. On a trip to California in 1940, Simplot saw an old prune drier adapted to drying onions. He ordered one and used it to create dehydrated potatoes, which fed the troops in World War II. That device helped make him an even wealthier man.</p>
<p>His next breakthrough was successfully freezing potatoes, which had never been done until one of Simplot's engineers discovered that the trick was blanching and compressing. That technology led to a deal with Ray Kroc in the mid-1960s for Simplot to sell frozen French fries to McDonald's (<a href="http://money.cnn.com/quote/quote.html?symb=MCD" target="_blank">MCD</a>), which made him a billionaire.</p>
<p>Micron (<a href="http://money.cnn.com/quote/quote.html?symb=MU" target="_blank">MU</a>) was founded by a group of engineers, including one Ward Parkinson, who were joined by Parkinson's twin brother, Joe, a lawyer. Raised in southeastern Idaho, the Parkinsons--who married and were divorced from sisters--worked potato fields and delivered spuds to Simplot warehouses as kids. They excelled in school and attended Columbia University in New York. After a decade of wandering and various jobs, the twins ended up in Boise, Ward doing contract engineering for Texas chipmaker Mostek and Joe doing dreary, small-city legal work. Ward and his engineering buddies had decided to form Micron in 1978. They set out to create a new, smaller version of the 64K DRAM chip, which is a memory chip that holds some 64,000 bits of information. (Joe ended up helping out so much he joined Micron and became head man.) One major problem: money. They needed sacks of it. The Parkinsons were introduced to Allen Noble, a farmer and inventor of irrigation systems, and to a couple of other potential investors, Tom Nicholson and Ron Yanke. The three men anted up $100,000 each-the Parkinsons pitched in too. Later they went to Simplot and his big bucks.</p>
<p>And just who are these founders and insiders? All Idahoans of the old school. Take Nicholson and Yanke, who both became board members (though Yanke later left) and played significant roles in nurturing the company. Frontier-friendly and best friends since Boise High School--Nicholson was student body president, while next to Yanke's yearbook picture it reads, "Lanky but never lonesome"--they each own about a million shares of Micron stock today.</p>
<p>One recent morning at Burns Bros. truck stop, Yanke and Nicholson arrive around 6 A.M. to eat and chat with the boys, including Bill Deasey, who preceded Bill Agee as CEO of Morrison Knudsen, and Harry Bettis, who owns some $85 million of stock in West One, Idaho's biggest bank. These are conservative Republicans, though politically distant from the off-the-grid types who inhabit the state's deep woods. Simplot, who says he's been offered and has refused two U.S. Senate seats, says he stays out of active politics since he has to get along with politicians from both parties.</p>
<p>After breakfast--a few order buffalo burgers and eggs, with hot sauce&mdash;Nicholson and Yanke hop into Yanke's truck and head over to the airport. Hearing that Micron stock is down two points, Yanke flips on his Motorola cell phone and calls his broker. "Get me 10,000 shares of Micron." Done deal. A $750,000 stock trade out of a 1.5-ton Dodge Ram. Then it's up in Yanke's Cessna Turbo 206 for a little elk spotting. (Is this their own private Idaho, or what?) "There's two, Ron," calls Nicholson. "No, Tom, those are cattle," replies Yanke. "Turn the plane around, Rory, and let's see." In a blink the pilot twists the Cessna sideways, 100 feet off the tall timber just west of the Sawtooth Range at 125 miles per hour. "Barf bags are behind the seat," says Nicholson.</p>
<div id="attachment_8455" class="wp-caption alignleft" style="width: 310px"><a href="http://fortunefeatures.files.wordpress.com/2012/02/yanke_nicholson.jpg"><img class="size-medium wp-image-8455" title="yanke_nicholson" src="http://fortunefeatures.files.wordpress.com/2012/02/yanke_nicholson.jpg?w=300&h=261" alt="" width="300" height="261" /></a><p class="wp-caption-text">Ron Yanke, in front, and Tom Nicholson, Micron multimillionaires, take the waters in Jackpot, Nevada.</p></div>
<p>The pair fly up to the town of McCall, on Payette Lake, where many of Idaho's power brokers--including Simplot and Yanke--have homes. Nicholson recalls a flight he made in the very same airplane with Micron co-founder Ward Parkinson back in the early 1980s when the company was struggling. Simplot's people wouldn't let him put in another penny, and Nicholson and Parkinson flew up to meet with Bill Agee, then CEO of the auto-parts company Bendix. (Agee was accompanied by his then-assistant Mary Cunningham.) "We offered him 50% of Micron for about $1 million," says Nicholson, who has known Agee for years. "And he said, 'It won't work: No.' " Much has been made of Bill Agee's boneheaded moves. That 50% stake is now worth some $7.5 billion.</p>
<p>But for Micron in the 1980s, Agee's rejection was just another chapter in a Russian novel of <em>nyets</em>. "We flew down to Dallas to talk with L.J. Sevin, head of Mostek," recalls board member Allen Noble. "And he said, 'You'll never make chips up there, never.' " In an exercise of sheer hubris, the Parkinsons pushed ahead to build a fabrication plant (called a fab) while they were still designing their chip. Bankrolled to a large extent by Simplot, they completed the fab in 1981 for between $7 million and $10 million, a tenth the cost of a typical facility. The company turned out its first 64K DRAM in 1982.</p>
<p>Micron went public in 1984. Terrible timing. Eleven U.S. firms would soon stop making DRAMs domestically--all except IBM, which mostly used the chips internally, and Micron--because the Japanese had broken into the market and crashed prices. "They dropped the price of DRAMs from $2 to 25 cents and kept it there for 18 months," roars Simplot. "They were dumping!" At various points the company was in deep trouble. But eventually the Reagan Administration slapped a $300 million tariff on Japanese chips. Next, Micron was hit by a slowdown in the chip business. By 1990 the company had $333 million in sales, but profits of only $5 million.</p>
<p>"We learned from those years," says Steve Appleton, the motorcycle-riding CEO. "We learned that to survive, we had to become the lowest-cost producer." Rather than focus on cutting-edge technology and then look for an application, engineers at Micron became experts at the process of making chips, especially a technique called shrinks. The smaller a company can make a chip, the more profit it can make, since tinier chips allow a company to produce more chips per batch. Chief technologist Tyler Lowrey, whom several board members call the company's franchise player, explains that Micron has been known more for its expertise in manufacturing chips than for actual chip design: "Our hallmark has been process technology. We've been high volume. We don't look for little niches."</p>
<p>So while the rest of the industry is now focused on making chips with 16 megs of memory (which can hold some 16 million bits of information), Micron still mostly churns out four megs. While most other companies have converted from six-inch to eight-inch wafers, Micron is just now switching over. Not that the company doesn't keep up with the latest technology. But it makes changes conservatively, carefully weighing the costs.</p>
<p>High volume, low cost is a familiar concept to Simplot, who's used to doing battle in tight margin commodity markets. But if Simplot didn't like the company's strategy, he'd probably change it. He may not be in control of scheduling shifts, but he does call the big shots. As one card player at the Arid Club bluntly puts it, "The board runs the company." Initially, Appleton takes issue with that notion. "Our board, like any other board, decides what the company tells the public. It decides what executives are paid. And it determines what we do with the stock." But when pressed, he admits that Micron's board is "slightly different." Major understatement.</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/02/micron_revenues_charts.jpg"><img class="alignleft size-medium wp-image-8456" title="micron_revenues_charts" src="http://fortunefeatures.files.wordpress.com/2012/02/micron_revenues_charts.jpg?w=192&h=300" alt="" width="192" height="300" /></a>During Micron's crisis years, the board began meeting every Monday morning at Elmer's Pancake House. It's a habit that stuck like syrup to a napkin. Even though the company now has billions in revenue, the board still gathers at Elmer's--where two ceramic pigs stand guard on top of a rotating cake display--once a week at 5:45 A.M. Get there after six and Simplot will cock his head and ask, "What's the matter, did you sleep in?" For breakfast Simplot passes on the short stack (which isn't bad) and orders a bowl of raisin bran. He's known to steal a few strips of bacon from the plates of other board members. Does this breakfast club really conduct serious business? "We go over everything," says Appleton.</p>
<p>Perhaps that's the kind of stifling oversight that precipitated the falling out between Joe Parkinson and Simplot. That, and the coincidence that both of them are as hardheaded as mountain goats. It's been over a year since Parkinson--who's now CEO of Integrated Information Technologies, a videochip company in Santa Clara, California--and Micron parted ways, and so far both sides have maintained a remarkable silence. But FORTUNE has pieced together what occurred. "You have to understand they were two extremes," says Appleton. "Joe Parkinson always liked to prepare for the worst, while J.R. Simplot is an eternal optimist."</p>
<p>That congenital divergence was reflected in nearly every decision the two men tried to make. Simplot says that Parkinson's communications to shareholders were unnecessarily pessimistic and that Parkinson would sell his Micron stock instead of hanging on to it. "I offered him a $50,000 loan several times to buy stock and he refused it," Simplot says. (Not that Parkinson needed to borrow $50,000 from Simplot.) Another divisive issue, Simplot says, was whether to expand the company, and if so, how to finance it. Says one Boise insider: "Joe was very suspicious of the markets. He wanted to hoard the company's profits and issue stock to pay for any new fabs. " Obviously a strategy that diluted the stock was not going to find favor with Simplot.</p>
<p>But there's another side to the story. Sources on the board say Parkinson believed Simplot was talking up the company to his buddies down at the Arid Club and perhaps to Wall Street. In the process, they say, Parkinson said Simplot revealed insider information. Parkinson, wary of shareholder lawsuits--the company was sued in 1989--or an SEC investigation, had Simplot sign a highly unusual document in February 1993. This "indemnification " document--a copy of which FORTUNE has obtained--states that "Simplot will not disclose to anyone not employed by Micron any proprietary information about [Micron] ... " And, "In the event Simplot breaches the foregoing, Simplot will defend ... hold harmless, and indemnify Micron &hellip;"</p>
<p>In October 1993, Simplot sent a letter to the <em>Wall Street Journal </em>talking up Micron's stock. Not knowing whether the <em>Journal</em> would print the letter--it ultimately didn't&mdash;the company felt compelled to issue a press release stating that "the letter is a personal statement of Mr. Simplot," that some of his comments were "factually incorrect," and that "Micron disavows any forecast of earnings." Meanwhile, Parkinson confronted Simplot about his loose talk, but Simplot--who has run a private company his whole life--said he wasn't sure he had revealed any numbers and that anyway he was not speaking for Micron and would damn well do as he pleased.</p>
<p>This wasn't the first time Simplot's business conduct had been questioned. In one of the largest scandals ever to hit the commodity markets, he was charged with manipulating the potato futures market in 1976. Basically, Simplot sold short potato futures, some say trying to depress prices. Instead of buying back contracts to cover his position, he let them expire. When those who held the long contracts demanded payment, Simplot sent them potatoes--though not Maine potatoes as the contracts stipulated--instead of cash, setting off an eight-year legal battle. Bottom line: Simplot was barred from trading for six years, paid a $50,000 fine, and settled a civil suit for $1.4 million. In 1977, Simplot was charged with tax fraud for failing to report more than $1 million in corporate income and claiming over $250,000 of false personal and family deductions. He pleaded nolo contendere and paid two $20,000 fines.</p>
<p>The conflict at Micron came to a head in September 1994, a week before the company was set to release yearly results. Over the weekend of September 17, Parkinson got a call informing him that Simplot again was spreading what Parkinson considered insider information--in this case Micron's year-end earnings to the penny. On Monday, September 19, Simplot skipped the meeting at Elmer's and drove out to the airport with his wife, Esther, to fly one of his Hawker jets to Canada for business. At Elmer's, Parkinson told the board he wanted a special meeting that morning in the privacy of Micron's boardroom to discuss the Simplot situation. Simplot was called and told of the meeting as he was about to board his plane.</p>
<div id="attachment_8457" class="wp-caption alignright" style="width: 268px"><a href="http://fortunefeatures.files.wordpress.com/2012/02/joe_ward_parkinson.jpg"><img class="size-medium wp-image-8457" title="joe_ward_parkinson" src="http://fortunefeatures.files.wordpress.com/2012/02/joe_ward_parkinson.jpg?w=258&h=300" alt="" width="258" height="300" /></a><p class="wp-caption-text">Joe Parkinson, right, who resigned as CEO, and twin brother Ward were among Micron's founders.</p></div>
<p>Simplot quickly drove the three miles over to Micron. When he arrived, the mood was somber. Board members say Parkinson asked Simplot if he was divulging insider information. Simplot said he didn't believe he was. Parkinson said he could no longer serve with Simplot on the board. Parkinson then made a motion that Simplot not stand for reelection to the company's board. But no one seconded the motion, and it failed. Simplot recalls reminding Parkinson of his controlling interest in over 20% of the stock. "Has it really come down to this," Simplot asked, "that it's either you or me?" It had. "I'm not leaving," said Simplot. So Parkinson and two allies, chief operating officer James Garrett and CFO Reid Langrill, resigned. It wasn't the first time Parkinson had walked. Years earlier, Simplot lost his temper. "You're fired," he said to Parkinson. "You can't do that," responded Parkinson. "Then get out of my building," J.R. growled. And Parkinson did. But this time Simplot was shaken and held his tongue.</p>
