Cutting to the core albert j dunlap

9-899-218 R E V : D E C E M B E R 1 5 , 2 0 0 3

________________________________________________________________________________________________________________ Professors Brian J. Hall and Rakesh Khurana and Research Associate Carleen Madigan prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 1999 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

B R I A N J . H A L L

R A K E S H K H U R A N A

Al Dunlap at Sunbeam

Dunlap v. [after Albert J. Dunlap (1937- )] 1. To turn a company around at lightning speed. 2. To focus on the best: to eliminate what is not the best. 3. To protect and enhance shareholder value.

— Al Dunlap, Mean Business

For much of his career before coming to Sunbeam, Al Dunlap was known as the poster child of corporate restructuring. Coming off a highly successful turnaround at Scott Paper, he had recently published a best-selling book, which detailed his career success at his previous jobs and celebrated his latest accomplishment, “rightsizing” the appliance-maker Sunbeam. Dunlap was both famous and infamous for his hard-nosed approach to turnarounds, which typically involved radical restructuring and downsizing. Although he was often criticized in the press, Dunlap was not shy about his “take-no-prisoners” managerial style, which he documented in his aptly titled book, Mean Business.1

His declared victory at Sunbeam (see Exhibit 1), however, may have been premature. Two months after increasing Sunbeam’s stock price to its all-time high of $53 per share, and only two weeks after Sunbeam’s largest shareholder Michael Price stated that Al Dunlap “is an outstanding executive and Sunbeam is fortunate to have him,” Dunlap was fired.2

Sunbeam’s board had hired Dunlap to turn around the company in 1996, in hopes that he could effect the same increase in shareholder value he had at Scott Paper from 1994 to 1995. As his tenure at Sunbeam carried into the second year, board members watched their stock price fall from a high of $53 to less than $16 the day his firing was announced. His cost-cuttings hadn’t panned out, and the companies acquired under his leadership had been much more trouble than the board had anticipated. Given his widely acclaimed history of turning around ailing companies, and the rapidity of his fall, many wondered what had happened. Was he really just a “one trick pony,”3 overrated and overpaid, or would his restructuring of Sunbeam have worked if he had only been given more time?

1 Dunlap, Albert J. Mean Business: How I Save Bad Companies and Make Good Companies Great. (New York: Simon & Schuster, 1996).

2 Business Wire. May 26, 1998.

3 “Al Dunlap: Exit Bad Guy.” Daniel Kadlec. Time, June 29, 1998.

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899-218 Al Dunlap at Sunbeam

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“Rambo in Pinstripes”

The day Sunbeam announced to Wall Street that shareholder-focused Al Dunlap would be its next CEO, the company’s stock price jumped 49%, creating almost $500 million of value for the shareholders, including Michael Price and Michael Steinhardt, the two men who controlled almost 42% of Sunbeam’s shares.4 Price and Steinhardt had pulled the appliance maker out of bankruptcy in 1990 when they bought the company from Allegheny International, a corporation that had acquired Sunbeam in 1981 and had done little to improve it.

By the time Dunlap was hired in July of 1996, Sunbeam had been through two other CEOs, an intensive restructuring and a long period of instability.5 (See Exhibit 2 for a history of Sunbeam.) Paul Kazarian, one of the partners in the buyout from Allegheny, and the CEO who took Sunbeam public, was fired in 1993 for his highly volatile leadership style. The CEO that followed, Roger Schipke, was a former GE executive focused on growing Sunbeam slowly, over the long term. He resigned in early 1996, noting a change in strategy, dictated by Price and Steinhardt, from long term to short term. The controlling directors wanted to cash out, and had retained Merrill Lynch to shop the company in late 1995. There had not been any takers.

Sunbeam, many believed, was a dying brand. It had failed to keep up the pace with competitors like Black & Decker, and had not succeeded in attracting new customers. Most of the consumers who bought Sunbeam products were older, and had been buying Sunbeam since its heyday in the 1950s and 1960s. Its factories were also aging, as were its machinery and tooling. There were no information systems to connect one department or factory to another. Turnover was high; among factory workers, it was well over 50%. Its board of directors was voted one of the worst boards of 1994 by Chief Executive magazine.6 By the middle of 1996, the stock price had hovered in the teens for close to a year and a half. Sunbeam needed a savior.

Dunlap had a well-established track record for “rescuing” ailing companies. His list of accomplishments ranged from implementing operational improvements in the factory he supervised at Kimberley-Clark (his first civilian job after graduating from West Point), to putting Lily Tulip back in the black for Kohlberg Kravis Roberts & Co. (See Exhibit 3 for Dunlap’s employment history.) A man from the “slums of Hoboken”7 who worked the factory floor before becoming an executive, Dunlap attributed many of a company’s ailments to “ivory tower disease”: the inability of business school-educated managers to make decisions about processes occurring layers of management below them.8 In later years, his restructuring plans carried the trademark of firing from the top down, and he earned a reputation for attacking corporate culture as the source of a company’s problems.

