Dale Buss

Dale Buss
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Dale Buss is a long-time contributor to Chief Executive, Forbes, The Wall Street Journal and other business publications. He lives in Michigan.

Anatomy of an Asymmetrical Acquisition

Why bigger companies are targeting smaller company acquisitions—and how they make them work.

CEO Interview: Chris Lofgren of Shneider National

Let Down by the Feds

Chris Lofgren
President and CEO, Schneider National

We're concerned about the impact of increasing government activism in the transportation industry and the private sector in general. I would include in that the impact of health-care reform. We're a big employer and self-insured [for health care], and we want to do the right thing for our associates.

We've been able to help our associates become good consumers of health care. That's the answer. The second you push everyone into a system, as a company we'll spend more—and our associates will receive less.

I'm also concerned about how the government is treating infrastructure. Surface transportation is really the power train of the physical economy and is a prerequisite to maintaining a high standard of living—and it's Schneider's lifeblood, of course. [But] last year's [$832 billion federal stimulus] got misdirected. I don't think we solved the real, systemic issue around infrastructure. We need to stop the redirection of highway trust funds to short-term agendas and make sure that these monies are spent specifically on highways—bike paths are not a transportation priority.

Going forward, there is not a lot of big capital investment by our customers, whether it's building new stores or extending manufacturing capacity. They're waiting to understand what kind of government regulation and tax situation we find ourselves in, and whether the consumer comes back. For 2011, I see modest growth in the economy, so our own investment in capital is pretty conservative too.

Schneider National, a $2.9 billion company based in Green Bay, Wis., is the nation's largest privately owned truckloadcarrier.

Green Visigoths

Increasingly, NGOs are wielding their media muscle to exact tithes from Corporate America. Here’s how to fight back

Global Warming’s Bottom Line

When Lehman Brothers consultant John Llewellyn spoke about climate change to 40 CEOs and COOs from some of the firm's biggest clients at the Davos Economic Forum in Switzerland in January, they were rapt. A globally acknowledged expert on the subject, he warned that drastic regulation of greenhouse gas (GHG) emissions was inevitable, and they had better do something to protect and advance their companies in light of it.

"You could have heard a pin drop," says Llewellyn. "I told them that everything was adding up to a clear, cold-blooded, unemotional cost-benefit case for their taking some action. I was struck by the intensity with which they were listening and the fact that many of them thanked me for setting up all those issues in a row."

Like Llewellyn's audience, more and more CEOs worldwide are finally grasping the need to deal with the bottom line of the clamor over climate change. While many remain unconvinced about what the science shows, CEOs are moving on to something more important: gauging the present and future impact of environmental mitigation on their employees and shareholders.

But even in this arena, hard, quantifiable answers remain as dicey as tomorrow's weather forecast. The only sure things are the awesome questions: How much will global governments and societies dictate that business spend to cut carbon-dioxide emissions? Who exactly will pay for it? How? And when? The complexity of these questions may be why none of the CEOs of 15 of the West's most important companies-ranging from the Big Three automakers to Swiss Re, DuPont and Kimberly-Clark-agreed to be interviewed for this story.

"CEOs aren't allowed to go off half-cocked on anything because of Sarbanes-Oxley, or they go to prison," notes David Littman, former chief economist for Comerica Bank and now with the Mackinac Center for Public Policy, a think tank in Midland, Mich. "The same thing will prove true ultimately with this rhetoric about climate change." 

Calculating Costs

Global warming will cost business in two major ways: weathering the natural disasters attributed to climate change and mitigating it. But how much? While estimates of the true cost are all over the map, the consensus of international economists is that global GDP will fall by as much as 3 percent per year due to economic costs and drag associated with abatement efforts.

Those numbers describe an impact that could plunge the world into prolonged recession or even depression. But things could actually turn out much, much worse, according to the Malthusian forecast and draconian prescription issued last fall by Nicholas Stern, a British economist who wrote the U.K. government's authoritative report on climate change. He believes losses may total as much as 20 percent of global GDP, forever, and that the overall economic toll of climate change could be as traumatic as that of the Great Depression or the world wars. Stern's report is the fulcrum of the economic debate right now. (See related story, "Global Warming Guide for CEOs, page 34.)

The main factor in Stern's extreme number is that he uses what economists call a "zero discount rate" that values the well-being of future generations as much as ours and, thus, commands us to immediate and overwhelming action for braking climate change. But most economists use discount rates ranging from 3 to 5 percent when trying to put a price tag on future damages.