<p>Parkinson insists it was only Simplot's leaking confidential information and denying he did so to the board that caused him to leave the company.</p>
<p>Insiders acknowledge Parkinson's contribution, but many say privately that he could be difficult to work with. His twin, Ward, left the company in 1989 after some serious head butting. Most won't comment on the record other than to compliment Parkinson's successor, Steve Appleton. For instance: "Steve is someone who really listens," says Gene Cloud, Micron's head of marketing.</p>
<p>Others say Simplot is the bad guy. He's a manipulator, they claim, who hypes Micron's stock. One board member says he sometimes cringes when Simplot starts talking during shareholder meetings. Simplot recently told FORTUNE: "They might not want me saying this, but it's my opinion. I think Micron is going to earn $12 a share next year."</p>
<p>Certainly, Simplot has his demons. His older sister Peggy lives back in south-central Idaho, but he doesn't see or talk about her much. And his son Richard, who had battled alcoholism, died of diabetes in 1993. Except for his daughter Gay, his other children, who are all on the Simplot board, don't seem to have anywhere near the same business acumen he does. His second wife, Esther, a classically trained singer in her early 60s, has preoccupations of her own. In 1991 she hired a mysterious Russian emigre to run the Ballet Idaho troupe--he left the company suddenly in 1993. In mid-September the nude and strangled body of the emigre's wife was found in some brush down the hill from the Simplot house.</p>
<p>But Simplot waves off all this unpleasantness. Personal tragedies, the feds, willful CEOs, lawsuits--Simplot seems to just brush them aside. With Parkinson gone, he has moved to push Micron harder.</p>
<p>The company is expanding full bore, funded by internally generated cash, of course. Last fall Micron announced plans to build a new $2.5 billion fab complex in a to-be-determined location. That set off the usual speculation and courting by states and municipalities.</p>
<p>By all accounts the company would have been content to stay in Boise--there's nothing but acres of sagebrush surrounding its facility--but for a nasty intrastate squabble. Micron, which already employs 1,000 engineers, wanted to build its new plant near an engineering school to help supply it with a pool of trained labor. Boise State, mostly a commuter school, has no engineering program, but the University of Idaho, 220 miles to the north in the otherwise low-tech hamlet of Moscow, does. Would the state be willing to move the engineering school, or let Micron help underwrite one at Boise State? Negative on both counts. Even with Micron, the Hewlett-Packard plant, and Zilog, another thriving chipmaker, in Boise, the state refused to move the school and made it impossible for Boise State to run an accredited program. Simplot was livid.</p>
<p>Not surprisingly, Micron announced the plant would not be built in Idaho but in Oklahoma, Nebraska, or Utah. Still, Simplot wanted to give it one more shot. On the morning of February 20 of this year, he demanded that a special joint meeting of the legislature be convened (that day!) so that he could address the lawmakers on the engineering school brouhaha! The lawmakers agreed to listen to him that afternoon in the statehouse's largest hearing room. Despite a half-hour appeal by Simplot, the upstate forces wouldn't change their minds. So on July 1, Micron broke ground in Lehi, Utah, at a site 20 miles equidistant from the University of Utah's and Brigham Young's solid engineering schools. What happened to Nebraska? Says Simplot: "Well, Warren Buffett called me up and talked to me for about 20 minutes trying to convince me to move the plant down there. He's a nice fella, but we just decided on Utah."</p>
<p>Micron hasn't exactly given up on Boise. The company is spending $900 million to expand its 1.8-million-square-foot headquarters. Every room, clean or otherwise, is buzzing with the business of making chips and is simultaneously expanding. Chipmaking equipment is so expensive and becomes outdated so quickly that shifts must work 24 hours to amortize. In one 2,000-square-foot space, dozens of $2.5 million chip testers are being installed. Half a mile down the road from Micron, a brand-new housing development--put up by guess who--is open for business. In a quirky television commercial, Simplot looks into the camera and barks, "You young people ... get a piece of the action!"</p>
<div id="attachment_8458" class="wp-caption alignleft" style="width: 280px"><a href="http://fortunefeatures.files.wordpress.com/2012/02/jr_simplot_hat.jpg"><img class="size-full wp-image-8458" title="jr_simplot_hat" src="http://fortunefeatures.files.wordpress.com/2012/02/jr_simplot_hat.jpg" alt="" width="270" height="273" /></a><p class="wp-caption-text">He may never make it onto a postage stamp, but Simplot has made his mark.</p></div>
<p>The 64-megabit question: Is Micron moving ahead too fast? The <em>Idaho Statesman</em> recently reported Micron is set to build another new plant in Ireland. Certainly, demand for DRAMs can't grow much faster. Worldwide semiconductor sales are expected to grow an amazing 40% this year, according to the Semiconductor Industry Association. The market for chips has become humongous. Micron, which has only a 5.5% share, could do $5.5 billion in sales in fiscal 1996 (which ends in August). The diversified Asian giants--Samsung, Hitachi, NEC, and Toshiba--control over 40% of the market, though much of their production is for internal use.</p>
<p>Right now Micron's profits are fat indeed. Net margins are over 28%. Prices for chips, which usually decline 30% annually, have risen or held flat for three years. Driving demand for Micron's chips is the boom in PCs, which need increasing amounts of memory. Simplot, who doesn't even own a computer ("Hell, boy, I came before the goddamn typewriter"), was recently given a demonstration of Windows 95. His assessment: "I love that program. It uses all kinds of memory." But will demand for PCs hold? Over 50 fabs are under construction around the world right now--including one by Taiwan's Chia Hsin Livestock--which will eventually depress prices.</p>
<p>A few security analysts have expressed concern over possible declines in chip prices, though they haven't cited any weakness in Micron's business. Fidelity Investments, which owned 26 million shares (12.7%) of Micron's stock in January, has cut back to 18 million shares (8.9%) as of October 1. And so the stock has dropped 25% in six weeks. At its high on September 11, Micron had a market capitalization of over $20 billion. That's bigger than Texaco's. Even today, at nearly $15 billion, Micron's market value is greater than that of Sara Lee or Merrill Lynch. Simplot isn't at all concerned about the stock price: "Hell, I'd buy more today, but my broker at Merrill Lynch won't let me. Says I have to diversify."</p>
<p>Micron bulls point to the company's tremendous profitability and its nearly debt-free balance sheet. They argue that Windows 95 upgrades, plus strong demand from consumers, plus overseas growth, will keep chip sales and margins strong for the foreseeable future. Yes, they say, new fabs are coming online, but long backlogs of chipmaking equipment are slowing capacity expansion. For now, executives at Micron are upbeat. "Christmas is going to be a blowout," says Gene Cloud, echoing others. Says one board member, sipping coffee up at the truck stop: "If we don't earn $2 billion next fiscal year, something is wrong with us." Simplot is looking for $2.5 billion.</p>
<p>To free themselves of the memory-chip product cycle, Appleton and company are looking to diversify. "We aren't just focusing on DRAMs anymore. We're making products to fill fabs," says technologist Tyler Lowrey. Those products include little marker chips that can be slapped on airport luggage or pieces of mail, and flash memory chips, which need no energy source to retain information. Micron is also becoming a major force in PCs. Last year the company merged Zeos, a mail-order PC maker, into its own computer business. The new company, Micron Electronics (MUEI), with $1 billion in annual sales, trades on Nasdaq and is 79% owned by Micron. MUEI sells mostly high-end machines--133 megahertz and up--which have been winning rave reviews.</p>
<p>All of which makes Simplot a happy man. He neither designs chips nor builds fabs, but he's become a major player in this business of computer chips. As with those boilers, sorters, driers, and freezers from decades before, Simplot has latched on to another moneymaking machine. This one, though--a half-fingernail sliver of silicon--could bring him more wealth than all the others combined.</p>
<p>Driving his Lincoln the 40 miles back from his dusty feedlots and steamy potato plants to the clean rooms of Micron, he turns and says, "Son, these computers are big, but they're going to get bigger. <em>Bigger than the goddamned wheel!</em>" Even J.R. shakes his head at that one.</p>
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		<title>The rise of Netscape</title>
		<link>http://features.blogs.fortune.cnn.com/2012/02/05/the-rise-of-netscape/</link>
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		<pubDate>Sun, 05 Feb 2012 12:46:43 +0000</pubDate>
		<dc:creator>mvella1271</dc:creator>
				<category><![CDATA[Fortune Classic]]></category>

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		<description><![CDATA[<p><em>Editor's note: Every Sunday, </em>Fortune<em> publishes a favorite story </em><em>from our magazine archives. This week, we turn to a July 1995 item on the rise of a world-changing internet startup that would eventually pull off a blockbuster IPO: Netscape.</em></p>
The tiny startup is the hottest outfit on the internet. But Jim Clark's company is also becoming a player on the corporate networks IBM wants to rule.
<p>By Alison L. Sprout</p>
<p>FORTUNE -- Behold the power of <a href="http://features.blogs.fortune.cnn.com/2012/02/05/the-rise-of-netscape/">MORE</a><img alt="" border="0" src="http://stats.wordpress.com/b.gif?host=features.blogs.fortune.cnn.com&#038;blog=916416&#038;post=8414&#038;subd=fortunefeatures&#038;ref=&#038;feed=1" width="1" height="1" />]]></description>
			<content:encoded><![CDATA[<p><em>Editor's note: Every Sunday, </em>Fortune<em> publishes a favorite story </em><em><a href="http://features.blogs.fortune.cnn.com/tag/fortune-classic/">from our magazine archives</a>. This week, we turn to a July 1995 item on the rise of a world-changing internet startup that would eventually pull off a blockbuster IPO: Netscape.</em></p>
<h2>The tiny startup is the hottest outfit on the internet. But Jim Clark's company is also becoming a player on the corporate networks IBM wants to rule.</h2>
<p>By Alison L. Sprout</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/02/rise_of_netscape-09.jpg"><img src="http://fortunefeatures.files.wordpress.com/2012/02/rise_of_netscape-09.jpg?w=300&h=171" alt="" title="rise_of_netscape.09" width="300" height="171" class="alignright size-medium wp-image-8417" /></a>FORTUNE -- Behold the power of a visionary scorned. In February 1994, Jim Clark, then chairman of Silicon Graphics, the computer workstation company he founded in 1982, quit in disgust. He had failed to persuade senior colleagues at the thriving company to speed up plans to make low-cost, high-volume hardware for the much-ballyhooed information highway -- a move he considered critical to Silicon Graphics' long-term survival. "I got tired of pushing against an immovable object," says Clark, 52. "I felt like I wasn't having any influence."</p>
<p>But after he left, Clark didn't know what to do with himself. At first he thought he might create a company to design software to provide interactive television services via phone lines or cable. But as he sniffed around, Clark was pulled in by another vehicle for delivering data -- the Internet. The Internet had two advantages over the "hypeway." One, it existed; and two, millions of people were scrambling to get connected every year. Intrigued, Clark sent E-mail to Marc Andreessen, a recent graduate of the University of Illinois who had created Mosaic, the hottest software on the Net. By April the two had formed Mosaic Communications, rechristened last November as Netscape.</p>
<p>For Clark, the partnership was a chance to start over; for Andreessen, 23, it was a once-in-a-lifetime opportunity to form a company with a Silicon Valley legend. Says he: "In Illinois starting a company seemed like sort of an unnatural act."</p>
<p><strong>MORE: <a href="http://finance.fortune.cnn.com/2012/02/01/omg-facebook-files-for-ipo/">OMG! Facebook files for IPO</a></strong></p>
<p>Clark put up $4 million to set up shop in Mountain View, California, and hire most of Andreessen's University of Illinois colleagues. The "browser" software the team had invented enables mere mortals to point-and-click their way around the World Wide Web, the subset of the Internet where interactive documents that can include text, photos, and sound are connected by hypertext links. Such links allow users who click on a word in one document to jump to a related piece. The university gave Mosaic away as a public service, and in so doing introduced millions of people to cyberspace.</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/02/rise_of_netscape.jpg"><img src="http://fortunefeatures.files.wordpress.com/2012/02/rise_of_netscape.jpg?w=233&h=300" alt="" title="rise_of_netscape" width="233" height="300" class="alignright size-medium wp-image-8418" /></a>Andreessen and crew set out to capture these newcomers by developing a "Mosaic killer," a souped-up version that would have all the qualities the original lacked: built-in security, speed, and the ability to handle sophisticated graphics. Netscape decided that it too would give its browser away-the company's strategy called for back-end products that would capitalize on the browser's popularity and Mosaic's eclipse.</p>
<p>Navigator, as Netscape's browser is called, made its debut last December. Seven months later two-thirds of the nine million browsers used on the World Wide Web are Navigators, according to Dataquest, a San Jose research firm. Even if you use another browser, it's hard to surf the Web these days without running into Netscape. Many popular sites on the Web, including Yahoo (a directory and search service) and Ventana Online (a virtual computer bookstore), have links to Netscape's corporate site, where you can download Navigator, check out what's cool-and order a new version of the program that costs $39 and entitles you to customer support.</p>
<p><strong>MORE: <a href="http://tech.fortune.cnn.com/2012/02/01/meet-the-man-behind-the-facebook-ipo/">Meet the man behind the Facebook IPO</a></strong></p>