He was perhaps hired as much for his reputation as for his skills. His aggressive style offered fodder to those he fired, and to the media, who portrayed him as, in his words, “some kind of serial killer.”9 His nicknames (“Chainsaw Al” and “Rambo in Pinstripes” among the most used) were not self-appointed, but Dunlap acted the part, at one point even dressing up as Rambo and posing on the

4 “Chainsaw Al to the Rescue?” Matthew Schifrin. Forbes, August 26, 1996.

5 OneSource Corporate Overview. August 10, 1998.

6 “America’s Best and Worst Boards,” April 1994.

7 Mean Business, 107.

8 Ibid., 113.

9 Ibid., 132.

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cover of USA Today (see Exhibit 4).10 Although his nicknames were originally meant to be compliments (John Aspinall, a friend of Sir James Goldsmith, said, “Al is like a chainsaw. He goes in and cuts away all the fat and leaves a great sculpture.”11), they more typically provoked comments like those of Thomas Petzinger, Jr. of the Wall Street Journal, who described Dunlap as, “an 80s style liquidator dressed up for the 90s as an angry white guy.”12

His tough-guy image and record for rapidly increasing his company’s share price, however, appealed to an important audience—shareholders. At his first major turnaround, Lily Tulip, Dunlap oversaw a $176 million increase in the company’s market value, while firing workers and closing factories. Working for Sir James Goldsmith and Kerry Packer in the late 1980s and early 1990s, he trimmed down large corporations, selling extraneous companies and saving billions of dollars. At Consolidated Press Holdings in Australia, he pared off 273 unrelated companies, generated a $623 million profit from a $25 million loss, and liquidated assets worth over $800 million.13 At his most famous turnaround, Scott Paper, Dunlap fired 10,500 people—35% of all the employees and 71% of the corporate staff.14 During his tenure at Scott, he also raised the stock price from $38 a share (pre- split) to $120 (pre-split), and sold the company to Kimberley-Clark for more than a $6 billion shareholder gain (see Exhibit 5). 15

At Scott Paper, as with most of his other companies, the turnaround was executed in rapid fashion. From the day of his arrival at the company to the day the merger closed with Kimberley- Clark, Dunlap’s tenure at Scott lasted only 20 months. The merger, which was announced just a year after he signed on, marked the end of the official restructuring in typical Dunlap style. “You look at some of these brand name companies where someone has been there a year and a half or two years and they haven’t turned it around,” he said. “If you are there that long, you’ve missed the window. The window shuts and you are trapped in the building.”16 In addition to downsizing quickly, Dunlap also strongly believed that layoffs should only be done once, in order to avoid creating a culture of paranoia among employees. “Do it once, do it severe, and get it over with. If you have to go back a second time, you’ve made a mistake.”17

Stakeholder vs. Shareholder

The ultimate goal of Dunlap’s restructuring plans was always to create value for the shareholders of the company. He championed himself as the shareholders’ savior, likening them to hostages held for ransom. “Sir James and I coined the phrase ‘corpocracy’—companies run for the benefit of

10 USA Today, August 30, 1996.

11 Ibid.

12 “Does Al Dunlap Mean Business, or Is He Just Plain Mean?” Thomas Petzinger, Jr. Wall Street Journal, August 30, 1996.

13 “CPH Shedding Done About As Pens Poise for Chemplex Deal.” Australian Financial Review, October 23, 1992.

14 “Can Al Dunlap Do It Again At Sunbeam?” Matt Krantz. Investor’s Business Daily, July 22, 1996.

15 Mean Business, 21.

16 “Who’s Chainsawed Now? Dunlap Out As Sunbeam’s Losses Mount.” Martha M. Hamilton. Washington Post, June 16, 1998.

17 Investment Dealers’ Digest, Inc. January, 1995.

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899-218 Al Dunlap at Sunbeam

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bureaucrats rather than the shareholders,” he said. “Scott was a microcosm of that. Its shareholders would have been better off captured by terrorists. They’d have been treated better.”18

Dunlap was no fan of the stakeholder model of corporate governance, which emphasized a manager’s accountability to multiple constituencies besides the shareholder (e.g., the employees, the community). “If you see an annual report with the term ‘stakeholders,’” Dunlap wrote, “put it down and run, don’t walk, away from the company. It means the company has its priorities upside down.”19 Dunlap argued that shareholders were the only ones in a company who had any kind of stake to claim, and that the company should be run for their profit alone. “Stakeholders! Every time I hear the word, I ask, ‘How much did they pay for their stake?’ Stakeholders don’t pay a penny for their stake. There is only one constituency I am concerned about and that is the shareholders.”20