And early this year, in an analysis of the Stern report, Yale University economist and climate-change expert William Nordhaus countered that Stern "magnifies enormously impacts in the distant future" and "rationalizes deep cuts in emissions, and indeed in all consumption, today," achieving a "bizarre result." So dire is any scenario that actually deflates the global GDP-resulting in massive unemployment and untold other types of dislocation-that many experts believe governments, business leaders and even an ecologically conscious populace simply won't commit to it. "The odds that global-warming hysteria will transform the modern industrial economy in any significant fashion are zero," says Jerry Taylor, a senior fellow of the Cato Institute, a libertarian think tank in Washington, D.C. "While the public increasingly thinks that something must be done about global warming, most people don't want to spend anywhere near [Stern's prescription] to turn wish into reality." 

Paying the Tab

Most CEOs and economists are resigned to the imposition of a cap-and-trade system similar to the one instituted a couple of decades ago that allowed the U.S. to get a handle on the sulfur-dioxide emissions that caused acid rain. The government would set the overall allowable level of greenhouse gas emissions, and then producers would receive-and could buy-credits allowing them to pump given amounts into the atmosphere. This is the route the European Union has chosen.

Under one scheme, 90 percent of the emissions allowances would be allocated for free to various affected industries, but the proportion of allowances to be auctioned grows to 38 percent in 2030 from 10 percent in 2012. A federal climate change trust fund, capped at $50 billion, would collect revenue from the auctions and disburse it for GHG-reducing research and development.

"One reason the green movement is so fond of cap and trade is that it's easier to hide things in schemes of trees uncut and oil unproduced and coal left in the ground," says Kenneth Green, resident scholar at the American Enterprise Institute in Washington. "But they also know that if people got a bill and saw that the costs were 2 percent of their income each year, they would push back."

That's why CEOs shouldn't necessarily write off the possibility of seeing the other approach: outright taxes on GHG emissions. "You can't capture regulating all energy use with a cap-and- trade system," notes John Fahsbender, of counsel with McMahon DeGulis, a Cleveland corporate-law firm. "People automatically recoil at the thought, but the argument is growing that it's more equitable and there are fewer transaction costs."

Green has proposed a dramatic overhaul of the U.S. tax system that would be "carbon-centric," shrinking existing taxes on income and corporate profits, for example, in favor of taxing carbon-based energy use. "It's revenue-neutral and would shift taxes in the economy to focus on creating incentives to drive down the cost of energy," he says.

In any event, some of the cap-and-trade bills now being considered in Congress call for the stabilization of global GHG at 450 ppm of carbon dioxide, slightly more than the current level of 430 ppm. To get there, they call for reduction of GHG from the U.S. of about 60 percent below business as usual by 2030. Under one bill, the U.S. Energy Information Administration calculated that the cap-and-trade permit price in 2025 would be about $11 per ton of carbon dioxide-how GHG abatement is being measured-corresponding to an emissions reduction of 10 percent.

A $45-a-ton price would be required to achieve a 22 percent reduction in GHG emissions. Today's prices of carbon "offsets" on the informal market are about $5 to $6 a ton. 

Gradual Approach

Despite Stern's clarion call for drastically reining in economic growth today to make things easier for future generations, most CEOs and economists expect the costs of climate-change mitigation to be sustained gradually.

There's also little doubt that, ultimately, consumers and taxpayers will bear the costs and that corporate shareholders, per se, will feel little of the pinch.

But every player also expects the price of stemming global warming to accelerate significantly in the decades ahead. "As the world economy grows," explains London-based Llewellyn, "it wants to be emitting more carbon, so you need a progressively higher price for the most efficient way of dissuading people from doing this."

Economists also warn CEOs not to assume they've got a lot of lead time to deal with this issue. Llewellyn compares it with demographic aging, which Western companies and governments saw coming for decades but whose effects, including staggering pension and health care costs, have begun weighing down corporations and national economies. 

Hard-Hit Industries

The big losers, of course, will be electric utilities, oil and gas companies, automakers and other stalwarts of our 150-year-old, carbon-based economy. Also clearly under strain will be CEOs of other big industrial enterprises ranging from aluminum smelters to manufacturers of construction supplies to papermakers, as they cope with higher costs for energy and raw materials-and with pressure to reform their own practices. But not all the potential losers have been fully identified yet. For example, airline CEOs so far have fallen under little pressure to demonstrate responsiveness about emissions because what their planes give off amounts to only a tiny percentage of the globe's output.

"But now there are suggestions that, because most of their emissions are at 35,000 feet, they have a disproportionately greater impact on climate change," says Craig Smith, a senior fellow at London Business School. "If that's shown to be scientifically correct, the pressure on airlines could be very huge-and very sudden." 

