Leading in a Time of Change

To loosely borrow a theme from Shakespeare, some executives covet dereguxlation for their industries and others have deregulation thrust upon them. Either way, many find that deregulation spawns a tempest they’re ill-equipped to handle.

Just ask the chief executives of Edison International and PG&E; Corp. as they grapple with the mess that is California’s power industry. Though few expected Shakespearean greatness from John Bryson at Edison and Robert Glynn Jr. at PG&E;, critics say they should have been better prepared to head off the debacle of the state’s since-discredited 1996 electricity deregulation plan.

Bryson and Glynn are only the latest in a long line of top managers across the vast spectrum of American business who have struggled to adapt to deregulation and the whims of the free marketplace. Conversely, others who migrated from the calm of government rule to the topsy-turvy ways of deregulation have not only thrived but also exploited the changeover with innovation and lower prices that have appealed to consumers and earned bigger profits for the executives’ firms.

How these CEOs fare under deregulation has an enormous influence on the economy, because their decisions affect millions of customers, employees, taxpayers, suppliers and investors.

Despite countless books and college courses on managing a deregulated business, there appears to be no hard-and-fast list of personal qualities or skills that can help executives flourish instead of flop as they move from regulated to deregulated markets.

Those who succeed usually take at least one big step, however: They foster an intense urgency not only to radically alter their own thinking but also to force their employees to become more facile and adaptable to ever-evolving markets as well. It requires shocking once-guarded corporate cultures into massive change, and the CEOs who can pull it off are in short supply, analysts said.

“It is very mysterious and very hard to predict” which executives will make the transition, said Philip Verveer, a Washington lawyer who specializes in telecommunications--another industry that has been turned on its ear by deregulation in the last two decades.

“But one thing is for sure: You have to be remarkably adept at recruiting the institution itself to change,” Verveer said. “If you don’t do that, you’re going to have trouble.”

Examples of the victors and the victims abound in the industries that have deregulated. Besides electricity and telecommunications, the sectors include natural gas, banks, airlines, railroads, brokerage houses and savings and loan institutions--which suffered an enormous calamity after deregulation.

“It takes a level of vision and personal confidence that’s tough for many” CEOs as they try to navigate the open market after being in regulated confines, said Philip Giudice, a vice president with Mercer Management Consulting Inc. in Boston.

A regulated business--in which the boundaries for markets, prices and competitors are set by the government--can often lead to bureaucracy and a hidebound corporate culture. When the business is set loose to compete on its own, those traits become an albatross that must be shaken off for a company to stay on top.

That is especially true in the utility industry, where executives had operated under the same general regulations for more than 50 years.

“When you go to deregulation it’s a whole new ball of wax,” said John Lamar, a managing partner with the Alexander Group, an executive search firm based in Houston. “You’ve got to be able to think on your feet and deal with an ever-changing market.”

Takeover Bait

Such a market usually includes mergers and acquisitions. Dozens of utilities, telecommunications firms, railroads and brokerage houses found themselves takeover bait after their industries were deregulated, in many cases because they were unable to prosper in their newly free markets.

That’s why companies that once were household names--such as the Santa Fe and Southern Pacific railroads and investment firms such as E.F. Hutton & Co.--were bought out.

Mergers also have swept the electricity industry in states that deregulated, and several executives involved in the deals became casualties when they or their boards of directors found their skills wanting in a deregulated world.

“Flexibility is probably the most important [quality], because they’re having to change almost 180 degrees from what they’ve done in the past,” said William Begley, head of the energy and utility practice in Houston for Heidrick & Struggles International, an executive recruiting firm.

To be sure, lots of events occur in a deregulated world that many executives think they are prepared to handle--and then can’t. Market prices soar or plunge, organized labor derails their strategies with demands of its own, or new competitors emerge that are much more nimble than anyone expected.

That is what happened in California’s electricity market, as soaring wholesale prices for power, tight supplies and surging consumer demand overwhelmed the state’s deregulated system, which was limited by price caps on consumers’ bills and a lack of new generating plants. Bryson, Glynn and their top lieutenants have been criticized for being slow to identify the problems and act on them.

The two men do get good marks for trying to innovate under deregulation. Bryson, for instance, was lauded for building up Edison’s unregulated Edison Mission Energy and Edison Capital units, which provide independent power production and power plant financing, respectively. But it wasn’t enough.

Predicting which executives will succeed in a deregulated world and which won’t is almost a fruitless exercise, because history shows that even some CEOs who fought deregulation later used it as a valuable asset, while others who fostered deregulation watched it lead to their demise.

Take Robert Crandall, the now-retired head of American Airlines and its parent, AMR Corp. When Congress weighed deregulating the airline business in the mid-1970s, Crandall publicly howled that it would ruin the industry. Yet after deregulation occurred in 1978, Crandall invented some of the industry’s most famous features, including super-saver fares and the computer reservations system.