<p>Netscape has grown nearly as fast as its product. Last April the two founders and an assistant were the only employees. As Fortune went to press, the head count had reached 220. In January, Clark brought in Jim Barksdale, who quit as CEO of $2.3-billion-a-year McCaw Cellular, AT&amp;T's wireless services division, to become Netscape's CEO. That frees Clark to evangelize about the Net and gives Andreessen time to dream up products. Growing fast makes for great hype -- but how has Netscape made any money when it has given away its most popular software? By charging hefty fees for programs called Web servers. Web-server software lets companies create interactive documents known as "home pages," which give access to a host of information. Customers use Netscape servers in different ways. On the World Wide Web, they set up virtual stores, offer publications, and advertise their products. Meanwhile, Sun Microsystems, Lockheed Martin, and other major companies have begun using Web servers internally, as a way for employees to share information on their corporate networks.</p>
<p>Netscape charges $1,495 for an entry-level server; adding the ability to handle secure credit card transmissions bumps the price up to $5,000. Specialized servers that can handle databases of online customers cost $50,000. The market for World Wide Web servers is small but promising: Forrester Research in Cambridge, Massachusetts, estimates that it will grow from $5 million this year to $644 million by the year 2000.</p>
<p>By then, Netscape wants to be the one-stop shop for handling business transactions on the Web. Says Robert Hertzberg, editor-in-chief of WebWeek: "They are setting themselves up to be the software infrastructure for the Internet-the bricks and mortar."</p>
<p><strong>MORE: <a href="http://tech.fortune.cnn.com/2012/02/02/facebooks-other-major-milestone/">Facebook's (other) major milestone</a></strong></p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/02/netscape_andreessen.jpg"><img src="http://fortunefeatures.files.wordpress.com/2012/02/netscape_andreessen.jpg?w=174&h=300" alt="" title="netscape_andreessen" width="174" height="300" class="alignright size-medium wp-image-8420" /></a>Companies that use Netscape servers to do business on the Web can host customers running any kind of browser. But those with Navigator get special service. Let's say you want to buy a bathrobe from Hammacher Schlemmer at marketplaceMCI, an electronic mall. With Navigator you just type in your credit card number, and the transaction is protected by Netscape's special encryption technology. If you've merely got Mosaic, you must send in your number via Internet E-mail-which is even less secure than reading your number over the phone to some stranger at the other end.<br />
Another customer is Wells Fargo, which uses Netscape servers to let customers with Navigator browsers check their account balances and transactions. Publisher Knight-Ridder delivers the complete text of the San Jose Mercury News daily to a Netscape server that has become one of the Web's most popular sites.</p>
<p>Netscape has lured bigtime partners and investors. In April, Adobe Systems, Hearst, International Data Group, Knight-Ridder, TCI, and Times Mirror joined forces to purchase an 11% stake. The group's advisory council meets quarterly to advise Netscape on products that publishers need for online success. Bank of America and First Data Corp., a clearinghouse for financial transactions, helped Netscape design its process for handling credit card purchases. In addition, Clark has inked marketing or technology agreements with Internet service providers Pacific Bell and Delphi, a division of Rupert Murdoch's News Corp.; MasterCard; and networking leaders Digital, Novell, and Sun Microsystems.</p>
<p>These last three agreements offer a glimpse into Netscape's future -- and suggest how the company may touch your life even if you never leave the safety of your corporate network to surf the World Wide Web. Despite the buzz it has created on the Internet, Netscape makes most of its money selling browsers and servers to companies that create internal Webs as a way of sharing information. At Sun, for example, employees use more than 500 Web servers, including many with Netscape software, to pass along things like engineering plans and organization charts. Using Navigator, any employee can read such documents and click on key sections for access to related articles, which might be on the same server or elsewhere on the network.</p>
<p>In other words, an internal Web is a rudimentary form of corporate groupware -- a poor man's Lotus Notes. And Notes, mind you, is the main reason IBM is willing to pay $3.5 billion for Lotus. Says Jerry Michalski, managing editor of industry newsletter Release 1.0: "Internal corporate networks are going to be a huge use of Web technology. The next generation of client-server applications is being designed there."</p>
<p>Dozens of companies have opted for internal Netscape setups. The technology is promising enough that Novell, the leading provider of software for local area networks, is making sure that its products work withNetscape browsers and servers.</p>
<p>Netscape isn't counting on Novell alone. Andreessen and colleagues have created servers that work with Microsoft NT, the primary challenger to Netware, Novell's network software. They are also working closely with Digital, which is equipping its salespeople's laptops with Navigator so they can easily tap into the company's internal Web servers while on the road. The two companies are collaborating on a project to let other businesses have similar access.</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/02/netscape_barksdale.jpg"><img src="http://fortunefeatures.files.wordpress.com/2012/02/netscape_barksdale.jpg?w=193&h=300" alt="" title="netscape_barksdale" width="193" height="300" class="alignright size-medium wp-image-8419" /></a>Netscape has enjoyed a heady first year -- but now it will have to fight off competitors to maintain its position as the leading commercial provider of browsers and software for Web servers. The company has only one real rival on the server side: Open Market, in Cambridge, Massachusetts (see following story). So far, Open Market has been more of a consultant than a software developer -- its business to date has consisted mostly of building custom-designed World Wide Web sites for clients like Time Warner and Conde Nast, complete with record-keeping and bill-paying services. But Open Market recently came out with a stand-alone server that could compete with Netscape's. A bigger threat may be Microsoft. The software giant will offer an enhanced version of the original Mosaic as an option with Windows 95. Servers may not be far behind-the upcoming Microsoft Network is expected to offer access to the World Wide Web. A Microsoft official will say only that making a commercial Web server "would be a smart thing to do."</p>
<p>The browser market, too, will likely get far more competitive than it is now. Online-service providers like America Online, CompuServe, and Prodigy already offer other browsers to their millions of subscribers.Netscape is fighting back by adding more and more features to Navigator. It has licensed from Sun a programming language called Java that will run live applications such as updated stock prices and animated advertising. A deal with Macromedia, the leading creator of software for multimedia developers, will allow Navigator to play certain games and programs originally designed for CD-ROMs that will soon be offered on Websites.</p>
<p>Indeed, the lowly browser, which has been so instrumental in hyping Netscape, could play a big role in the company's future. As more and more homes get connected to cable and telephone lines with greater bandwidth, a good front end that allows them to navigate between the text, video, graphics, and sound to be delivered will be in high demand-software that's a lot like Netscape Navigator. "The next step is interactive video on demand," says Clark, "and Netscape will be there."</p>
<p>Hmmm. Sounds like Jim Clark may not have given up on the interactive TV business after all.</p>
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		<title>The evolution -- and promise -- of the new united Europe (Fortune, 1990)</title>
		<link>http://features.blogs.fortune.cnn.com/2012/01/29/the-evolution-and-promise-of-the-new-united-europe-fortune-1990/</link>
		<comments>http://features.blogs.fortune.cnn.com/2012/01/29/the-evolution-and-promise-of-the-new-united-europe-fortune-1990/#comments</comments>
		<pubDate>Sun, 29 Jan 2012 12:33:15 +0000</pubDate>
		<dc:creator>mvella1271</dc:creator>
				<category><![CDATA[Fortune Classic]]></category>

		<guid isPermaLink="false">http://features.blogs.fortune.cnn.com/?p=8333</guid>
		<description><![CDATA[<p><em>Editor's note: Every Sunday, </em>Fortune<em> publishes a favorite story </em><em>from our magazine archives. This week, we turn to a September 1990 story from the annual power confab in Davos, which was also going on this week. Its author, the legendary Marshall Loeb, writes of the dawn of a new era for Europe and asks about the decades to come.</em></p>
<p>By Marshall Loeb</p>
<p>FORTUNE -- The 1990s may well be the Decade of Europe, an era <a href="http://features.blogs.fortune.cnn.com/2012/01/29/the-evolution-and-promise-of-the-new-united-europe-fortune-1990/">MORE</a><img alt="" border="0" src="http://stats.wordpress.com/b.gif?host=features.blogs.fortune.cnn.com&#038;blog=916416&#038;post=8333&#038;subd=fortunefeatures&#038;ref=&#038;feed=1" width="1" height="1" />]]></description>
			<content:encoded><![CDATA[<p><em>Editor's note: Every Sunday, </em>Fortune<em> publishes a favorite story </em><em><a href="http://features.blogs.fortune.cnn.com/tag/fortune-classic/">from our magazine archives</a>. This week, we turn to a September 1990 story from the annual power confab in Davos, which was also going on this week. Its author, the legendary Marshall Loeb, writes of the dawn of a new era for Europe and asks about the decades to come.</em></p>
<p>By Marshall Loeb</p>
<p>FORTUNE -- The 1990s may well be the Decade of Europe, an era when that energized and integrated continent offers more challenge and opportunity than either Asia or America. In this new Europe, the leading force -- the critical mass -- will be a united Germany. Details of how to bring about unification are being worked out now, and not only in Bonn and East Berlin but also in other European capitals and Washington. Just as war is too important to be left to the generals, so German reunification is too important to be left to the Germans. With capitalist-inspired revolution sweeping Eastern Europe and the Soviet Union, what will that part of the world look like as the decade unfolds?</p>
<p>Some remarkable insights came forth at the recent annual World Economic Forum in Davos, Switzerland -- attended by some 1,200 chieftains of business, government, and the media. For the first time, the Eastern Europeans were there in large numbers, among them the Presidents, Prime Ministers, or principal deputies of East Germany, Czechoslovakia, Hungary, Poland, and Bulgaria. All the Eastern Europeans are struggling to find some new economic model that will provide both the opportunities of capitalism and the safety nets of socialism. A common plea to Westerners: "Send us your managers. That's what we need most." They also need capital, and tried to outbid one another in proclaiming new liberalizations. (For more on what they offer, see The World.)</p>
<p>At the other extreme: a common fear of possible violence, from the newly unemployed or old ultranationalists. Mikhail Gorbachev's chief economic strategist, Deputy Prime Minister Leonid Abalkin, granted that many parts of the Soviet economy are very backward -- but not its military-industrial complex (yes, he called it that). Quick progress could be made by shifting the military machine to produce more consumer goods, he said. Added Nikolai Shmelev, head of the North American Department of the Soviet Academy of Sciences and member of the Congress of People's Deputies: "All our history, we have preferred gigantic projects. It was almost our national disease. But now it's much more important to have not one or two or three huge projects involving foreign investment but hundreds or, if possible, thousands of medium-size and small enterprises."</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/01/ludwig_erhard_karl_marx.jpg"><img src="http://fortunefeatures.files.wordpress.com/2012/01/ludwig_erhard_karl_marx.jpg?w=300&h=138" alt="" title="ludwig_erhard_karl_marx" width="300" height="138" class="alignright size-medium wp-image-8335" /></a>The Soviets' most daunting problem: jobs. "Already," said Shmelev, "we have five million people unemployed. Another 30 million of our personnel are employed, but inefficiently. They must be sacked. But you can understand the danger of social reprisal if they are all let go at once." And, Shmelev continued, "a lot of our mines should be closed. They are hopelessly inefficient. But how can you retrain a miner?" One of his solutions: Let the Soviets borrow in the West against their gold hoard, about $30 billion, and use the money to finance joint ventures.</p>
<p>West Germany's Chancellor Helmut Kohl spoke eloquently on the problems of the present and the promise of the future, saying that a unified Germany would be trustworthy and needed to be an integral part of the West. He thanked the U.S. for its postwar support and said that today it was West Germany's turn to help those in need. Then, referring to the free-enterprising Finance Minister (and later Chancellor) who lifted West Germany from the ashes more than 40 years ago, he said, "Ludwig Erhard has triumphed over Karl Marx." Now, he concluded, the new Europe must have as its goal the grand vision expressed by Thomas Jefferson: "Life, liberty, and the pursuit of happiness."</p>
<p>Humor often prevailed at the World Economic Forum too. Eastern Europeans needled the many Soviets present. For example, Czech Prime Minister Marian Calfa demanded, Why did the Russians need more than a year to pull their troops out of his country when "it took them only 24 hours to come in?" Others joked at their own expense. Bulgaria's new Premier, Andrei Lukanov, said of his job: "It's terrific. There's no government to deal with." Old hatchets were buried, and new relationships created. And for the first time West Germans claimed East Germans as meine Landsleute -- my countrymen. That, perhaps above all else, provided a clear look at the face of Europe in the 1990s.</p>
<div><span class="Apple-style-span" style="color:#333333;font-family:Arial, helvetica, sans-serif;font-size:14px;"><em><br />
</em></span></div>
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		<title>Can Big Business learn to live with Newt Gingrich? (Fortune, 1995)</title>
		<link>http://features.blogs.fortune.cnn.com/2012/01/22/newt-gingrich-fortune-1995/</link>
