Paper’s Tiger

Few promote themselves or their companies with the unbridled exuberance of Scoff Paper’s Al Dunlap Few match the hired gun’s record In turning around troubled corporations.

March 1 1995 by Jonathan Burton


At characteristic high-speed, without a shred of modesty, Al Dunlap rattles off a blue book’s worth of reasons why his clean sweep of Scott Paper ranks among the greatest corporate turnaround stories ever. He follows with a stern lecture about the failings of corporate America, and his luncheon order of bluepoint oysters and broiled bay scallops-lean pickings in the meat-and-potato environment of New York’s ink, Scott Paper renowned Sparks Steak House-hasn’t even Al Dunlap says arrived yet.

Then again, who needs lunch? Albert J. Dunlap is a short-order cook with a fat-free, four-course vision. Shortly after he took over as Scott’s chairman and CEO in April 1994, Dunlap sold Scott’s printing and publishing papers subsidiary, S.D. Warren, for $1.6 billion. Then he sold its energy complex in Mobile, AL, for $350 million. The company’s other nonstrategic assets, including its woodlands, pulp mills, food-service operation, and an energy complex in Chester, PA, are next-sales he hopes will leave Scott with $3 billion in freshly minted working capital and a lucrative core business as the world’s largest tissue products maker. One more thing Dunlap placed on the block: Scott’s Philadelphia headquarters, 55 bucolic acres of walking paths, ponds, and geese. “A headquarters is merely deference to the CEO’s ego,” Dunlap says. Of course, Scott doesn’t really need a big central office now. In a single stroke last year, Dunlap eliminated 11,200 jobs, equivalent to 34 percent of Scott’s worldwide work force. The fearsome blow included 71 percent of the company’s headquarters staff and nine of its 11-member executive committee-in fact, Scott’s operation now fits neatly into three floors of one office building.

“We’re moving from a paper company to a consumer products company,” Dunlap promises, something akin to rivals Procter & Gamble or his former employer Kimberly-Clark. “We’ll have a high multiple, a higher margin, and we’ll be heavily focused around the world.”

It’s hard to argue with success. Dunlap’s approach is expected to save Scott an estimated $340 million in operating costs this year alone. Operating income for 1994 hit $264.1 million, or $3.54 per share, including gains on asset sales. That compares with a loss of $237.8 million in the year-earlier period, including restructuring charges. Moody’s Investors Service and Standard & Poor’s both hiked their ratings on Scott’s long-term debt, and some on Wall Street are looking for Scott’s EPS to top $5 in 1995. “He’s exceeded expectations,” Linda Lieberman of Bear, Stearns & Co. says about Dunlap. “They’re selling assets most people didn’t know they owned.”

Just what shareholders hoped for when Scott’s board of directors lured Dunlap out of retirement with a $1 million a year, five-year mandate to remake the company. Dunlap had returned to the U.S. early in 1993 after a two-year stint in Australia working for billionaire publisher Kerry Packer. Scott, a matronly, 114-year-old Main-Line company, was being crushed under $2.4 billion in long-term debt and steadily declining earnings. “They could have called me or called Dr. Kevorkian,” quips Dunlap, bursting into a belly laugh.

Two brass ornaments prominently displayed in Dunlap’s office at Scott are circling sharks, creatures that must keep swimming or die. Obviously, this is not someone who believes in consensus building. ‘A clear formula for mediocrity,” he thunders. By his own admission, he is not easy to work for and isn’t often the focus of affection. “If you want to be loved, buy a dog,” Dunlap says with a chuckle, delivering a sound bite he frequently recycles for the press. “But I can be challenged,” he adds. I’m a strong person. Listen, if you do the things I’ve done and you’re not a strong personality, every body’s going to roll you at every step.” So it’s not surprising that Dunlap has no patience for piecemeal corporate restructurings. “It’s hopeless,” he says. `All you do is paralyze the company, create paranoia within your people. Do you want to work with a company that says, ‘We didn’t get you this year, but watch out next year?’ It’s nonsense.”

