Who Stole the American Dream? (9 page)

AL DUNLAP PRACTICED
what some economists call “predatory capitalism.” Like many other American CEOs in the New Economy of the 1990s and 2000s, Dunlap made a personal fortune worth hundreds
of millions of dollars with a corporate formula of cut-cut-cut—cut costs, cut plants, cut jobs.

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traditional CEOs such as Bob Galvin, who ran Motorola from 1959 to 1990 as CEO or chairman, rejected predatory strategies. Galvin believed the best way to achieve efficiency and market dominance was through the relentless pursuit of high quality. That approach, Galvin told me, would produce better products, bring down costs, and generate higher earnings on a much more solid basis.

But Dunlap’s more Darwinian formula was a favorite on Wall Street, and it won financial backing from big investors such as Mutual Series Fund owner Michael Price, whose financial syndicate bought Sunbeam, the appliance/consumer products manufacturer, out of bankruptcy. The syndicate paid $60 million in 1990 to buy Sunbeam, and within five years, Price and Mutual Series Fund made a $1 billion profit by selling off half its ownership in Sunbeam on the market.
Price made all that profit, he told me, by installing new bosses to shrink Sunbeam by sharply cutting costs and getting the company growing again. But still holding another half ownership in Sunbeam, Price was eager for more profits. He became impatient with Sunbeam’s slow growth, so he called in Dunlap as Sunbeam’s new CEO to slash costs even further to help Price make another financial killing.

Galvin was a different kind of owner and CEO. At Motorola, which was once largely owned by his family, he saw employees as a cherished asset who should be trained, not fired—trained and retrained and retrained throughout lifetime employment, as Motorola adopted one new technology after another.

Galvin fought to keep jobs in America. Facing aggressive Japanese competition in 1986, he decided to build Motorola’s new cellular phone plant in Arlington Heights, Illinois, rather than in Malaysia, as some senior Motorola executives recommended. When Galvin discovered that half of Motorola’s existing workers could not read well enough or do the relatively simple math required in the new plant, he established Motorola University and spent $200 million
a year on retraining all Motorola employees, from the janitors to himself.

But by the mid-1990s, CEOs like Galvin were a dwindling minority. After he retired, his successors at Motorola began shutting down the company’s plants in the United States and in 2010 sold their wireless networks division to Nokia Siemens, a joint Finnish-German firm.

Through the 1980s, the model of the American CEO was changing. Wall Street banks and big-time investors like Michael Price were putting the heat on corporate CEOs for ever-higher profit margins, which translated into deep cutbacks for average Americans. In some business quarters, anti-union strategies gained legitimacy from the sharply anti-labor stance of Republican presidential nominee Barry Goldwater in 1964 and the union-busting tactics of President
Reagan, who broke the air controllers strike in 1981. By the 1990s, ever-higher profits and share prices had replaced sharing the wealth as the touchstones of corporate success.

London Business School economist Sumantra Ghoshal, among others, pointed to business schools and economic thinkers as the main sources of new corporate attitudes. In an influential essay,
Ghoshal cited Milton Friedman, the Nobel economist from Chicago, as the intellectual godfather of the New Economy idea that CEOs should focus narrowly on maximizing shareholder returns. In his 1962 book,
Capitalism and Freedom
, Friedman had rejected as “subversive” the notion that corporations had social responsibilities. “Few trends could so thoroughly
undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible,” Friedman asserted.

Ghoshal disagreed. Employees as well as shareholders create value, he argued, and they should share more equally in corporate gains. But Friedman’s views turned out to be much more influential than
Ghoshal’s. The aggressive management notions of the Chicago school of economists took root at prominent East Coast business schools, causing Ghoshal to complain years later, after the Enron and WorldCom scandals, that “many of the
worst excesses of recent management practice have their roots in a set of ideas that have emerged from business school academics over the last 30 years.”

The New Economy model suited Al Dunlap. He became a cult figure on Wall Street. His specialty was parachuting into troubled companies, staying just long enough to shrink them drastically, boost their stock quickly, and
turn a huge profit for Wall Street fund managers like Michael Price.

As a good-looking, sixty-year-old graduate of West Point, Dunlap was eager to play up his tough-guy image, riding to the rescue of troubled companies with his slash-and-burn strategies. Other CEOs would conduct similar brutal surgery on such major companies as General Electric, IBM, General Motors, and AT&T, but they soft-pedaled the carnage in public to avoid offending average Americans. What set Dunlap apart was that he thrived in the limelight and he spelled out the brutal New Economy tactics in plain English.
Mean Business
was the title of his how- to management book. To publicize it, he posed in a Rambo headband with bandoliers of bullets crisscrossing his chest and two automatic pistols drawn at the hips. His patented technique—chopping off whole divisions of companies—earned him the nickname “Chainsaw Al.”

In 1997, when I met Dunlap, he was fresh from a ferocious turnaround job at Scott Paper Company, the inventor of paper towels and maker of Scotties tissues and toilet paper. Scott was a century-old company with
a family-like corporate culture. But it had fallen on hard times, and under pressure from Wall Street financiers, the board brought in Dunlap. Dunlap quickly chainsawed eleven thousand employees and fired a slew of senior managers. He drastically cut research and development, canceled Scott’s charitable giving, and focused on short-term profits. Within a year, Scott’s stock doubled in price.

Quite a few Scott executives rode the Dunlap escalator to personal wealth—the same way he did, by getting grants of company stock. “I created sixty-two millionaires at Scott in eighteen months,” Dunlap boasted.

Among them was Jerry Ballas. “I am much better off financially than I ever thought I would be,” Ballas told me.

