Reformation Redux

Activists are nailing demands for reform on corporate doors nationwide, recalling Martin Luther’s 16th century attack on the Catholic Church. CEOs who ignore the groundswell may be swept away in a secular explosion.

October 1 1993 by David A. Heenan


Five hundred years ago, an obscure German monk named Martin Luther attacked the most powerful institution of the time: the Roman Catholic Church. The rise of religious nationalism in northern Europe, overcentralization of church authority, and a litany of papal abuses triggered the Reformation, which shattered a millennium of Christian unity and altered the religious practices of millions.

For remarkably similar reasons, Americans today are angry. They have reached the “boiling point,” says political analyst Kevin Phillips in his similarly titled bestseller. The target of their wrath: the once respected institutions of business and government. The reasons for such indignation vary, but several common themes emerge. Like the 16th century Roman Church, contemporary institutions are overmanaged, but underled. They have become too arrogant, too centralized, too top-heavy.

But at some contemporary corporations, a dramatic transformation is underway. I call it Reformation Redux. If successful, it could mark the end, or at least the decline, of the present wave of institutional contempt and the beginning of what Henry Grunwald, former editor-in-chief of Time, calls “a new age of faith.” The hallmarks of this movement include a penchant for decentralization, accountability, downsizing, and more democratic forms of corporate governance. Its leaders-with few ties to the corporate establishment-are the Luthers of our day.

APOSTLES OF CHANGE

The apostles of the new age reject the status quo. They see only too clearly the shortcomings of former powerhouses such as General Motors; International Business Machines; and Sears, Roebuck & Co. that experienced recent setbacks. The new reformers of U.S. industry are hell-bent on overhauling, not simply fine-tuning, corporate America. They are simplifying their organizations through aggressive downsizing and delayering. With less bureaucracy, companies can react quicker to market developments and new technologies.

In the new organizational galaxy, reform-minded CEOs want to mesh the creativity of a small, entrepreneurial business with the strategic clout of a big corporation-not an easy task. But space-age telecommunications enable companies to maintain smaller command posts, while empowering their larger operation units.

For some time, the CML Group has been among the pacesetters of firms making these “big/small” reforms. Its chairman and founder, Charles M. Leighton, advocates unleashing the power and potential of the business units. “I’ve learned that operating companies are like kids,” he says. “There are certain ones you don’t have to check on and others that you have to make sure they have done their homework.”

Leighton should know. His Acton, MA, headquarters of only 12 people (including secretaries) controls a diverse, $494 million conglomerate of specialty and leisure businesses, including NordicTrack and The Nature Company.

CML and other reform-minded companies are devoid of the overmanagement malaise that characterizes many American businesses. They support, rather than direct, their operating units and strive to achieve a balance between bold creativity and effective management control. “Instead of formalistic baloney and out-oftouch leaders,” says management expert Tom Peters, “the ‘new control’ is the energy, excitement, spirit, hustle, and clarity that emanates from the corporate center.”

To be sure, the rush to crush the organizational pyramid has stirred deep-seated feelings of hostility for U.S. business. What corporate America views as a vital process to restore its global competitiveness has been interpreted by others as the ruthless elimination of thousands of dedicated and hardworking employees. Indeed, the country’s 500 largest manufacturers have slashed nearly 4 million jobs since 1982. Accordingly, reform-minded firms are drafting a new social contract to regain the trust and confidence of a shell-shocked work force. Companies such as Herman Miller, Corning Glass, S.C. Johnson & Son, and Cummins Engine Co. are introducing innovative housing assistance, educational allowances, child and elder care, and other social programs to demonstrate to their employees that they care about them, their families, their communities.

This communitarian spirit has done wonders for furniture-maker Herman Miller of Zeeland, MI, which consistently has been ranked on Fortune’s list of “most-admired” companies. Its chairman, Max O. DePree, argues that the U.S. must adopt a similar ethos-and quickly. “If we don’t find ways to get the capitalist system to be an inclusive system rather than the exclusive system it has been, we’re all in deep trouble,” he says. “If we don’t find ways to begin to understand that capitalism’s highest potential lies in the common good, not in the individual good, then we’re risking the system itself.”

SHAREHOLDER REVOLT

As corporate insiders press their reforms, outside forces are attempting to overhaul the governance system. For years, “America‘s large corporations have been virtually ownerless,” charges Sara Teslik, executive director of the Council of Institutional Investors, which represents 70 leading public-sector and union pension funds. However, this is changing.

Institutional investors, shareholder associations, and several government agencies are joining forces to reassert ownership control over U.S. business. Among the proposed changes: stronger roles for outside directors, separation of the CEO and chairman of the board positions, greater external control of shareholder committees, and clearer disclosure provisions.