		<comments>http://features.blogs.fortune.cnn.com/2012/01/22/newt-gingrich-fortune-1995/#comments</comments>
		<pubDate>Sun, 22 Jan 2012 14:30:25 +0000</pubDate>
		<dc:creator>Fortune Editors</dc:creator>
				<category><![CDATA[Fortune Classic]]></category>
		<category><![CDATA[Bob Dole]]></category>
		<category><![CDATA[Fortune Classics]]></category>
		<category><![CDATA[Newt Gingrich]]></category>
		<category><![CDATA[White House]]></category>

		<guid isPermaLink="false">http://features.blogs.fortune.cnn.com/?p=8063</guid>
		<description><![CDATA[The leaders of corporate America have never been his biggest fans. But while they still don't want him in the White House, they love the way he runs Congress. By Ann Reilly Dowd with Madeline Jaynes<img alt="" border="0" src="http://stats.wordpress.com/b.gif?host=features.blogs.fortune.cnn.com&#038;blog=916416&#038;post=8063&#038;subd=fortunefeatures&#038;ref=&#038;feed=1" width="1" height="1" />]]></description>
			<content:encoded><![CDATA[<div><em>Editor's note: Every Sunday, </em>Fortune<em> publishes a favorite story <em><a href="http://features.blogs.fortune.cnn.com/tag/fortune-classic/">from our magazine archives</a>. This week, we turn to a September 1995 item on former Speaker of the House and Republican presidential hopeful Newt Gingrich, whose campaign staged a comeback with a victory in South Carolina's GOP primary race on Saturday.<br />
</em></em></p>
<h2>The leaders of corporate America have never been his biggest fans. But while they still don't want him in the White House, they love the way he runs Congress.<em><em><br />
</em></em></h2>
<p>By Ann Reilly Dowd with Madeline Jaynes<a href="http://fortunefeatures.files.wordpress.com/2012/01/newt_gingrich_1995_opener.jpg"><img class="alignright size-full wp-image-8078" title="newt_gingrich_1995_opener" src="http://fortunefeatures.files.wordpress.com/2012/01/newt_gingrich_1995_opener.jpg" alt="" width="240" height="315" /></a></p>
<p>FORTUNE -- When Newt Gingrich and his Republican revolutionaries seized control of Congress last fall, delight in many corner offices that Washington might finally move to cut federal spending and roll back noxious regulations was dampened by doubts about whether the new Speaker was up to his responsibilities. Indeed, for most of Gingrich's career, his relations with the men who run America's largest corporations have generally ranged from distant to frosty. To him, the big-business crowd, while sympathetic to his aims, have been too stodgy, too timid, too compromise-prone, and--worst of all--too willing to donate PAC money to the powerful Democratic barons on Capitol Hill. To them, Gingrich has been an intriguing but unnerving upstart: too radical, too quick to shoot from the lip, too self-consciously intellectual--in short, just too weird.</p>
<p>So where do things stand now? <em>Fortune's</em> latest exclusive poll of the heads of America's largest corporations provides the answer: Nine months into the new regime, big business finds itself living happily--though still warily--with Newt. In an August survey of Fortune 1,000 CEOs conducted by the opinion research firm of Clark Martire &amp; Bartolomeo, 93% of 201 respondents voiced approval of Gingrich's performance as Speaker. Most striking, 49% of top executives rose up on their wingtips and said they "approved strongly." By contrast, just 31% of voters--and only 53% of Republicans--in a recent CNN/USA Today Gallup poll held a "favorable" opinion of Gingrich. Insists Kenneth Duberstein, who served as chief of staff in the Reagan White House and now advises a number of major companies: "Corporate America has gone ga-ga over Newt."</p>
<p>Some surely have. Listen to John Snow, chairman of CSX Corp. (<a href="http://money.cnn.com/quote/quote.html?symb=CSX">CSX</a>) and current head of the Business Roundtable, who exults: "Newt Gingrich offers America a historic opportunity to change the direction of government, to move on a truly pro-growth path. He's a visionary, a strategist, a tactician, a revolutionary--and may go down in history as the most important person in modern times."</p>
<h2><a href="http://finance.fortune.cnn.com/2012/01/19/gingrichs-private-equity-past-part-3/">See also: Gingrich's private equity past</a></h2>
<p>But other findings in <em>Fortune's</em> poll suggest reasons why relations between big business and Gingrich could yet turn sour. Example: While CEOs like the way Newt is running Capitol Hill, they don't at all like the notion of his running for the White House. Only 13% believe he should enter the presidential race, vs. 29% who think General Colin Powell ought to join the fray. (And this, mind you, is among a crowd whose political affiliation breaks down as follows--72% Republican, 19% independent, and just 7% Democrat.)</p>
<p>Instead, America's top executives would much prefer to see as President the man once famously dismissed by Gingrich as "the tax collector for the welfare state," Senator Bob Dole of Kansas. Among all current and possible contenders, Dole was picked by 38% of CEOs, followed by Powell with 12% and California governor Pete Wilson with 10%. Where's Newt? Way back in the pack at 5%, barely ahead of Texas Senator Phil Gramm, and tied with those who favor giving Bill Clinton a second chance or taking a flier on former Tennessee governor Lamar Alexander.<span id="more-8063"></span></p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/01/newt_gingrich_pointing.jpg"><img class="alignleft size-full wp-image-8073" title="newt_gingrich_pointing" src="http://fortunefeatures.files.wordpress.com/2012/01/newt_gingrich_pointing.jpg" alt="" width="300" height="288" /></a>In part, Newt's presidential stature gap reflects the habitual preference of the small-c conservatives who run America's major corporations for statesmen who are, well, statesmanlike. "Gingrich shoots his mouth off too much," grouses National Life Insurance CEO Frederic Bertrand in a typical complaint. Unease with Gingrich's impulsive, in-your-face, maverick style may also explain why, despite their strong support for his efforts to reengineer Washington, 54% of CEOs in our poll said they would not hire Newt to reengineer a multimillion-dollar business like those they run.</p>
<p>Corporate leaders also continue to fret about the rising power of the so-called social conservatives within the new GOP--a shift that Gingrich, as much as anyone, has helped bring about. Fully 65% say the National Rifle Association has too much influence in the party, and nearly half feel the same way about the Christian Coalition. Warns Home Depot (<a href="http://money.cnn.com/quote/quote.html?symb=HD">HD</a>) CEO Bernie Marcus: "If the right insists on shifting the focus to social issues, Republicans will lose."</p>
<p>So given all these lingering doubts, you may be asking, Why the glowing job performance reviews for Newt? Simple: Since last November he has proved he can not only talk the conservative talk but also move legislation that may finally deliver on business's dream of a smaller, less costly, less intrusive federal government. "These are goals we've been pushing for 25 years," says Bell Atlantic CEO Ray Smith. "Now we've got a guy with energy, intellectual depth, and an astonishing ability to get things done. We'd be crazy not to get behind him."</p>
<h2><a href="http://features.blogs.fortune.cnn.com/2012/01/22/how-manager-gingrich-gets-it-done-fortune-1995/">See also: How manager Gingrich gets it done (Fortune, 1995)</a></h2>
<p>Indeed, the proof is in our poll: when asked what legislation would have the greatest impact on job creation and growth, the CEOs put the Republicans' liability law reforms and moves to impose cost-benefit standards on new regulations at the top of their list, with 71% naming these as "very important." Next in line was cutting the capital gains tax (62%), followed by getting control over the budget through containing Medicare spending (46%). Interestingly, though the executives far and away prefer the flat tax to other pro-savings tax reforms--66% backed taking this route--they rated radical tax reform behind these other measures as a spur to the economy.</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/01/chart_picking_president.jpg"><img class="alignright size-full wp-image-8075" title="chart_picking_president" src="http://fortunefeatures.files.wordpress.com/2012/01/chart_picking_president.jpg" alt="" width="200" height="222" /></a>By holding out the promise of sweeping change, Gingrich has managed to minimize what seemed a potentially large problem last fall--stiff business resistance to cuts in federal subsidies for agriculture, high tech, and other favored enterprises. "If you ask me, 'Would I rather preserve technology funding or cut capital gains?' " says Texas Instruments (<a href="http://money.cnn.com/quote/quote.html?symb=txn">TXN</a>) CEO Jerry Junkins, "there is no question the latter would have a more profound impact on my company and the economy." So while Junkins would like to save tech funding, losing that debate won't be a deal breaker for him. "If we miss this opportunity," he explains, "there may not be another." Agrees AlliedSignal CEO Larry Bossidy, who's heading up a multimillion-dollar campaign to promote budgetary balance: "For the first time in 20 years, the stars are in the right place, and we have a real chance."</p>
<p>Still, the toughest tests for this budding relationship lie ahead, starting this fall, when Gingrich must steer his party's regulatory reforms and tax and budget cuts--including major changes in Medicare--past threatened presidential vetoes. Beyond that is the huge challenge of keeping the GOP's economic and social conservatives marching together through an election year. And then there's the little matter of whether Newt joins the race. His wife, Marianne, is against the idea, and Gingrich himself puts the odds of his running at no better than 19 to 1. Even so, Marlin Fitzwater, Bush's longtime press secretary, is one of many seasoned pols who'd take that bet. Says Fitzwater: "When looking for presidential candidates, follow the ego. Newt hates Dole. He thinks he can beat Clinton. He will run."</p>
<p>If he does, that would inevitably put a rea<a href="http://fortunefeatures.files.wordpress.com/2012/01/chart_ceos_believe_that.jpg"><img class="alignleft size-full wp-image-8077" title="chart_ceos_believe_that" src="http://fortunefeatures.files.wordpress.com/2012/01/chart_ceos_believe_that.jpg" alt="" width="340" height="137" /></a>l strain on a partnership where old tensions have merely been suppressed, not eliminated. Gingrich recently spoke about those differences in a wide-ranging interview with <em>Fortune</em>. "Big businesses are essentially risk-averse," he said. "An awful lot of them have been stodgy bureaucracies seeking shelter in the arms of a nurturing government. Or they have found a way to make money by routine behavior. So rocking the boat is not something they do very easily. They are cautious and thoughtful, where we are entrepreneurial and risk-taking." Or as a longtime Gingrich ally less delicately puts it, "Newt knows most big-business executives are whores--but he believes in redemption."</p>
<h2><a href="http://finance.fortune.cnn.com/2011/12/05/newt-gingrich/">See also: Newt Gingrich and his sleazy ways: A history lesson</a></h2>
<p>Redemption, or at least improved communication, is also a prime rationale behind an intriguing series of small, private dinners the Speaker has been holding with America's corporate elite. Participants have included CSX's John Snow, IBM's (<a href="http://money.cnn.com/quote/quote.html?symb=ibm">IBM</a>) Lou Gerstner, General Electric's (<a href="http://money.cnn.com/quote/quote.html?symb=ge">GE</a>) Jack Welch, General Motors' (<a href="http://money.cnn.com/quote/quote.html?symb=gm">GM</a>) Jack Smith, and AlliedSignal's Bossidy. For Gingrich these sessions offer a chance to share ideas, lecture--and even bond a bit. "I told them what's shocked me about being the CEO--which I, in effect, am--is that even with the most ruthless delegation, probably, in political history, it is an all-day, total-immersion experience," says Gingrich. "They all said: 'You get it! Now you understand why we're a club, because we all know what it's like to be the final deciding <a href="http://fortunefeatures.files.wordpress.com/2012/01/chart_ceos_who-like-newt.jpg"><img class="alignright size-full wp-image-8076" title="chart_ceos_who-like-newt" src="http://fortunefeatures.files.wordpress.com/2012/01/chart_ceos_who-like-newt.jpg" alt="" width="150" height="249" /></a>point, to be in the middle of a fire hose and to be immersed.' It's the scale of it."</p>
<p>The message these aggressive downsizers have been giving him, in turn, he says, is to continue to be bold: "They've said, 'You can go further and faster than you think. Set very tough goals. Delegate dramatically. And ignore the experts. They will always be wrong. They will always be too timid.' " James A. "Micky" Blackwell, president of the aeronautics sector of Lockheed Martin (<a href="http://money.cnn.com/quote/quote.html?symb=lmt">LMT</a>), which through mergers and downsizing has shed more than 100,000 jobs since 1986, expresses it this way: "If you're going to cut off a dog's tail, don't do it in pieces. Whack it off."</p>
<p>For his part, Gingrich pointedly observes that while he appreciates these private words of encouragement, what he'd really like to see from his new corporate fans and allies is a lot more public boldness than they have hitherto displayed in the policy arena. His message to business: If you really want this relationship to work, be more like me.</p>
<p>"A number of businessmen have said to me, 'I hope you have the courage to change things, but don't ask me to take any risks. Don't ask me to get my customers mad. Don't ask me to get my employees mad. Don't ask me to get my stockholders mad. Don't ask me to get into any controversial debate.' I say, 'Have the courage you wish politicians had. If you don't have the courage to lead, why should you expect anyone else to do so?' "</p>
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		<title>How manager Gingrich gets it done (Fortune, 1995)</title>
		<link>http://features.blogs.fortune.cnn.com/2012/01/22/how-manager-gingrich-gets-it-done-fortune-1995/</link>
		<comments>http://features.blogs.fortune.cnn.com/2012/01/22/how-manager-gingrich-gets-it-done-fortune-1995/#comments</comments>
		<pubDate>Sun, 22 Jan 2012 14:30:07 +0000</pubDate>
		<dc:creator>Fortune Editors</dc:creator>
				<category><![CDATA[Fortune Classic]]></category>
		<category><![CDATA[Contract With America]]></category>
		<category><![CDATA[Newt Gingrich]]></category>
		<category><![CDATA[Republican]]></category>

		<guid isPermaLink="false">http://features.blogs.fortune.cnn.com/?p=8085</guid>
