Corporate Blitzkrieg Brings a Rapid Turnaround

“Business is not a social experiment,” says Albert J. Dunlap, who came to Scott Paper Co. as chairman and chief executive last April and since then has cut one-third of the employees--11,200 people--sold assets worth more than $2 billion and boosted the 115-year old company’s stock price from $37.75 a share to $84.625.

“Dunlap should be cloned,” says one of America’s foremost experts on corporations and shareholder value.

But should he really? Is Al Dunlap, 57, West Point graduate and roving executive with years of restructuring under his belt, a new style corporate hero for the ‘90s, or just an old-fashioned hatchet man who built a rising stock price on swelling ranks of jobless people?

The answer is more hero than hangman. “I know what unemployment is like,” says this blunt-spoken tough guy. “My father worked for Todd Shipyards in Hoboken and was laid off a lot. And let me tell you one thing, I have never been willing to sacrifice 100% of the people to save 25% or 30%.”

Dunlap was hired by Scott’s board of directors to revitalize a company that was mired in over $2 billion of debt, had lost almost $300 million the previous year and, in the words of a Philadelphia investment banker, “was going nowhere but down.”

He tore into the job, firing 71% of the headquarters staff, 50% of the management. He also cut 20% of the hourly labor force, sold forest products and other businesses and brought the company back to its original tissue, paper towel and napkin business. Scott, with more than $4 billion in annual sales, is the world’s largest maker of toilet tissue.

Last week, Dunlap sold Scott’s opulent Philadelphia headquarters. “We had a 55-acre site with three buildings, 700,000 square feet,” he says. “We had walking paths, we had geese. Quite, quite an idyllic place. Except nothing ever happened there. Large headquarters are just there to stroke the ego of chief executives.”

His thoughts on corporate management are not merely irreverent, they’re contemptuous. But Dunlap’s barbs and corporate actions contain lessons for many U.S. companies. Investors and employees everywhere take note.

“The year before I arrived at Scott, they spent $30 million for consultants,” he says. “This year we’ll spend nothing. I don’t know what the hell they were consulting for because their record was so bad.”

He’s right there. “The company was a typical blue-blood Philadelphia company that had long ago lost the spark that built it,” says Thom Brown, a partner in Rutherford, Brown & Catherwood, a Philadelphia investment bank.

Scott Paper invented the paper towel in 1907, but Procter & Gamble took over market leadership in recent decades. Scott still sells more toilet tissue than P&G;, making many of the supermarkets’ own labels. But the company had lost money as often as not in recent years. Dunlap’s predecessor as chairman had begun a three-year restructuring that would have cut 8,300 employees.

But to Dunlap, multiyear programs guarantee paranoia and paralysis. “Why do executives do that? Because no one likes criticism,” he says. Far better to do it quickly. “Hit it head on. There are more than 20,000 people with a more secure future at Scott today because we did the restructuring properly and it’s over.”

Dunlap, who spent part of his career managing companies for Britain’s Sir James Goldsmith, also has an ego and knows how to play for high stakes. He had retired to Boca Raton, Fla., a wealthy man--estimated net worth $50 million--when Scott’s directors called. He made Scott pay $3.3 million for his Florida home and pay him $1 million a year.

But now he’s moving Scott corporate headquarters--reduced to about 100 employees--down to Boca Raton, in what looks like another case of a CEO bringing his office to the golf course. Bill Agee and Pebble Beach come to mind. Dunlap points to Florida tax breaks designed to lure Scott headquarters, but Philadelphians are skeptical.

Still, there’s widespread admiration for the fact that Dunlap invested $2 million of his own money when he joined Scott, and $2 million more some months later when the stock had risen past $50 a share.

He believes in stock ownership, pays directors in stock and has pushed Scott executives to buy almost $10 million of the company shares with their own money. His thoughts on executive compensation are typically caustic. “People ought to be compensated on the wealth they create, not on taking two people to lunch next week,” Dunlap says.

“He puts his money where his mouth is,” says Nell Minow, manager of the Lens Fund, which invested in seven laggard companies and pressured boards of directors to reform them: Sears, American Express, Borden, Eastman Kodak, Westinghouse, Stone & Webster and Scott Paper. Under Lens’ prodding, all but one of those companies have changed management.

“Scott’s board was ready to act,” Minow says, “and bringing in Al Dunlap solved the problem of shareholder value.” Scott Paper’s total stock market value now is about $6.3 billion, up $3.5 billion from last April.

“And the shareholder is not a bunch of rich guys on Wall Street,” notes Dunlap. “It’s the pension funds; it’s your mother and father.”

Yes, but in the 1980s, the jobs of a lot of mothers and fathers were sacrificed to the enrichment of corporate manipulators who stripped companies down. Is that pattern repeating? Labor consultant Audrey Freedman says no, the ‘90s are different. “Slash and burn downsizing is over,” says Freedman. “Now it’s selling other assets to reinvest in core businesses where the company can succeed.”

That’s really what Dunlap has done at Scott, returning it to being a consumer products company rather than a diversified producer of paper for packaging and business uses.

The question after such a burst of success is about the long-term: If he can reform a company, can he also manage it? Dunlap says yes and points to investments in new, efficient tissue plants in Owensboro, Ky., and Yucca, Ariz., and to new ventures for Scott in China and India. “Factories fold tissue by hand in those countries, and our machines can do thousands of cases a minute, so you can see the potential we have,” he says.

A successful man who seldom misses a chance to note that his father was a union shop steward and that his mother worked in Woolworth’s, Dunlap holds to a management credo that is more West Point than business school. “You take the tough decisions and ultimately you get respect,” he says. “And the most important thing in business is respect.”

Makes you think maybe West Point isn’t a bad business school.

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Soaring Stock Price

Scott Paper Co. stock has shot up in the last year. Monthly closes, except latest: (see newspaper for chart)

Friday: $84.625, up 37.5 cents

Source: TradeLine