Dunlap’s invocation of the rights of shareholders caused Peter Cappelli, chairman of the management department at Wharton Business School, to comment. “He is persuading others that shareholder value is the be-all and end-all. But Dunlap didn’t create value. He redistributed income from the employees and the community to the shareholders.”21 Marjorie Kelly, a co-founder of the publication Business Ethics, agreed. “So much for the theory popular among business ethicists that ‘In order to serve stockholders well, you have to serve all other stakeholders first,’” she said, in reference to Dunlap’s turnarounds. “The theorem at work goes more like this: ‘In order to serve stockholders well, you have to squeeze the living daylights out of employees.’”22 Dunlap, however, accepted responsibility for his management decisions, including their effect on his employees. “I accept the heat because I am my own biggest critic. Every day I’ll ask myself, ‘Did I really do a good job?’ So long as the answer is yes, somebody else’s criticism doesn’t bother me much.”23

One of Sunbeam’s employees at the company’s electric hair clipper manufacturing plant in McMinnville, Tennessee, was Marsha Dunlap (no relation to Al). She was fired in 1997, after having worked at the plant for 34 years. She made $9.30 an hour and provided her family’s only form of health insurance. By transferring the hair clipper production to Mexico, Sunbeam would save on wages, insurance and pensions. “They say the wages in Mexico is (sic) a lot less than what they pay us, so that’s where their profit is,” she said. When she received her termination letter, the effective date for the end of her employment with Sunbeam read ‘July 4, 1997.’

“It was very devastating to find out that you’re going to lose your job. People don’t understand, not unless you’ve been there. And it affects everyone—the whole community: the car dealership, the real estate, discount stores, everyone.”24

At Scott Paper, it was more than just the car dealerships and the discount stores that were affected. In Scott’s hometown of Philadelphia, Dunlap shuttered the company’s 750,000 square-foot headquarters, fired 70% of the headquarters’ staff, and moved the operation to a more modest setting in Boca Raton, Florida. He reneged on all of Scott’s charitable donations, including the last $50,000 of a $250,000 pledge to the Philadelphia Museum of Art. Just after Dunlap’s appointment as CEO, Scott 18 “Scott’s Clean Sheet: Tony Jackson Speaks to Al Dunlap.” Tony Jackson. Financial Times, October 27, 1994.

19 Mean Business, 197.

20 Ibid.

21 “Dunlap: I Saved Scott Paper.” Marcia H. Pounds. Sun-Sentinel (Ft. Lauderdale), January 14, 1996.

22 Marjorie Kelly, Minneapolis Star Tribune, December 2, 1996.

23 Mean Business, 23.

24 Ibid.

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also began breaking off ties with suppliers, in an effort to bring the total number down from 20,000 to 1,000.25

Al and others argued that his controversial layoffs were necessary to save the company.

When I become ‘Rambo in Pinstripes’ or ‘Chainsaw Al,’ who sells assets and fires people, I have empathy for those let go. But what I keep uppermost in my mind is not that I cut away 35%, but that I saved 65%. I think that’s terribly important. If I don’t take action—if I back off as most chief executives do, and fire a nominal 10% of the workforce—that’s nothing. It’s a tease. I could do less and avoid the criticism. But then I’ll have to go back and slash again and again. That is a fraud imposed on employees.26

He also remarked that benevolence isn’t what gets a company back on track, saying “the harshest critics call me a bastard and say I have no heart. I’m probably a much nicer guy than most people think, but who’s going to hire a nice guy to turn around a failing conglomerate?”27

For all of the controversy he created, however, one undisputed fact was that shareholders greatly profited while Dunlap was at the helm. And Dunlap was always one of those shareholders. Indeed, one of his core beliefs was that managers should have their compensation linked to shareholder wealth creation. At both Scott and Sunbeam, his compensation was directly tied to the stock performance of the company, in the form of options and grants. As a result of the rise in stock price during his 20-month tenure at Scott Paper, Dunlap increased his own wealth substantially—by almost $100 million, according to his calculations. “Did I earn that? Damn right I did. I’m a superstar in my field, much like Michael Jordan in basketball and Bruce Springsteen in rock ‘n’ roll. My pay should be compared to other superstars in other fields, not to the average CEO. Only a handful of chief executives are worth the big bucks they are paid. Many are grossly overpaid and should be fired and then replaced by CEOs whose pay is strictly performance-based.”28

Sunbeam

Because of his apparent success at Scott Paper, Dunlap received a large compensation package upon his arrival at Sunbeam (see Table 1A and 1B). True to his philosophy of aligning compensation with company performance, Dunlap took no bonus, but received a substantial package of stock options and awards. Also believing that CEOs should put their own money into the company they work for, he invested $5 million in Sunbeam stock the first year of his tenure. As Nell Minow, an institutional investor known for her shareholder advocacy, said of Dunlap, “He puts his money where his mouth is.”29 His initial purchase of 244,898 shares from the company came at a price of only $12.25 per share; he bought them just 48 hours before it was announced that he would be the next CEO of Sunbeam.30 From those shares alone, Dunlap made more than $1.5 million in two days.

