Memo to Al Dunlap: You’re Fired!

In 1994 Al Dunlap took over as chairman and chief executive officer of Scott Paper to the acclaim of all those who believed that what mattered most in company management was enhancing shareholder value. Scott Paper had become, like so many other sclerotic companies, slow to move, bloated, and bleeding money. Dunlap, a man who enters a room as though he has just rappelled down the side of the building, immediately took a chainsaw to the business, cutting employees by the thousands, closing plants, and even reneging on commitments made to charities by his predecessor. He reportedly looked at a shelf of binders containing the company’s strategic plans from previous years and ordered that they all be eliminated, sniffing, “I don’t read fiction.”

As John Byrne, a senior writer at Business Week, observes in his excellent new book, Chainsaw, Dunlap hacked away at employees and facilities over the next 18 months, and then negotiated a takeover by Kimberly-Clark at a price that was more than twice what the stock was worth when he arrived at the company. Wall Street was ecstatic, but others weren’t quite so sure. Kimberly-Clark executives learned after the fact that Dunlap all but eliminated major plant and equipment maintenance, slashed R&D expenses, and found other ways to borrow from the future in order to inflate the present bottom line. That was Dunlap’s modus operandi, however. As Byrne puts it, “Dunlap ran Scott’s factories and drove people as if the company were going out of business.”

Even as Kimberly-Clark executives spent hundreds of millions of dollars to clean up the mess Dunlap had created, Scott investors were singing his praises for enriching them. At the same time, a new breed of activist investors were beginning to target under-performing companies, not for hostile takeovers, but for drastic makeovers. Michael Price and Michael Steinhardt were among those investors who had enormous sums at their disposal. They had locked their sights on Sunbeam and in 1996 engineered Dunlap’s appointment as chairman and CEO ostensibly to turn the company around. Byrne’s absorbing and richly detailed book is primarily focused on Dunlap’s disastrous tenure there.

Dunlap took the position with everyone quite convinced that it was going to be another Scott. The stock market reacted in kind and within two months boosted the stock price from 12 to 24. It continued to move up to a high of 52 before Dunlap and the company began to unravel.

Byrne shows that Dunlap was not a master of turnarounds and restructurings, but of tantrums, abusive behavior, dissembling, and subterfuge. He implemented cuts arbitrarily, based on his own whims and recommendations from his right hand man, Donald Burnham, a senior partner at Coopers & Lybrand. Swarms of accountants descended on Sunbeam operations looking only for ways to cut costs, not for ways to improve operations or profitability. Burnham’s recommendations were often misguided, revealing a lack of understanding of the company’s basic businesses. A recommendation to outsource the company’s computer operations, for example, resulted in months of downtime and higher costs. The draconian cuts encouraged Sunbeam’s more able employees to head for the exits as quickly as possible. Dunlap quickly became a hated man among the employees of the company. Eventually, the book reports, Dunlap bought a bullet-proof vest and a gun – and charged them both to the company.

As Chainsaw tells it, Donald Uzzi, a manufacturing executive in the firm, questioned the wisdom of closing a particular plant. His projections showed that closing the plant would save about $200,000 in annual transportation costs, but cost the company more than $10 million to consolidate the plant’s operations with another plant some 40 miles away. Uzzi suspected that the decision was a trick. “I thought Al was trying to see if I knew what I was doing.” But when he raised the issue with Dunlap, the CEO refused to discuss it. He had made his mind up that the plant was to be closed, period. Indeed, in his first week Dunlap, with no real information to base his decision on, told his senior executive team that the company would eventually have just 4 or 5 plants operating, down from the current 26.

As the company’s stock price went up, Dunlap realized that the “Dunlap premium” was working against him. Because the company was becoming too expensive for any other company to acquire. Meanwhile, the book notes, Dunlap and his cronies resorted to a growing number of questionable accounting practices to “make the numbers” each quarter. The most notorious was “inventory-stuffing”: selling customers far more product than they needed, but offering them considerable financial inducements to take the products. Such short-term tricks pump up the sales figures for a quarter or two, but come back to haunt the company when the customer refuses to buy any more product for months.

This book is not only an unflattering portrait of Dunlap. It also reflects badly on the directors of the company. A cover story in The Economist (October 30), entitled “Firing the Boss,” observed that “sacking the boss ultimately comes down to the judgment of the firm’s directors. Yet boards find many excuses for doing nothing.” That accurately portrays the directors in this saga. In an interesting twist, investors Price and Steinhardt were so eager to hire Dunlap that they agreed to his demand that he be allowed to select up to three new board members, effectively allowing him to control the board.

Byrne’s book tells an all-too-familiar story: a person with an enormous ego begins to believe his own press clippings. Investors flock to him, showering him with power and wealth, but failing to create any system of accountability. Hubris and greed dominate this story, but Dunlap was humiliated when he was fired and Michael Price watched his more than $600 million profit in Sunbeam stock evaporate. Both are, however, still extraordinarily wealthy men today.