On the other hand, Donald Burr seized deregulation to start a low-fare airline called People Express. It was briefly a hit with consumers, but in just a few years Burr (in part because of Crandall’s hardball competition) was forced to sell the airline. Then again, Southwest Airlines Co. CEO Herbert Kelleher also embraced deregulation to build his low-fare, short-haul airline, and it’s still a top performer today.

In the brokerage arena, Charles Schwab fought for the end to fixed stock trading commissions, and then, after commissions were uncapped in 1975, made Charles Schwab & Co. the nation’s largest discount broker. But that was only the start. For the next two decades, Schwab expanded into myriad investor services that deregulation enabled, and the company remains one of Wall Street’s stellar players.

Kelleher and Schwab are often lauded for the culture they nurture--demanding their employees steer away from complacency, invade new territories and continually innovate to keep pace with their changing markets, even if some of the moves ultimately fail.

AT&T; in the Aftermath

“Unfortunately, it’s hard to find a lot of examples of people who have done it successfully,” lawyer Verveer said. “To somehow or other cause a significant revision of the [corporate] culture is a terribly difficult job.”

Prime example: AT&T; Corp. Many contend that since Ma Bell was broken apart in 1984, AT&T;’s leadership has failed to find the formula that would return the telecommunications giant to a path of sustained growth. Yet the American icon has been managed since then by executives plucked from other industries for their expertise in deregulated markets.

With its unsuccessful forays into computers and wireless systems and, more recently, a $100-billion gamble on cable television, AT&T; hasn’t been able to supplant its core long-distance business, which continues to erode.

In those cases, critics said, AT&T; couldn’t shake its lumbering, bureaucratic culture, which left it unable to make quick decisions in businesses changing with lightning speed. So AT&T; is again proposing to bust itself apart into three companies to restore its growth and sagging stock price.

As Edison and PG&E; try to keep their necks above water in California, two other energy executives, Kenneth Lay and Jeffrey Skilling, are proving how a once-sleepy energy company can profitably reinvent itself after being deregulated.

Skilling is president of Enron Corp., a Texas concern created in 1985 by the merger of natural gas providers Houston Natural Gas and InterNorth. Under Skilling and Chairman Lay (whom Skilling succeeded as CEO Monday), Enron took advantage of deregulation to completely transform itself into not just an energy provider, but also a powerful buyer and seller of energy and many other commodities.

Skilling, though, is the first to acknowledge that the Houston company’s overhaul wasn’t just a matter of executive prescience. After it was created, Enron was burdened with debt, faced new rivals because of deregulation and was suffering from slumping energy prices.

“We said to ourselves, ‘We’re in the soup, and if we don’t do something we’re dead,’ ” Skilling recalled. “That led to huge changes inside the company,” including the replacement of 70 of Enron’s 75 top managers between 1985 and 1990.

In fact, Skilling said, it is often the worst-performing companies that rebound once deregulation arrives because the change “creates a tremendous sense of urgency.” In Enron’s case, that meant venturing into new markets, “collapsing the organization’s structure” and making company stock available to employees as an incentive.

Now called one of the country’s most innovative companies, Enron produces little power itself today but annually trades billions of dollars’ worth of gas, electricity, metals, paper and even bandwidth--pipelines, if you will, through which all types of telecommunications, video and Internet services can flow.

“Enron understands it’s in a commodity business now, where electricity is no longer a monopoly but instead is very sensitive to changing prices and markets,” said Begley of Heidrick & Struggles.

As Enron prospers, Skilling has become something of a “new-economy” poster boy for deregulation’s upside. Yet he offers qualified support of the two utilities that embody the downside of a California deregulation plan gone awry.

“I don’t blame PG&E; and Edison for this,” he said. With so many rules covering prices and competition still in place, “this was not deregulation.”

The airlines also prove that whether or not their CEOs are savvy, corporate mistakes are common in a deregulated world. The carriers were deregulated more than 20 years ago, but today they are awash in service woes, labor pains and debatable merger plans that have consumer activists and lawmakers calling for a return to some regulation to protect “passenger rights.”

Each industry is different and political, and labor and competitive forces can enhance or undermine the game plan of the sharpest business mind. Even so, an executive entering a deregulated world must throw nearly every preconceived notion about his or her business out the window, observers said.

“It means changing every aspect of what you’re doing,” said Giudice of Mercer Management. “It means being open to changing, including in ways that are uncomfortable to you. And there have been many executives who looked at that future and said, ‘It isn’t for me.’ ”

*

More Times coverage of the state power crisis is at https://www.latimes.com/power.