		<description><![CDATA[<p>FORTUNE -- If what really wows CEOs about Newt is his ability to get things done, a question naturally arises: How does he do it? By now, most people know Gingrich is a keen reader of books by the like of quality guru W. Edwards Deming and Peter Drucker (whose <em>The Effective Executive</em> is one of Newt's favorites), and a student of the tactics of leaders like the Duke of <a href="http://features.blogs.fortune.cnn.com/2012/01/22/how-manager-gingrich-gets-it-done-fortune-1995/">MORE</a><img alt="" border="0" src="http://stats.wordpress.com/b.gif?host=features.blogs.fortune.cnn.com&#038;blog=916416&#038;post=8085&#038;subd=fortunefeatures&#038;ref=&#038;feed=1" width="1" height="1" />]]></description>
			<content:encoded><![CDATA[<p>FORTUNE -- If what really wows CEOs about Newt is his ability to get things <a href="http://fortunefeatures.files.wordpress.com/2012/01/newt_gingrich_back1.jpg"><img class="alignright size-full wp-image-8086" title="newt_gingrich_back" src="http://fortunefeatures.files.wordpress.com/2012/01/newt_gingrich_back1.jpg" alt="" width="340" height="268" /></a>done, a question naturally arises: How does he do it? By now, most people know Gingrich is a keen reader of books by the like of quality guru W. Edwards Deming and Peter Drucker (whose <em>The Effective Executive</em> is one of Newt's favorites), and a student of the tactics of leaders like the Duke of Wellington and General George C. Marshall.</p>
<p>What's still underappreciated, though, is the extent to which management theory informs almost every act of this bare-knuckle political brawler. Consider the now famous Contract With America. Newt explains its genesis this way: " Prior to the election, our biggest fear wasn't losing, but winning and not having anything to do. So we created the Contract to imprint on members everything they had to do for the first 100 days. After the election, you never discussed it. You just executed. The Contract was designed as a management-training document that was politically useful, not simply as a political document. Nobody has ever figured that out."</p>
<p>Once the new Congress was in session, Gingrich moved quickly to reinvent the way the House works and shift power from the individual committees, which had been run like feudal fiefdoms, to the Speakership. "I believe in very rapid consolidation," he says. One of his first moves was an unprecedented order requiring all committee chiefs of staff to report to the Speaker's chief of staff. At the same time Gingrich went over the heads of senior Republicans and handpicked committee chairmen for their aggressiveness and loyalty.</p>
<p>Gingrich also set up a leadership structure filled with like-minded and battle-tested conservatives whose responsibilities are clearly defined, and with whom he typically meets in two-hour sessions twice a week. Gingrich sees himself as the CEO. "I do vision and strategy," he says. "When people ask me what's happening on the floor, I say: 'I don't know. That's Armey's job.' " Majority Leader Dick Armey, a cowboy-booted economist from Texas, is Newt's COO, the man responsible for the day-to-day operations of the floor. Another Texan, House Majority Whip Tom DeLay, acts as production manager--or as he puts it, "the shoe leather guy" who builds votes. Other top lieutenants tend to things like market research and building coalitions.</p>
<p>This division of labor allows Gingrich to concentrate on the big picture. Thus while the House was doing the Contract, he was focusing on budget strategy. When the House turned to budget matters, Newt was already on to Medicare reform. By the time the House is moving ahead on Medicare, he plans to be deep into his next long-range project: "Systems reform. How do we train the next generation of Congressmen? What is the Information Age process of self-government?"</p>
<p>Colleagues praise Gingrich as a leader who listens, especially to the freshmen whom he considers the heartbeat of his revolution. He's also happy to delegate. It's a running joke in the GOP cloakroom that you don't complain to him unless you want an assignment. But in a crunch, he's not at all shy about throwing his considerable weight around. When Commerce Committee Chairman Tom Bliley, who has close ties to AT&amp;T (<a href="http://money.cnn.com/quote/quote.html?symb=T">T</a>), produced a telecommunications bill in May that would have kept the Baby Bells out of the long-distance business for at least five more years, Gingrich--who instinctively favored a more deregulatory approach, and also figured the Baby Bells packed more collective grassroots clout than AT&amp;T, MCI, and Sprint (<a href="http://money.cnn.com/quote/quote.html?symb=s">S</a>)--insisted that the legislation be revised. His solution held.</p>
<p>Finally, like any good salesman, Gingrich knows packaging pays. Example: As part of the critical campaign to control Medicare spending--an effort Gingrich is personally spearheading--extensive GOP polling has found that seniors don't like the idea of "improving" Medicare. That's because they like the system just fine the way it is. So Republicans who've been trained in Newtspeak talk instead about "saving, preserving, protecting, and strengthening" Medicare. Still, Manager Gingrich insists he doesn't pander: "I don't follow public opinion polls. I use them. There's a huge difference. I know where we have to go. I just want to know what works in explaining it."</p>
<p><em>Return to</em> <em> <a title="Edit "Can Big Business learn to live with Newt Gingrich? (Fortune, 1995)"" href="http://features.blogs.fortune.cnn.com/2012/01/22/newt-gingrich-fortune-1995/">Can Big Business learn to live with Newt Gingrich? (Fortune, 1995)</a></em></p>
<br />Filed under: <a href='http://features.blogs.fortune.cnn.com/category/fortune-classic/'>Fortune Classic</a>  <a rel="nofollow" href="http://feeds.wordpress.com/1.0/gocomments/fortunefeatures.wordpress.com/8085/"><img alt="" border="0" src="http://feeds.wordpress.com/1.0/comments/fortunefeatures.wordpress.com/8085/" /></a> <a rel="nofollow" href="http://feeds.wordpress.com/1.0/godelicious/fortunefeatures.wordpress.com/8085/"><img alt="" border="0" src="http://feeds.wordpress.com/1.0/delicious/fortunefeatures.wordpress.com/8085/" /></a> <a rel="nofollow" href="http://feeds.wordpress.com/1.0/gofacebook/fortunefeatures.wordpress.com/8085/"><img alt="" border="0" src="http://feeds.wordpress.com/1.0/facebook/fortunefeatures.wordpress.com/8085/" /></a> <a rel="nofollow" href="http://feeds.wordpress.com/1.0/gotwitter/fortunefeatures.wordpress.com/8085/"><img alt="" border="0" src="http://feeds.wordpress.com/1.0/twitter/fortunefeatures.wordpress.com/8085/" /></a> <a rel="nofollow" href="http://feeds.wordpress.com/1.0/gostumble/fortunefeatures.wordpress.com/8085/"><img alt="" border="0" src="http://feeds.wordpress.com/1.0/stumble/fortunefeatures.wordpress.com/8085/" /></a> <a rel="nofollow" href="http://feeds.wordpress.com/1.0/godigg/fortunefeatures.wordpress.com/8085/"><img alt="" border="0" src="http://feeds.wordpress.com/1.0/digg/fortunefeatures.wordpress.com/8085/" /></a> <a rel="nofollow" href="http://feeds.wordpress.com/1.0/goreddit/fortunefeatures.wordpress.com/8085/"><img alt="" border="0" src="http://feeds.wordpress.com/1.0/reddit/fortunefeatures.wordpress.com/8085/" /></a> <img alt="" border="0" src="http://stats.wordpress.com/b.gif?host=features.blogs.fortune.cnn.com&#038;blog=916416&#038;post=8085&#038;subd=fortunefeatures&#038;ref=&#038;feed=1" width="1" height="1" />]]></content:encoded>
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		<title>Bain: A consulting firm too hot to handle? (Fortune, 1987)</title>
		<link>http://features.blogs.fortune.cnn.com/2012/01/15/bain-fortune-1987/</link>
		<comments>http://features.blogs.fortune.cnn.com/2012/01/15/bain-fortune-1987/#comments</comments>
		<pubDate>Sun, 15 Jan 2012 14:30:30 +0000</pubDate>
		<dc:creator>Fortune Editors</dc:creator>
				<category><![CDATA[Fortune Classic]]></category>
		<category><![CDATA[Bain & Co.]]></category>
		<category><![CDATA[Bain Capital]]></category>
		<category><![CDATA[Bill Bain]]></category>
		<category><![CDATA[Mitt Romney]]></category>

		<guid isPermaLink="false">http://features.blogs.fortune.cnn.com/?p=7974</guid>
		<description><![CDATA[Bain &#38; Co. gets its hands ''deep in the trousers of client companies,'' says an executive who knows it well. Maybe too deep, the Guinness scandal suggests. By Nancy J. Perry with Susan Caminiti<img alt="" border="0" src="http://stats.wordpress.com/b.gif?host=features.blogs.fortune.cnn.com&#038;blog=916416&#038;post=7974&#038;subd=fortunefeatures&#038;ref=&#038;feed=1" width="1" height="1" />]]></description>
			<content:encoded><![CDATA[<p><em>Editor's note: Every Sunday, </em>Fortune<em> publishes a favorite story <em><a href="http://features.blogs.fortune.cnn.com/tag/fortune-classic/">from our magazine archives</a>. This week, we turn to an April 1987 item on the management consulting firm Bain &amp; Co., which counts former Massachusetts governor and Republican presidential hopeful Mitt Romney as an alumnus (and former CEO). Romney co-founded the spin-off investment firm Bain Capital in 1984. The following story takes a close look at some of the benefits and pitfalls of the consulting firm's famously aggressive business approach.<br />
</em></em></p>
<h2>Bain &amp; Co. gets its hands ''deep in the trousers of client companies,'' says an executive who knows it well. Maybe too deep, the Guinness scandal suggests.</h2>
<p>By Nancy J. Perry with Susan Caminiti<a href="http://fortunefeatures.files.wordpress.com/2012/01/opener.jpg"><img class="alignright size-full wp-image-7989" title="opener" src="http://fortunefeatures.files.wordpress.com/2012/01/opener.jpg" alt="" width="340" height="443" /></a></p>
<p>FORTUNE -- On a January morning four years ago, 30 sleek, immaculately turned-out executives sat tensely at a ring of tables in a large conference room at the Hyatt Rickeys Hotel in Palo Alto. They had flown in from all over the world for a regular partners' meeting of Bain &amp; Co., a Boston-based management consulting firm. Their attention was riveted not on a discussion of the firm's revenues but on a speakerphone placed on a table in the center of the room.</p>
<p>Rising out of the ether was the voice of John Theroux, Bain's managing partner in London. He was describing a palace coup in progress at Guinness PLC, one of Bain's largest clients. Ernest Saunders, the Guinness managing director who had hired Bain, was trying to unseat Deputy Chairman Anthony Purssell, the man who had brought Saunders in to head the company. Because it was in the Bain firm's interest to have its man indisputably in charge, Theroux was seeking advice on how to help Saunders consolidate his position.</p>
<p>For the next two hours the partners were canvassed for ideas on how to place Purssell in such an untenable situation that he would have to quit. Ultimately a strategy was devised. ''It was quite cold-blooded,'' recalls a partner who attended. Within the month Purssell was out, and Saunders was alone at the top.</p>
<p>The creator of ''relationship consulting,'' Bain has built its business on the close ties that it develops with chief executives. Among the comparatively few people who know its work, the firm has become noted for the enormous power it wields with clients, for the cloak-and-dagger mystique that surrounds it, and for the shrewd, suave people it employs. Starting salaries in excess of $60,000 lure the sharpest, most presentable MBAs from Harvard and Stanford.</p>
<p>The brainchild of one man, William W. Bain Jr., 49, Bain &amp; Co. has created a new type of management consultant, the quasi-insider, privy to his client's secrets, who works directly with the CEO. to help put into effect the consulting firm's recommendations. As the Guinness affair was to show, it's a concept that can be pushed too far.</p>
<p>Bain's relationship with Guinness began on a damp day in October 1981, when a patrician-looking man appeared, unannounced, at the firm's elegant London offices near Hyde Park. He introduced himself as Ernest Saunders and said that he needed help rather badly. During the previous 10 years, Guinness had diversified into 250 businesses ranging from yacht rentals to a drug made from snake venom. Meanwhile, sales of the company's flagship product, Guinness stout, were declining steadily, and the stock was languishing at 50 pence a share, the equivalent of 81 cents at the recent rate of exchange.</p>
<p>The payoff from Saunders's visit was spectacular. Within two years of retaining Bain, Guinness had sold off 150 companies, imposed one of the tightest financial control systems in Britain, and revitalized Guinness stout. Then, at Bain's recommendation, Saunders began to position the company for the Nineties by diversifying into hard liquor. In rapid succession Guinness acquired two major producers of Scotch whisky: Arthur Bell &amp; Sons and Distillers Co.</p>
<p>By the end of fiscal 1986, profits at Guinness had risen sixfold, to nearly $400 million, and the stock had peaked at $5.75 a share. ''The turnaround at that terrible, awful company was the most beautiful thing I've ever seen,'' gushes a London businessman. ''What Bain did for Saunders was extraordinary.'' It was Bain's finest hour.</p>
<h2><a href="http://finance.fortune.cnn.com/2012/01/12/the-bain-bomb-fizzles/">See also: Gingrich's 'Bain bomb' fizzles</a></h2>
<div>And, ultimately, its darkest. In December, Britain's Department of Trade and Industry launched an investigation into Guinness's purchase of Distillers in April 1986 for stock valued at $3.8 billion. The department suspects that Guinness may have illegally inflated its stock price to woo Distillers' shareholders away from a competing offer from the Argyll Group, a Scottish food retailer. Guinness was thought to have purchased its own stock during the offering period to keep the price up and to have indemnified against loss other firms who bought it on Guinness's behalf.</div>
<p>Among those implicated in the scandal were Ernest Saunders, whom the board removed as chief executive, several top executives at Morgan Grenfell, Guinness's investment bank, and a 36-year-old Frenchman named Olivier Roux. Roux was director of financial strategy and development of Guinness and also a vice president at Bain; in 1981 the firm had lent him ''temporarily'' to its client.</p>
<div id="attachment_7986" class="wp-caption alignleft" style="width: 250px"><a href="http://fortunefeatures.files.wordpress.com/2012/01/olivier_roux.jpg"><img class="size-full wp-image-7986" title="olivier_roux" src="http://fortunefeatures.files.wordpress.com/2012/01/olivier_roux.jpg" alt="Olivier Roux" width="240" height="247" /></a><p class="wp-caption-text">Olivier Roux</p></div>