I asked Ballas what it was like to work for Al Dunlap. “
The word that comes to mind is ‘terrorizing.’ I mean it, literally, it’s terrorizing working for the man,” Ballas replied. “What you do is you avoid, at all costs, getting near him, avoid contact with him.”

According to Ballas, Dunlap had cut so deeply into Scott’s core that Ballas feared Scott could not survive. Some of its operations were teetering near breakdown, he said, and employee morale was in tatters. “Clearly Al did not worry or care about people,” said Ballas. “He cared about stockholders. He cared about stock price.”

Investor activists like Nell Minow, who represented some large Scott investors, contended that Scott could have been nursed back to profitability without massive layoffs. But by then, Dunlap was into his exit strategy. Eighteen months after taking over, he sold Scott Paper to competitor Kimberly-Clark for $9 billion. The deal paid off richly for his Wall Street backers—and for Dunlap, who made $100 million from stock options. So for his eighteen months at Scott, Dunlap had
made $166,000 a day.

Neither Dunlap’s methods nor his payoff was out of line with much corporate and Wall Street performance over the past two decades.
More often than not, Wall Street’s gain derived from Main Street’s pain. The dynamics of the New Economy disrupted the virtuous circle of growth, the economy of middle-class power, and the Great Compression, where the destinies of management and labor had been linked.

In the New Economy, wedge economics split the fortunes of CEOs from the fate of their employees. It split Wall Street from Main Street. The destinies of the Two Americas parted company. Wedge economics made for corporate profits and big payoffs for CEOs like Al Dunlap, but it began unraveling the American Dream for millions of average Americans.

That dichotomy never came across to me more vividly than in the small town of McMinnville, Tennessee, where I saw the tale of two Dunlaps—CEO Al Dunlap and longtime employee Marsha Dunlap—play out on July 4, 1997.

The plant in McMinnville was one of Sunbeam’s most profitable, even after the company softened a slowdown in the late 1990s. When Al Dunlap took over, he swiftly executed his draconian formula. In a few short months, he cut Sunbeam’s workforce in half, sold off several divisions and warehouses, and shut down eighteen of Sunbeam’s twenty-six factories. Only four plants remained in the United States, and three of them were in low-wage Mississippi. So Dunlap focused on the fourth plant—in Tennessee. Its eight hundred workers were making modern electrical hair clippers for home use or barbershops. Dunlap announced that all but 150 of those jobs would be moved to Mexico.

Art Oxley, the young, soft-spoken plant manager, was baffled. Oxley knew that the McMinnville plant had delivered $100 million in sales in 1996 and that their hair clippers were among Sunbeam’s most popular and profitable items. “
It’s like we thought we made money,” Oxley said incredulously. “Why are we losing our jobs? Why is it going to Mexico? We’re a profitable business.”

When I told Oxley that Dunlap had called Sunbeam’s operations “a basket case,” he stiffened. “I’ve never heard of McMinnville as referred to as a basket case,” he objected. “Maybe a cash cow. But not a basket case.”

I told Dunlap what Oxley had said, and he snapped back, “It was a component of a seriously failing company.” From his perspective, the profitability of that plant was not the issue. He could get the work done for less in Mexico, for $3 an hour instead of $9 or more, and that would ring bells on Wall Street, which was the sole standard by which Dunlap lived. He kept a stock ticker right outside his office.

When Marsha Dunlap, no relation to Al, learned she was one of those cut by Al Dunlap, she was speechless. She had invested thirty-four years of her life at the McMinnville plant and was making $9.30 an hour assembling hair clippers. “It was very devastating, you know, to find out that you’re going to lose your job,” she muttered numbly. “It’s
a hurt feeling…. People don’t understand, you know, not unless you’ve been there.”

Marsha Dunlap had no idea what to do next. The McMinnville area had no other employer, or group of employers, that could absorb all the workers laid off by Dunlap. Unbelievably, the ax fell on Independence Day. In a white porch chair, Marsha Dunlap showed me her termination letter. “It says my termination date is July the Fourth, 1997,” she told me, barely able to speak. After punching out on the factory time clock for the last time, she warned her daughter, “Your Christmas is going to be light. I’m not going to pay for it with the unemployment check.”

Marsha Dunlap was right about the economic impact on the community. “It affects everyone, the whole community,” she said, “the car dealership, the real estate firms, grocery stories, discount stores. Everybody.”

But back in Delray Beach, Florida, at Sunbeam’s next annual meeting, the investors were toasting Al Dunlap. One well-dressed couple told me they had “done fantastic” with their twenty-five thousand shares of Sunbeam (now worth well over $1 million). The stock price had tripled since Dunlap’s arrival in May 1996. Dunlap himself had four million shares, then worth about $160 million.

When I asked Dunlap whether all the layoffs had been necessary, he bristled. “It’s like a commander in the field,” he shot back. “You don’t want to lose a single soldier, but when you go into battle, you’re going to lose some…. But my job at the end of the day is to save the corporation and save as many jobs as I possibly can. And I’ve saved over six thousand jobs.”

But some of his competitors disagreed. The owners of Wahl Clipper Corporation, which was making similar hair clippers in Sterling, Illinois, disputed Dunlap’s claim that you couldn’t turn a solid profit making hair clippers in America. Wahl had not laid off a single employee in twenty-five years. “
Why the layoffs? They’re not necessary. They’re extremely wasteful,” asserted Jack Wahl, the white-haired CEO. “He’s laying off quality people. These are key people. I don’t think you can … get rid of 25 percent, 30 percent, of your employees without changing radically…. They’re quality people and they shouldn’t be terminated.”