25 “The Shredder: Did CEO Dunlap Save Scott Paper, or Just Pretty It Up?” John A. Byrne. Business Week, January 15, 1996.

26 Mean Business, 23.

27 Ibid.

28 Ibid., 22.

29 “Corporate Blitzkrieg Brings a Rapid Turnaround.” James Flanigan. Los Angeles Times, March 19, 1995.

30 Sunbeam Shareholder Proxies 1997 and 1998.

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899-218 Al Dunlap at Sunbeam

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Table 1A Al Dunlap’s Compensation at Sunbeam

1996 1997 Dunlap’s New Contract for 1998

Salary $507,054a $1,115,385 $2,000,000b Bonus 0 0 0 Other Compensation $68,600 $287,638 N/A Options (number) 2,500,000c 0 3,750,000d Black-Scholes Value on grant date $16,621,000 0 $75,000,000 Value at peak stock pricee $110,724,000 0 $127,406,000 Restricted Stock Awardsf

(number of shares) 1,000,000 0 0

Value on grant date $12,500,000 0 0 Value at peak stock priceg $31,200,000 0 0 Stock Grants (number of shares) 0 0 300,000 Value on grant date 0 0 $11,055,000 Value at peak stock price 0 0 $15,600,000 Stock Purchased (number of shares) 244,898 77,669 0 Value on date of purchase $3,000,000 $2,000,000 0 Value at peak stock price $12,734,696 $4,038,788 0

Source: SEC Filings. a Dunlap became CEO of Sunbeam on July 19, and therefore did not receive his full salary for 1996. b Dunlap’s contract was renegotiated in February of 1998, but terminated on June 15, when Dunlap was fired. c These options were granted with an exercise price of $12.25. A third of the options were immediately vested, and the remaining

two-thirds would vest over two years. The term of the options was ten years. d Under Dunlap’s new contract, the options granted in 1996 were fully vested, and Dunlap received 3,750,000 new options (with

the same vesting restrictions as his previous agreement) at an exercise price of $36.85. e Sunbeam stock reached a record high of $53 per share in March 1998. f One third of these shares were immediately vested on the grant date, with the remainder vesting in two equal installments on the

first and second anniversaries of the grant date. g As per Dunlap’s new contract, 40% of his original restricted stock award was cancelled, and the remainder became fully vested.

Table 1B Value of Dunlap’s Stocks and Options Upon Departure

Unvested Vested Options held at the time of departure 2,500,000 3,750,000 Black-Scholes value at the time of departure $7,450,000 $21,225,000 Shares held at the time of departure 1,491,564 Value on date of departure $23,492,133 Company shares outstanding 100,811,194

Source: SEC Filings.

Upon his arrival at Sunbeam, Dunlap made the board of directors take similar action. He ended monetary compensation for all outside directors, and severely reduced the size of stock grants they received. Previously, board members had received $20,000 annually, in addition to $1,000 for each meeting they attended in person. They had also received 5,000 shares of stock, and options to buy 1,000 shares upon each re-election. Under Dunlap’s plan, members of the board of directors were each granted 1,500 shares of stock upon their election to the board, and upon each subsequent

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election. They were also required to buy and maintain ownership of at least 2,000 shares of Sunbeam stock31 (see Exhibit 6).

Charles Elson, a law professor from Stetson University, was one of the first people Dunlap asked to join the board. The two first met when Dunlap was still at Scott Paper, and Elson had just published a study linking executive overcompensation to a low level of stock ownership by the board. In an article he wrote for the Wall Street Journal, Elson proposed that board members be paid only in stock, indicating the findings of his study. The article caught Dunlap’s attention, and he asked to meet with Elson, saying that he wanted to institute a similar plan for board members at Scott Paper. When Dunlap then went to Sunbeam, he called Elson and said that he’d like to put a shareholder advocate on the board. “I said, ‘great!’—thinking he meant someone like Nell Minow, or another well-known person,” said Elson. Dunlap asked Elson if he’d consider becoming a board member, provided he would be willing to buy stock in Sunbeam—$100,000 worth. “That’s a lot of money for a law professor,” said Elson. “Dunlap said, ‘I wanted to make you sweat a little.’ I said, ‘It worked—I’m drenched!’” He agreed to join the board.