<p>One of Saunders's top aides, Roux was a member of the special ''war cabinet'' that masterminded the Distillers battle. Unfortunately he was also still on the Bain payroll, to the tune of $200,000 a year, prompting criticism that the firm was guilty of a conflict of interest and leaving Bain vulnerable to some of the lawsuits likely to arise from the Guinness affair. Roux resigned his posts at both Guinness and Bain earlier this year.</p>
<p>Making matters even stickier for Bain, Sir Jack Lyons, whom the consulting firm hired to help it get business in Britain, has admitted receiving more than $3 million in fees from Guinness for ''advisory services.'' His company, J. Lyons Chamberlayne, is also under investigation for accepting another $480,000 from Guinness linked to improper share buying. Bain fired Lyons in January.</p>
<p>So far Bain &amp; Co. has not been accused of any wrongdoing in the Guinness affair, and Bainies, as the consultants are known, still haunt the halls of Guinness, although in fewer numbers. But a nasty question foams up from the brewing brouhaha: How could a respected, albeit highly aggressive, firm like Bain have left itself open to being tainted by the scandalous behavior of a client? The answer may lie in Bain's approach to business: ''They get their hands deep into the trousers of a company,'' says an executive who knows the firm well. ''They behave more like colleagues than consultants.''</p>
<p>Notoriously secretive about itself and its work for clients, Bain has over the years been labeled the ''KGB of Consulting,'' or a ''Moonie commune'' run by the ''Reverend'' Bain. Bain consultants seem possessed by a mission to increase the ''total economic value'' of their clients. Like religious zealots, they single-mindedly dedicate themselves to improving their customer's competitive position. Business is a holy war that the client must win and the competition must lose.</p>
<p>On the surface there is no mystery to Bain &amp; Co. If it were a person, it would be articulate, attractive, meticulously well groomed, and exceedingly charming. It would exude Southern gentility. But it would also be a shrewd, intensely ambitious strategist, totally in control. The firm would be, in short, Bill Bain, its Tennessee-bred founder.</p>
<p>Unlike the consultants who work for him, Bain does not put in long days, and weekends are devoted to his second wife, Colleen, 37, their two sons, 11 and 8, and a 2-month-old daughter. Bain also has a 28-year-old son from a previous marriage. ''I spend a lot of time at home,'' he admits. ''But I think a lot about the business.''</p>
<p>Like a pole vaulter, Bain devotes most of his time to preparing for the event -- say, a meeting with a chief executive. Physical preparation is as important to Bain as mental preparation. He jogs daily and plays a serious game of tennis. When he walks into the client's office, Bain is in top form and in control of the situation. That control extends to the firm that bears his name.</p>
<p>Until 1985, when Bain &amp; Co. incorporated, the partners were partners by courtesy only. They did not have rights to a specific percentage of the firm's earnings; rather, Bain parceled out profits at the end of the year as he saw fit. Partners could not easily argue with the split because most of them were never told what the firm earned. The partnership agreement did, however, contain a noncompete clause.</p>
<h2><a href="http://finance.fortune.cnn.com/2012/01/12/bains-jobs-data-under-lock-and-key/">See also: Bain's jobs data: Under lock and key</a></h2>
<p>When James Lawrence and Iain Evans, two European partners, told Bain in 1983 that they were going to start their own firm, Bain stalled them in his office long enough for a deputy sheriff of Suffolk County to arrive with a notice that Bain &amp; Co. had filed a lawsuit against them.</p>
<p>Some consultants chafe under such a tight grip, but most display a fierce loyalty to their leader. Employee turnover, <a href="http://fortunefeatures.files.wordpress.com/2012/01/revenues_staff_charts.jpg"><img class="alignright size-full wp-image-7985" title="revenues_staff_charts" src="http://fortunefeatures.files.wordpress.com/2012/01/revenues_staff_charts.jpg" alt="" width="340" height="469" /></a>while higher than in the past, is still only 12%, lower than the industry average of 20%. One thing that has kept folks aboard is the firm's spectacular growth. Since its founding in 1973, revenues at Bain &amp; Co. have grown at over 50% per year, compounded annually, to more than $150 million in 1986. In 1987 the company expects that number to exceed $200 million. More than 30% of those revenues will come from consulting for overseas clients, now the fastest-growing part of Bain's business. Says a former Bain consultant: ''It is a pretty damn amazing place.''</p>
<p>Between 1980 and 1986, the size of Bain's staff more than tripled. Today, Bain has a worldwide professional staff numbering close to 800. Not all are MBAs; to keep costs down and numbers up, the firm has over the years employed a growing number of recent college graduates, which it styles ''associate consultants.''</p>
<p>Bainies are a homogenous bunch. Monogrammed shirts and red ties prevail. Manners are impeccable. ''Each one of them is cut out of the same cloth,'' says Vernon Loucks, CEO of Baxter Travenol Laboratories, a longtime client. ''If you don't like the cloth, don't hire Bain. If you do, though, you know what you'll get for years.''</p>
<p>Headquartered on three sprawling floors in the ultramodern Copley Place building in the heart of Boston, Bain &amp; Co. also has offices in London, Munich, Paris, San Francisco, and Tokyo. Bill Bain has come far for a man with no business background. In 1967 he was toiling away for $19,000 a year as the director of development at his alma mater, Vanderbilt University. Vanderbilt was thinking of setting up a business school, and Bain sought out Bruce Henderson, a fellow alumnus and the founder of the Boston Consulting Group, for advice. In addition to advice, Henderson gave him a job, even though Bain admits that back then he didn't fully understand the concept of depreciation.</p>
<p>By 1973, Bain was earning $150,000 a year as a group vice president at BCG and thought it was time to set up his own firm. On the day before Henderson was to fly to Madrid for a meeting of BCG's European vice presidents, Bain and a colleague, Patrick Graham, showed up in his office to tell him they were quitting to start a software company. An upset Henderson left for Spain as scheduled, only to be tracked down at a Spanish restaurant that night with an urgent call from his secretary. It seems the ''software company'' was setting out to solicit BCG clients, although this is a point Bain disputes.</p>
<p>Henderson caught the next flight back and frantically began rousting his consultants out of bed to get to his firm's clients before Bain did. Recalls Henderson: ''It was war.'' By the time the guns stopped firing, several weeks later, Bain and Graham had made off with seven of BCG's consultants and two of its biggest clients, Black &amp; Decker and Texas Instruments (<a href="http://money.cnn.com/quote/quote.html?symb=TXN">TXN</a>).</p>
<p>Henderson, now a professor at Vanderbilt's business school, felt that he had been a mentor to Bain, and he was bitter. Yet today he says, ''Bill is an imaginative man. He is a very able man. I wish he had stayed.''</p>
<p>Bain was itching to try a new approach to management consulting. During his stint at BCG, he had grown increasingly dissatisfied with traditional project-oriented consulting. Says Graham, a self-effacing Midwesterner: ''The client would think he had a marketing problem, and then you'd find out halfway through the project that he really had a cost problem.'' Hence Bain's idea to focus on the profitability of the entire organization.</p>
<p>To alter a company's economic trajectory requires a thorough understanding of the competition, Bain says. ''All big companies are out there clashing against each other. The company that knows what it wants to accomplish and how it wants to position itself against its competitors has an advantage.'' Such knowledge demands data and a great deal of time for analysis. So Bain would strike a deal. In order to guarantee clients a proprietary strategy, he promised that his firm would not work for their competitors.</p>
<p>The notion was unique; other consultants thought nothing of working for two or more competitors simultaneously. In return for abiding by that restriction, Bain ultimately expected a long-term commitment from the client. Says one: ''Because of their guaranteed exclusivity, they're privy to stuff that makes them insiders, really.''</p>
<p>He also insisted on something else: He wanted to work directly with the chief executive. That partnership with the CEO more than anything else is the key to the firm's success. For one thing, Bain has seldom had to market itself; it lets satisfied customers do the job.</p>
<p>Word of Bain's unique product has spread, primarily by word of mouth, from boardroom to boardroom. Chief executives at Baxter Travenol (<a href="http://money.cnn.com/quote/quote.html?symb=bax">BAX</a>), Chrysler Motors, Dun &amp; Bradstreet (<a href="http://money.cnn.com/quote/quote.html?symb=dnb">DNB</a>), Owens Illinois (<a href="http://money.cnn.com/quote/quote.html?symb=oi">OI</a>), and Sterling Drug rave about Bain's services. If a satisfied chief executive is worth his weight in billings, a dependent one is even better. Indeed, competitors carp that the Bain approach demands an insecure CEO. That is not exactly true, says a former Bain partner: ''Ideally we wanted a paranoid CEO.'' From this unpromising clay, he adds, ''Bain creates unbelievably powerful CEOs.''</p>
<p>To hook the big boys, Bain consultants sell not a 50-pound report but tangible results. To that end, Bainies stick around to implement their recommendations. This also helps the firm achieve another of its objectives -- to grow its billings from a client every year. With Bainies swarming all over them, it becomes difficult for clients to disengage themselves from the firm. Says one: ''They anchor themselves in the stomach of the business. They forge a dependent relationship: 'If you have a problem, call us.' There should be a weaning-away process.''</p>
<p>Sensitive to the criticism of the firm as a tapeworm in the corporate intestine, Bainies take pains to prove to clients that they add value. Four years ago the firm developed a ''Bain Index,'' which charts the performance of Bain client stocks against various indexes. The index, audited for <em>Fortune</em> by Price Waterhouse, shows that the stock market value of all Bain's U.S. clients has increased 319% since 1980, compared with 141% for the Dow Jones industrial average and 67% for an index of stocks in industries in which Bain has clients. Bain also conducts periodic meetings with its clients to quantify the results of its consulting activities. The goal: to produce value worth 10 times fees. Bain typically bills out its consultants at a rate three to four times the consultant's salary.</p>
<p>The Bain approach has yielded some remarkable successes. When National Steel hired the firm in 1981, it was the highest-cost producer of flat-rolled steel in the country. A small task force of Bain consultants undertook a six- month study of the steel market. While its conclusions were hardly surprising -- it urged National to downsize, modernize what was left, and cut costs -- it saw to it that National Steel was the first company in the industry to adopt a new continuous-casting technology for all its steel operations.</p>
<p>Bain consultants were accused of running the company, and line managers who disagreed with their recommendations found themselves ousted or moved around like chess pawns. But, says the company's president, James Haas, ''they weren't dancing around our boardroom.''</p>
<p>By 1984 National Intergroup, as it was renamed, had become the lowest-cost steel producer in the country. Haas estimates the economic value added to the company during that period at close to $200 million per year. Says he: ''It wasn't hard to tell you were getting more Bain for your buck.''</p>
<p>At Chrysler, Bainies figured out the fewest ways to produce the Omni Horizon that would still incorporate 99% of the combinations of options that customers wanted to buy. Largely as a result, Chrysler was able to lop $1,400 off the price of the Omni. Chrysler plans to extend Bain's analysis to other cars as well, and has the firm beavering away on half a dozen other fronts. ''Bain consultants have a peculiar tenacity about them,'' says Chrysler Motors Chairman Gerald Greenwald. ''They'll dig up 50-year-old city planning commission records just to understand a competitor's building costs.''</p>
<p>Convinced that the firm really does add value and tantalized by the juicy profits it is helping to squeeze out for clients, Bain has moved to grab a bigger piece of the action for itself, with results that have consulting industry eyebrows heading skyward. As Bill Bain puts it, the firm has ''quite naturally'' begun to experiment with ''more uniquely appropriate'' methods of getting compensation from its clients. For example, it wants its publicly traded companies to pay it with a combination of fees and stock appreciation rights, so that its objectives, Bill Bain explains, ''will be more closely aligned with those of our clients.'' Bain claims that a few companies have been willing to go along with this unusual compensation scheme, although he will not name any.</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/01/mitt_romney.jpg"><img class="alignleft size-full wp-image-7988" title="mitt_romney" src="http://fortunefeatures.files.wordpress.com/2012/01/mitt_romney.jpg" alt="Mitt Romney" width="240" height="340" /></a>Bain also wants to expand its direct investment in its clients. In 1984 the firm set up Bain Capital, a limited partnership run by W. Mitt Romney, son of George Romney, a onetime presidential hopeful. The partnership invests in start-up companies and buyouts of small to medium-size firms in which Bain feels it can add value with its advice.</p>
<p>Preliminary results have been impressive. Bain Capital has so far acquired seven companies and started nine. The combined rate of return of all the investments the partnership has made since 1984 exceeds 60%. The firm also plans to acquire ownership in larger private companies. Grumbles James Kennedy, publisher of Consultants News: ''What they are doing flies in the face of everything we know about ethics in management consulting.''</p>
<p>The real problem for Bain &amp; Co., though, may be the firm's tendency to alienate and weaken lower-level managers at the companies where it works. Complains a former executive at Dun &amp; Bradstreet: ''Once Bain gets into a company, and D&amp;B is a perfect example, there is nobody left who is credited with being able to make the decisions and do the analysis that are part of his job.'' Adds an executive at Monsanto (<a href="http://money.cnn.com/quote/quote.html?symb=MON">MON</a>), a company that was Bain's biggest client during the mid-1970s: ''On a scale of one to 10, I'd give them a nine for antagonizing our people and creating management problems.''</p>