In fact, much of corporate life seems nonsensical to this 57-year-old boardroom veteran. Dunlap is especially disdainful of top management that gets away with poor performance. “How can people, year after year, be at a corporation and not get the results, and stay there?” he wonders. “You know, if you’re a CEO of a company, it’s a great job. It’s America‘s aristocracy. In England, they have the royal family; in America, we have chief executives.”

Dunlap also dumps liberally on boards of directors. “Boards get nice fees; they get nice perks, and I don’t agree with that,” he says. Shareholders will vote at their annual meeting in April on Dunlap’s plan to compensate each board member with 1,000 shares of Scott stock each year, forfeiting the traditional gift basket of annual fees, bonuses, and stock-option agreements. The only other big U.S. outfit with a similar all-stock setup: The Travelers insurance company. Scott’s board now has nine outside members and Dunlap a highly irregular mix-lacking the representation from pension funds and investment bankers the CEO prefers. But perhaps most counterintuitive, Dunlap scoffs at the notion that boards must mirror the communities they serve, with women, for example, sitting as directors in proportion to the customer population. “Business is not a social experiment,” he snaps.

Dunlap himself serves on only two boards: Scott’s and General Oriental Investments Ltd., a Cayman Islands corporation controlled by industrialist-turned politician Sir James Goldsmith. As the head of Sir James’ operations in the U.S. and worldwide between 1986 and 1991, Dunlap drew fire from the press, including British tabloids, which dubbed him “Chainsaw” for his often-abrasive manner. SirJames himself labeled Dunlap “Rambo in Pinstripes.” “He is obviously not a diplomat,” the billionaire former financier observes in a telephone interview. “He’s got a short fuse, and he doesn’t tolerate inefficiency.” Nonetheless, Sir James admires Dunlap. “In terms of discovering the thin man inside the fat man-the core business-and improving that core business, he’s the best.”

They made an unlikely pair-Dunlap, the scrappy son of a shipyard worker and a store clerk who grew up in the Hudson River town of Hoboken, NJ, in the shadow of the  Manhattan skyline, and Sir James, a member of Parliament, with his upper-crust Eton education and King’s English. But pair up they did, acquiring Diamond International and CrownZellerbach, and selling non-essential assets. Similar intentions for US. tiremaker Goodyear Tire and Britain‘s BAT Industries went down in political flames. Had either succeeded, Dunlap would have filled the chief executive’s chair.

At Scott, Dunlap is back in form: ruthless inside the corporation but a jagged-edged, bad-boy charmer outside. No matter the audience, the rapid fire repetition of fundamental ideas remains unchanged, and an ironclad confidence makes it easy to believe Dunlap can squeeze blood from stone. He certainly puts his money where his mouth is. His first day at Scott, Dunlap bought $2 million in company stock on the open market at $38 a share. When the stock reached about $50, he spent another $2 million for additional shares. These calculated, dramatic moves generated a wave of welcome publicity, but they also proved smart investments. Scott stock recently traded around $77 a share.

Characteristically, Dunlap is confident about Scott’s future. “We’ve been training,” he tells a meat-eating team of Chief Executive editors. “Now we get to play.” How is he going to beat his competition? Dunlap doesn’t break stride. “Ask the better question,” he says. “What will they do to beat me?”

Upon your arrival at Scott, what needed to be done first?

I cited four things: We had to sell S.D. Warren, the energy operations, and other assets that don’t fit the core business. We had to put a management team in place; we had to have a major restructuring; and we had to have a strategy for the future. And we had to do it all very quickly. Scott is the largest producer of tissue in the world. We were also in the coated paper business. My view is we couldn’t continue to be in two paper businesses.