No area of U.S. business is more ripe for reform than executive compensation. Today, it is politically correct to be outraged over corporate pay. From the White House to Congress to the Securities and Exchange Commission, Washington is mandating compensation reform. How its proposals will fare is difficult to tell. But one thing is clear: Greater accountability will be a central feature of Reformation Redux.

Another byproduct of the reform movement is the emergence of more active boards of directors, often led by individuals willing to take on the business-as-usual gang. CEOs no longer are buffered by their directors. Gone are the days when a board simply rubber-stamped its top-dog’s decisions. Cronies no more, the new leaders of today’s corporate boards are independent thinkers willing to challenge the status quo. The dismissal of IBM’s John Akers is a prime example of outside directors blowing the whistle on an ineffective incumbent. The Big Blue board also forced two of Akers’ lieutenants to step aside.

In addition, the heir apparent is no longer automatically seated on the corporate throne. At General Motors, citing the need for a “more aggressive management approach,” several unhappy directors forced the early retirement of Chairman Robert Stemple and three of his protégés. Outsider John Smale, retired chairman of Procter & Gamble, replaced Stemple. The move destroyed the good-ol’-boy network at the nation’s largest corporation.

THE NEW REFORMERS

Both the IBM and GM examples illustrate why U.S. companies need tough-minded leaders with bright ideas. In times of crisis, America increasingly is turning to independent thinkers who can get things done. “In business, today’s reformer must be an activist-not a harmony-driven CEO,” says Harvard Business School‘s Andrall Pearson. More often than not, outsiders make better activists. They can shake up corporations by taking a more dispassionate view of a company’s operations, cost structure, and management team.

Across the nation, fresh faces are being recruited as chief executives to restore and restructure ailing businesses. For the first time in its 79-year history, an outsider, Louis V. Gerstner, is running IBM. A few other prominent examples: Michael Walsh (Tenneco), Stanley Gault (Goodyear Tire & Rubber), Robert Eaton (Chrysler), William D. Ruckelshaus (Browning-Ferris Industries), Randall Tobias (Eli Lilly), and Michael Jordan (Westinghouse Electric).

Today’s corporate apostles share another trait: toughness. They possess the same kind of courage that enabled Martin Luther to endure excommunication. But leaders nowadays must temper muscle with compassion. Consider Paul Kazarian, Sunbeam-Oster’s former chairman. Ousted after turning the company around, Kazarian was thought to be too tough for his own good. Even General Electric’s steely-eyed chairman, John (“Neutron Jack”) F. Welch Jr., concedes the days of “the autocrat, the big shot, the tyrant” are over. “A CEO can be both tough and fair,” insists John F. Grundhofer, chairman, president, and CEO of First Bank System Inc. Grundhofer is known as “Jack the Ripper” because of his role in the bank’s aggressive downsizing.

 NO PAIN, NO GAIN

These days, far too many companies resemble the Pentagon, with its beefy bureaucracy, plodding decision-making, budgetary excesses, and bitter infighting. For leaders of these firms, self-interest is “in,” and accountability is “out.” Americans are especially furious at CEOs who give themselves fat pay increases while throwing thousands of employees out on the street. Not surprisingly, many business leaders have lost their legitimacy-their ability to win the trust and confidence of everyday folks.

To be sure, the private corporation is not the only institution that is in trouble. Public education, despite two decades of good intentions and a string of self-described “education” presidents, continues to produce dismal results. Congress, which ended last year with the check-bouncing “Rubbergate” scandal, unfinished ethics hearings, and a spate of sexual harassment complaints, currently is held in the lowest esteem in history. Hospitals, universities, labor unions, and even philanthropic agencies also suffer from public contempt.

But, if the ’80s was the decade of economic recovery, the ’90s is the decade of corporate reform. Any reform movement is difficult. Just ask Boris Yeltsin. However, despite some stops and starts, outsiders in U.S. business are making progress. They are changing how U.S. business operates. “The history of man,” wrote psychologist Erich Fromm, “is a graveyard of great cultures that came to catastrophic ends because of the incompatibility for planned, rational, and voluntary reaction to change.” The traditional corporate culture is no exception-the business-as-usual gang is on the way out, and none too soon. Nothing short of a full-fledged reformation will brake corporate America‘s slide and revitalize its self-esteem.

“The people are restless and their eyes are open,” Luther warned in 1522. Our business leaders would do well to heed that warning.


David A. Heenan is chairman and CEO of Honolulu, HI-based Theo. H. Davies & Co. Ltd., a $230 million company engaged in industrial equipment, automotive, shipping, and food service businesses.