<h2><a href="http://money.cnn.com/2012/01/10/news/economy/romney_bain_capital/index.htm">See also: What Mitt Romney did at Bain</a></h2>
<p>Not surprisingly, shortly after Monsanto's chief executive retired in 1984, the company retired Bain as well. Notes the chairman of another management consulting firm: ''Their product is brilliant. It's the package that has been a problem. Five million Bainies saying, 'Stand aside, asshole. Here we come.'''</p>
<p>Chastened by some early failures -- the firm lost Texas Instruments and Black &amp; Decker as clients -- Bain has made more of an attempt to avoid what one ex-Bainie calls the ''transplant-reject syndrome'' that results from not fitting into the client organization. Bain claims it now builds consensus at all management levels of a client company and encourages line managers rather than Bain consultants to present reports to the chief executive. Says John Halpern, one of the firm's founders: ''We've become more and more explicit in our description of the conditions under which we'll work for a client.''</p>
<p>In addition to the requisite sense of partnership with the CEO, he says, there now must also be a ''collaborative relationship with the organization.'' Indeed, Bain offers a free acquaintanceship period to see if consultant and client can work together.</p>
<p>In Guinness, Bain found what might have seemed the ultimate client. Ernest Saunders showed up when the firm was struggling to crack the London market. ''The Guinness relationship was held up within Bain as the ideal,'' says a former partner in Europe. ''It was the perfect marriage.'' Bain became so entrenched at Guinness -- as many as 70 or 80 Bainies worked there at any one time -- that managers complained that they couldn't do anything without the consultants around. They had become, says a former Bain consultant, ''the brains of Guinness.'' One division president physically threw a Bainie out of his office. Still, fees paid the firm soared as high as $12 million per year.</p>
<p>Ernest Saunders became dependent on Bain. He hounded Olivier Roux to come to work for him as his financial director. When he couldn't persuade Roux to quit, he nagged Bain for a loan. How could the firm refuse? Guinness was one of its most important European clients. Bain reluctantly seconded Roux to Guinness.</p>
<p>The arrangement was to have lasted only until Saunders could build his own management team. But when Saunders brought in David Defty as a replacement for Roux in August 1984, Roux accepted a seat on the Guinness board of directors. Although Bain had an explicit policy of not allowing its consultants to serve on client boards, the firm made an exception for Roux.</p>
<p>Defty left Guinness as the Distillers battle was heating up, and Roux once again became financial director. It was then that he found himself caught up in a mess of conflicting loyalties. Should he go along with the scheme or blow the whistle? Either way, he placed one or both of his employers -- as well as one of the largest takeovers in British history -- in jeopardy. Comments a source close to Roux: ''It's all a pretty sad story.''</p>
<p>Bain has tried to contain the damage to its reputation, particularly in Europe, telling new hires that the publicity has provided it with free advertising and assuring clients that the firm will suffer no gross embarrassment. So far the fallout appears to be minimal.</p>
<p>One thing seems clear: The Guinness affair is unlikely to change Bill Bain. Asked recently what drives him, he thought for a moment. Sitting in the serenity of his royal-blue office, surrounded by Oriental ceramics, fresh flowers, and family photographs, he took a sip of his ever-present Dr Pepper, tapped his index fingers to his lips, and stared into the Boston twilight. A man who takes care to say exactly what he means, he finally settled on just the right phrase: ''I enjoy staying at the edge of the state of the art.''</p>
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		<title>Embattled Kodak enters the electronic age (Fortune, 1983)</title>
		<link>http://features.blogs.fortune.cnn.com/2012/01/08/embattled-kodak-enters-the-electronic-age-fortune-1983/</link>
		<comments>http://features.blogs.fortune.cnn.com/2012/01/08/embattled-kodak-enters-the-electronic-age-fortune-1983/#comments</comments>
		<pubDate>Sun, 08 Jan 2012 14:00:18 +0000</pubDate>
		<dc:creator>Shelley DuBois, writer-reporter</dc:creator>
				<category><![CDATA[Fortune Classic]]></category>
		<category><![CDATA[Eastman Kodak]]></category>
		<category><![CDATA[George Eastman]]></category>
		<category><![CDATA[IBM]]></category>
		<category><![CDATA[Kodak]]></category>
		<category><![CDATA[Silicon Valley]]></category>
		<category><![CDATA[Xerox]]></category>

		<guid isPermaLink="false">http://features.blogs.fortune.cnn.com/?p=7919</guid>
		<description><![CDATA[<p><em>Editor's note: Every Sunday, Fortune publishes a favorite story <em>from our magazine archives. This week, as Eastman Kodak prepares for a possible bankruptcy filing, we look back as the company that Fortune called "the slow, deliberate master of the photographic industry" prepared for the fast-paced digital age.</em></em></p>
<p><em><em>The going was tough for Kodak, even then. This story provides a backgrounder on some of its most innovative technology, as well as the <a href="http://features.blogs.fortune.cnn.com/2012/01/08/embattled-kodak-enters-the-electronic-age-fortune-1983/">MORE</a><img alt="" border="0" src="http://stats.wordpress.com/b.gif?host=features.blogs.fortune.cnn.com&#038;blog=916416&#038;post=7919&#038;subd=fortunefeatures&#038;ref=&#038;feed=1" width="1" height="1" />]]></description>
			<content:encoded><![CDATA[<p><em>Editor's note: Every Sunday, Fortune publishes a favorite story <em><a href="http://features.blogs.fortune.cnn.com/tag/fortune-classic/">from our magazine archives</a>. This week, as Eastman Kodak prepares for a possible bankruptcy filing, we look back as the company that Fortune called "the slow, deliberate master of the photographic industry" prepared for the fast-paced digital age.</em></em></p>
<p><em><em>The going was tough for Kodak, even then. This story provides a backgrounder on some of its most innovative technology, as well as the internal issues that kept it struggling, for so long, to keep its head above water.   </em></em></p>
<p><em><em></em></em>By Thomas Moore</p>
<div id="attachment_7922" class="wp-caption alignright" style="width: 630px"><a href="http://fortunefeatures.files.wordpress.com/2012/01/1983_kodak_camera-091.jpg"><img class="size-full wp-image-7922" title="1983_kodak_camera.09" src="http://fortunefeatures.files.wordpress.com/2012/01/1983_kodak_camera-091.jpg" alt="" width="620" height="355" /></a><p class="wp-caption-text">To illustrate Kodak's kaleidoscope of technologies, Chairman Colby Chandler was photographed with a disc camera like the one he is holding.</p></div>
<p>Inside the neat, period-piece brick buildings of Eastman Kodak's headquarters and manufacturing plants, spread over 3,000 acres in Rochester, New York, the slow, deliberate master of the photographic industry is whipping itself into a war frenzy. Kodak is arming to take on the combined might of the Japanese, Silicon Valley, IBM, Xerox, Du Pont, and a host of other forces that are threatening its profitability. The $10.8-billion-a-year company has finally decided, after ten years of watching and waiting, to enter the burgeoning electronics and video businesses in a big way. By its annual meeting next spring, if not sooner, Kodak will announce the formation of an electronics division that it has been quietly and carefully nurturing for the past seven years.</p>
<p>The company is counting on products from the new division to lift its sagging fortunes. Competition from upstart film companies has sent its profit margins into an extended decline and it faces an even greater long-run challenge from new technologies. Kodak's plan is to hang on to its markets, and profits, by combining electronics with its optics and film know-how. Down the road, the company plans to use electronics to enter new markets as well, as it already has so successfully with its high-speed copier machines. Kodak's Ektaprint machines have made serious inroads on Xerox's dominance in the top end of the copier business. Three out of every four dollars spent on new research projects next year will go into electronics, and the company is adding ten electrical engineers for each new chemical engineer it hires. The operative word among its executives, after a token protestation about not abandoning photography, is "imaging." Says research director Leo Thomas, 46, "We have a mandate to integrate electronics into the fiber of this company over the next five years."</p>
<p>Talk like that signals a veritable reformation at Kodak. The company viewed its cofounder, George Eastman, as deserving a place in the pantheon of the gods and elevated the chemical film technology he pioneered into a religion. Long after Eastman's suicide in 1932, Kodak clung to his cautious ways. If George didn't do it, his successors didn't either. The company passed up an invention called xerography, leaving the new technology to a then tiny Rochester company called Haloid. Kodak let Polaroid have the instant-camera business to itself for nearly 30 years. Wags joked that Eastman's ghost presided at board meetings.</p>
<p>The conservative strategy paid off despite the missed opportunities, at least through the Sixties. Kodak continually extended the frontier of film chemistry. Its technological edge, coupled with economies of scale from huge production runs, gave Kodak a virtual monopoly in photographic film and paper and made it one of the most profitable blue chip companies in the world.</p>
<p>That approach plainly isn't working anymore. Over the last decade Kodak's profit margins have declined from 15.7% of sales in 1972 to 10.7% last year. But it wasn't until the first quarter of this year, when the company announced a shuddering 73% decline in earnings, that outsiders realized how seriously Kodak's situation had deteriorated. Most of the decline was due to the onetime costs of a special early-retirement program, much of which will be made up in payroll savings during the remainder of the year. But operating earnings alone fell 24%, a decline that continued in the second quarter and may persist for the entire year. The company's stock, once a superstar, has been the worst performer among the Dow Jones industrials lately. In a raging bull market, Kodak has fallen 27% from a high of $98 last October. The stock is at less than half its price of a decade ago.</p>
<p>Kodak's inner peace was rudely disrupted in the Seventies when Japanese film manufacturers broke its lock on the lucrative color film and paper markets, which historically accounted for 75% of the company's profits. The Japanese, led by Fuji Photo Film, improved their production efficiencies and quality to the point where most consumers couldn't see much difference. At the same time, Kodak did little to improve its own productivity in the face of rising costs. When the Japanese began to compete aggressively in price, they not only cut into Kodak's market share but also squeezed its margins. Some analysts estimate that its share of the U.S. photographic paper business plummeted from 92% to 50% during the Seventies. The Japanese gains in the film market came mostly at the expense of secondary companies like GAF, but Kodak is now feeling the pressure as well.</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/01/kodak_computer_engineer.jpg"><img class="alignleft size-medium wp-image-7923" title="kodak_computer_engineer" src="http://fortunefeatures.files.wordpress.com/2012/01/kodak_computer_engineer.jpg?w=300&h=223" alt="" width="300" height="223" /></a>The advent of video cameras and recorders unsettled Kodak's markets even more. Despite being priced much higher than Kodak's latter-day Brownies, video products have been selling faster and faster ever since Sony introduced its Betamax machine in 1975. Home video is now a $3-billion business in the U.S.--already a fifth the size of the photographic industry. For the first five months of this year, according to Mark Obenzinger, a security analyst with Lehman Brothers Kuhn Loeb, shipments of video recorders are up 104% and video cameras 22%. The recorders and cameras don't use any film, of course, and Kodak doesn't make videotape. Photo specialty stores are adding video equipment to their wares to make up for lost sales in conventional photography.</p>
<p>Former Kodak chairman Walter Fallon, the tough technocrat who was heralded at his retirement party this June as the man who made the elephant dance, attributes the company's poor performance to adverse economic conditions rather than false steps. In particular he bemoans the markets outside the U.S., where Kodak makes 40% of its sales and has achieved much of its growth in recent decades.</p>
<p>Kodak's new chairman, Colby Chandler, 58, an amiable Down Easter who drives a pickup truck to work, says profits will recover with the world economy. Wall Street is less sanguine. The first-quarter earnings decline, following a 6% drop in 1982, sent previously upbeat analysts scurrying to their calculators to revise their estimates for the year. Kodak earned $1.16 billion, or $7.12 per share, in 1982. Some analysts now figure it will be lucky to make $5 per share this year--little more than half what they were predicting 12 months ago.</p>
<p>Kodak's record over the last decade suggests that recovery alone won't be enough to restore prosperity. Of four major product lines launched under Fallon, only the high-speed copiers are paying off. The Ektaprint copiers, which receive top marks in quality and reliability, have become the company's fastest-growing product line. Kodak executives say the seven-year-old Ektaprint business, if spun off as a separate company, would make the FORTUNE 500.</p>
<p>The company wasn't so lucky with the Kodamatic instant camera, basically a Polaroid clone that came out just as instant cameras were losing popularity. Analysts doubt that the Kodamatic has made any money for the company. Kodak's president, Kay Whitmore, 51, says the camera's future will depend on whether a new feature that allows users to peel the photo from its bulky chemical backing boosts sales.</p>
<div id="attachment_7924" class="wp-caption alignright" style="width: 235px"><a href="http://fortunefeatures.files.wordpress.com/2012/01/kodak_ektachem_700.jpg"><img class="size-medium wp-image-7924" title="kodak_ektachem_700" src="http://fortunefeatures.files.wordpress.com/2012/01/kodak_ektachem_700.jpg?w=225&h=300" alt="" width="225" height="300" /></a><p class="wp-caption-text">A finger touch on the screen activates any of 25 series of blood tests on the Ektachem 700, Kodak's new product for clinical laboratories.</p></div>