In assembling a new management team, I promoted people from within and brought in three people from the Eli Lilly Co., people who’ve worked with me before. They know how to do turnarounds, know how to build companies.

In building for the future, we’re looking overseas: We’re the first American paper company with a joint venture in China. We have a big position in Mexico. On the homefront, we’ve just broken ground in Yucca, AZ, for a new converting facility; and we’re going ahead with a state-of-the-art facility in Owensboro, KY.

What’s it like learning to live without one-third of your work force?

Absolutely wonderful. It frees your people to be creative, to have responsibility, to make decisions.

You have a real strong opinion on buzzwords, such as quality and empowerment.

Most of them, in my view, are nonsense. Somebody comes up with a new buzzword, then they write a book. So they sell the book. Nobody understands the book. Then they get money to give lectures. It’s amazing.

Look at the background of the people making pronouncements today. What are their credentials? Have they dealt with what happens in a company? The only buzzword I’ve ever heard that has any value is “culture.” Every corporation has a culture. If it’s a good one, nourish it and grow it; if it’s a bad one, don’t send it into remission, eradicate it.

You came to Scott when the paper and pulp industry was enjoying a resurgence. You’re riding a good wave. Performance the last six months has zilch to do with the industry. The industry is cyclical and is about to catch the upturn. The upturn is frosting on the cake, but we made the cake first.

If the new Scott is going to be quality at a competitive price, what was the old Scott?

Scott’s a great old-line name, a great franchise, but it obviously was not performing. Where was the innovation? The growth? They didn’t exist. Some companies bring somebody in to fix the situation, but often it’s a horrible marriage that ends in a quick divorce. Other companies go from one custodian to another. I am not a custodian. If I’m going to come in, I’m going to come on the condition that I am going to make all the hard decisions, and I’m going to build the company.

You have a strong personality. What was the most hostile thing anyone ever said to you?

Well, I’ve had death threats. I do things that are fairly dramatic. Does that upset some people? Of course, it does. If you make statements that challenge the establishment, the establishment is not going to like it. If you’re doing the right thing, people will come to respect you.

So you’re not a big fan of consensus building?

Not at all. Consensus building takes you down to the lowest possible common denominator. I am a fan of surrounding yourself with really great people who will come up with the best decision; some of them may never agree with you.

Where would you like things to go at Scott, particularly in terms of acquisitions?

Acquisitions we might look at will be closely related to the core business. I don’t believe in getting so far afield from the expertise in the corporation. What do we do? What fits with the definition of what we can do? This holds true with one exception: I would say to corporations, “Build on tradition, don’t live on it. If you live on tradition, you die on tradition.”

You’ve a rather defined notion of what comprises the ideal board.

I believe a board should be 10 or fewer people, and they should all have an interest in the company, the exact same motivation as the shareholders. When you have boards that do not share the shareholders’ views, you have a problem.

The ideal board should have a topflight lawyer, a person who has investment banking experience, someone with marketing experience, and a person who has experience either in your industry or an associated one. You also should have people who represent a pension fund or something of that nature.

Should the chief executive serve as the chairman of the same board?

Yes. And if he doesn’t do a good job at either one of them, fire him. The problem with the so-called professional chairman is he’s not close enough to the business to have a clue what he’s doing, and he does not take the time to find out.

You’ve said your greatest buzz is the turnaround challenge. What is the least fulfilling aspect of your job?

Obviously, firing a person is no fun. I do the tough decisions, because they have to be done. But my obligation is to see that I create the best environment I can. With me, what you see is what you get; there’s never a hidden agenda. I say what I believe, and I believe passionately in the company.

But surely, that’s not as simple as it sounds.

People try to create a great mystique and try to make business very esoteric. In truth, business is painfully simple. It’s about doing the right fundamental things.

Here’s how simple it is. You say, “I. have to get a good management team, I have much too much cost.” You ask, “What am I doing in these businesses?” And you ask, “What am I going to do in the future?” What could be simpler?