<p>The Ektachem 400, a two-year-old blood analysis machine that uses dry chemical slides rather than liquid solutions, got off to a poor start because it performed only a limited number of tests and proved unreliable. The machine was supposed to preserve Kodak's faltering presence in the health care market. Sales of X-ray film, under pressure from competitors like Du Pont and from filmless scanners, have gone nowhere for three years. The company is hoping for better results with a new blood analyzer, the Ektachern 700. The machine performs 25 series of tests, half again as many as its predecessor can do. An operator can order up a test simply by touching a word on a video screen. The machine can be tied in to computerized patient records and clinical data sources. Kodak foresees smaller versions of the machine for use in doctors' offices.</p>
<p>Kodak's disc camera, launched with much hoopla last year as a replacement for the phenomenally successful pocket Instamatic, has also proved disappointing. The company shipped eight million disc cameras last year, a first-year record for a new camera format. But more than a million of those cameras were sitting on dealer shelves after Christmas. Hot-selling 35mm point-and-shoot cameras are now priced as low as most disc models, and pictures from the tiny disc negatives are grainier than buyers expected. The graininess has cut down picture taking by photo enthusiasts who bought the disc as a secondary snapshot camera. Says Sean Callahan, editor of American Photographer, "The disc has charming cosmetics, but after four or five rolls the quality of the pictures outweighs the convenience."</p>
<p>The disc has sold poorly in Europe and Japan, the two largest markets outside the U.S. and ones that are more accustomed to 35 mm quality. "To say the disc has not met company projections abroad," says one industry source, "would be inaccurate. It's getting murdered."</p>
<p>Kodak denies that sales in those two markets, where its regular cartridge-loaded cameras have never sold well, are worse than anticipated. "The novelty factor has worn off in Europe," says Phillip Samper, 49, the new head of the photographic division. "Now we just have to get out there and move the cameras." The company's research shows 90% of disc users in the U.S. are satisfied with the camera, and that its high "yield rate"--93% of the pictures are printable as opposed to 75% for the pocket Instamatic--more than makes up for the graininess.</p>
<p>The disc's future is being decided this summer. Picture taking is heaviest in summer and dealers gauge the activity to determine their camera orders for the Christmas selling season. But the camera already seems unlikely to enjoy the eight- to ten-year life cycle of its popular predecessors--and may last only half as long. A shorter life would give Kodak less time to recover its development costs, which security analysts estimate at over $ 300 million.</p>
<p>The uneven performance of its new products and the most serious competition in its history have stirred the Kodak elephant into action--even into uncharacteristic flashes of anger. Walter Fallon is said to have pounded the table when he learned that Fuji had snatched the sponsorship of the 1984 Olympic games while his negotiators dithered. If somewhat belatedly, the company has launched a major program to coordinate planning around the world, increase productivity, and reduce costs. Two years ago the company reshuffled some of its foreign production. Many of Kodak's international divisions were manufacturing identical products for their regions, often at higher costs than at the main factory in Rochester. Kodak brought the high-cost foreign manufacturing home--just in time for part of the $55 million in productivity gains to be offset by the strong dollar, which boosted the cost of the products when exported.</p>
<p>This year Kodak instituted a special early-retirement program, announced it was postponing next year's pay raises for six months, and made its largest layoffs in a decade. Says Whitmore, "We are looking less at reducing a given percentage of people than whole functions."</p>
<p>Chandler, who made his mark by leading Kodak's assaults on Polaroid and Xerox, criticizes what he says was an ad hoc approach to product development and has ordered up the company's first corporate-wide strategic plan. "We can no longer be all things to all people," he says. "Kodak is a little like the government in that it takes things on much easier than it can get rid of them."</p>
<p>Traditionally dominated by its technical side, Kodak has given its marketing departments a louder voice, if not the final say, in the company's direction. Kodak's two marketing stars, Samper and Wilbur Prezzano, 42, manager of worldwide marketing, have moved up to the second and third spots in the unofficial line of succession after Whitmore. Kodak has never allowed a marketer to run the company. Gerald Zornow, chairman from 1972 to 1976, got closer than any other, but still was No.2 to Fallon.</p>
<p>Kodak also has abandoned some of its fusty ways and finally adopted tactics that have long been standard procedure at other multinationals. It has created a marketing intelligence group, issued its first significant debt ($275 million of convertible debentures), purchased more than $1 billion in tax-benefit leases, and started hedging its foreign-currency risks in the futures market.</p>
<p>Most important, Kodak has finally decided it would rather switch than fight, and has joined the electronics revolution. Over the last decade the company made sure its research labs kept up to speed with fast-changing video technology. In fact, it developed a video system of its own in the early Seventies. "We had a hell of a good product," recalls Zornow. "We had both a video-movie and a still camera, and the quality of the image was excellent on a TV screen. We killed it off, though, when we found out what the costs were."</p>
<p>To get a window on the video business, Kodak also bought a small California company called Spin Physics in 1972 that specialized in magnetic recording heads for highdensity data storage. But Kodak sat on its video know-how in the Seventies and decided to commit its resources to instant cameras and copiers instead.</p>
<p>The company has now changed its mind. Among other reasons, Kodak was mightily annoyed when Sony, upstaged its announcement of the disc camera last year by unveiling a "revolutionary" video still camera called the Mavica and promising to have it on the market in the U.S. right about now. Kodak knew that current solid-state sensors could not capture anywhere near as much picture "information" as silver-emulsion film. Sony's best sensors last year contained about 280,000 picture elements, compared with the four million-plus needed to match the comparatively poor quality of the ordinary 110-size negative that is used in pocket Instamatics.</p>
<p>The video picture looked all right on a TV screen, but was fuzzy when printed. Given the high cost of the sensors, the camera itself would have to be priced over $1,000, making it too expensive, in Kodak's opinion, for a mass market. But the idea of taking pictures, showing them on a TV set, printing out hard copies, and then erasing the tape to take more, all without having to buy film and send it to a developer, caused quite a stir in the photographic world. The technical problems were lost on a public accustomed to the wonders of electronics.</p>
<p>Instead of ignoring Sony as in the past, Kodak decided to reveal its own electronic imaging capability-and zap Sony's Mavica. Last October at the Photokina trade fair in Cologne, West Germany, Kodak demonstrated a video display unit that allows disc film negatives to be shown in color on a television set. Thomas, the research director, made it a point to give a personal demonstration of the new device to his counterparts at Sony. The video display unit was conceptually inferior to what Sony had in mind: the disc film still had to be sent to a developer and could not be erased. But the demonstration revealed that Kodak had a solid-state sensor with 50% more pictorial capability than Sony's "state of the art" Mavica. "They were very impressed," says Thomas. Today Sony doesn't like to talk about the Mavica, except to say that Japanese newspapers are now experimenting with a black and white version. It has nothing to say about the color version anymore.</p>
<p>That Kodak exhibited its video display unit, which is still under development, was unprecedented for the company. Kodak usually doesn't hint at what it has in the laboratory until the product is ready to sell. Not only did the gesture demonstrate Kodak's strength in electronics, it also showed a new competitive zeal that the company will sorely need in the frenetic electronics business.</p>
<p>Kodak's experiences with electronics haven't all been so positive. It has run into a host of problems with Atex, a manufacturer of electronic publishing systems for newspapers and magazines that it bought in 1981--only its second major acquisition in over 50 years. A typical high-tech success story, Atex was started in 1972 by three entrepreneurs, literally working in a garage, and grew to become the leader in its field, doing $50 million of business a year when Kodak bought it. Since then, the three founding partners and eight vice presidents have departed. Kodak found itself stuck with a system of "dumb" terminals dependent on central computers when the industry was moving to "smart" terminals with computer capabilities built in. Atex is quickly losing its technological lead in the industry.</p>
<p><a href="http://fortunefeatures.files.wordpress.com/2012/01/leo_thomas_kodak_research.jpg"><img class="alignleft size-medium wp-image-7925" title="leo_thomas_kodak_research" src="http://fortunefeatures.files.wordpress.com/2012/01/leo_thomas_kodak_research.jpg?w=300&h=229" alt="" width="300" height="229" /></a>"The people at Kodak are hardworking but bureaucratic," says Al Edwards, a former Atex vice president who defected to Systems Integrators Inc., Atex's top competitor, because he couldn't abide Kodak's poky pace. "They do not understand the competitive nature of computer technology. You sometimes have to react to the marketplace on a weekly basis. At Kodak, if you came up with an idea, it would be five years before you saw the product."</p>
<p>Edwards estimates Atex shipments will be down about $20 million this year and the company will lose money. Kodak maintains it is still the market leader and that sales will be about the same as the $85 million last year. "Sure, some people have left here and we've had some bad times," says Joseph Quickel, 62, Atex's third chief executive under Kodak. "But that's one of the hazards of the electronics business, and now we've successfully made the transition."</p>
<p>Spin Physics has fared better under Kodak's stewardship. It continues to be a leader in its field, and two of its products will be seminal to Kodak's electronics effort: a new high-density magnetic surface for both tape and computer discs, and a high-speed video system that can play back the action of fast-moving equipment in slow motion so engineers can analyze problems visually.</p>
<p>Spin Physics has been so successful in the magnetic recording business that Kodak, after holding the subsidiary at arm's length for a decade, has decided to embrace it as one of three building blocks of the new electronics program. The other two blocks: a solid-state research laboratory and a facility to design and produce integrated circuits.</p>
<p>One important question about Kodak's electronics effort is whether a big, stodgy company in gray, nonswinging Rochester can attract and hold the notoriously disloyal electronics cowboys who thrive best in Silicon Valley. Kodak has had no trouble recruiting electrical engineers. But finding managers with an electronics background has been tougher. James Lemke, a co-founder of Spin Physics who stayed with the company, was offered a top job at the new electronics division but turned it down because he didn't want to move from California to Rochester. Still on Kodak's payroll, Lemke is helping to set up the Center for Magnetic Recording Research at the University of California at San Diego. The center, supported by Kodak, IBM, and more than a score of other companies, is the country's first pooled research effort in magnetics.</p>
<p>Kodak has yet to name a director for the new division, and hasn't filled other important slots. "We clearly have to attract people into the company who don't exist here now," says President Whitmore. That in itself will be a major departure for Kodak; few if any of its senior executives ever worked for another corporation. Gerald Zornow, for one, doubts that outsiders can successfully adapt to the Kodak culture. "They tried some people from the outside before and it never worked out," he says. "Kodak is like an old family that grows up together, and it is tough for outsiders to fit in."</p>
<p>Venturing into the volatile electronics business obviously is a gamble for Kodak, but the company doesn't have much choice. A competitive electronic still camera is at least a decade away, and electronic imaging technology will probably never fully match the quality of silver-based film. Amateur and professional photography will always be a large business, though possibly a much diminished one. Video has already begun to undercut many of Kodak's consumer and commercial applications. TV news film, for instance, has been eliminated by the immediacy of videotape. To the extent people use the latest generation of small video cameras to shoot movies of the kiddies, still photography suffers.</p>
<p>The biggest question about Kodak is how well it can play in a different and tougher game. Increasingly Kodak will be competing in a business where it is not the worldwide leader, where it does not have a technological edge, and where it does not have a significant cost advantage. And it will not have a unique strategy. The same competitors that have bedeviled Kodak in the photographic business are also going electronic. Fuji, the fastest comer in film, makes videotape. Canon, Minolta, Olympus, and Pentax--companies that bested Kodak in still camera technology--already sell TV cameras.</p>
<p>All corporations must be alert to changes in their technologies and their markets. Its move into electronics, however tardy, indicates that Kodak has the flexibility to adapt to a new world. Considering the company's roots, that's not terribly surprising. The lesser known of its co-founders was a man named Henry A. Strong who decided to gamble that young George Eastman's dry photographic plates might lead to something. Strong made buggy whips.</p>
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