Winners in Warming

Some "rent-seeking" companies obviously stand to gain much by developing and supplying technology and systems to help other companies meet emissions-reductions mandates. These include General Electric, which wants to sell nuclear plants and windmills, and Toyota, whose pole position in harnessing hybrid autos has benefited from substantial federal tax credits for consumers who purchased them.

Other early movers in disparate industries also could gain by way of public support, handy templates, carbon credits and other monetizable chits. S.C. Johnson, for example, devised its Greenlist system in 2001 to apply a green philosophy to its raw-materials procurement, and now it has begun licensing the process-royalty-free, for the time being.

And Wal-Mart CEO Lee Scott made a splash in April by announcing a major environmental overhaul across its stores and supply chain that presumably soften its hard-edged reputation in social-change circles. Yet, it also could cut costs, allowing the retailer to reap significant gains in this discipline just as it has in pioneering discount pricing and efficient logistics. Variables on the Horizon

One big remaining issue, for instance, is whether the Western world can count on China and India to join them in a single abatement scheme. Future emissions by those two growing economic powers easily could eclipse the combined output of the North American and European economies. "But the only way to get them to make stronger commitments is for historical large emitters, like the U.S., to take the first step," says Truman Semans, an executive of the Pew Center on Global Climate Change, in Arlington, Va.

The ultimate answers to all of these questions bear the potential to reshape the global economy and life as we know it. But even as CEOs continue to influence the scientific, political and social debate over climate change, their primary responsibility will remain making sure that their own companies come out with their heads above the ever-rising seawaters. And that will be challenge enough.


Global Warming's Ground Zero

CEOs in America's Midwestern coalfired, electric-utility industry are already toting the costs and girding their companies for the struggle ahead. "We've seen projections that the cost of carbon credits will be as much as $10 a ton by 2015 and $20 a ton by 2020," says Jim Rogers, CEO of Duke Energy in Charlotte, N.C., which recently acquired Cincinnati-based Cinergy. "That means our extra expenses will likely be $1 billion a year and then become $2 billion a year. That [$2 billion] is what we pay today for all the coal supplies for the entire company as well as the cost to transport it." CEOs like Rogers are confident that under a cap-and-trade regulation scheme, industries which currently are heavy emitters of carbon dioxide such as theirs will be extended the most generous allowances of permits as they build cleaner new plants and retrofit old ones to cut GHG output. "Fifty percent of our nation's electricity is from coal," he notes. "You can't turn the lights out on 50 percent of America tomorrow."

At the same time, these CEOs

aren't taking chances that they can depend solely on Midwestern politicians to help them through the wrenching change that will be required by global-warming abatement. Mike Morris, CEO of American Electric Power, based in Columbus, plans to be "a first mover" on emissions reduction, "which means that whatever hardware decisions we make will be more cost-effective for our customers." And Roy Thilly, CEO of Sun Prairie, Wis.-based Wisconsin Public Power, has accepted an appointment from Wisconsin Gov. James Doyle to become co-chair of the state's new commission on dealing with climate change. "We need to be at the table, because how it's done-such as whether a cap-and-trade system uses allocations or auctions-will be hugely important questions for individual utilities and the industry," says Thilly.


What Might It Cost?

Meeting the middle of the consensus target range for greenhouse-gas levels in the atmosphere by 2030 would require the abatement of 26 gigatons of the stuff. One feasible scenario for getting there, by McKinsey, starts with energy-efficiency measures that would actually end up reducing emissions by lowering demand for power, such as better insulation. But the costs rise from there up to important but complex measures such as broad carbon- capture and -storage schemes, which McKinsey estimates could account for 3 gigatons of GHG reduction alone.

John Barth: Steering Solutions

When you've got a CEO as willing to jump on an airplane as Johnson Controls' John Barth, no corner of the world is safe from his inspection. So in 2003, when the Barth clan was connecting through a Midwestern airport on their way back to Milwaukee from a vacation, Barth, his wife and children carefully checked out the lavatories. His company maintained the facilities, and customers had been complaining that the bathrooms weren't clean enough.

Whether it's to visit the latrines at an airport, his subordinates around the world or key global customers such  as Carlos Ghosn, CEO of Nissan and potential new partner of General Motors, Barth is all about personal attention. Through the '90s, he demonstrated this capability aplenty in bringing Johnson Controls' auto interiors operations to its current leadership position. Since being named CEO in 2002, he's racked up thousands of miles in global crisscrossing to meet with business partners, customers and subordinates alike.

But to continue the diversified industrial company's six-decade record of annual sales increases and 15-year string of yearly profit improvements, Barth will have to demonstrate an intensity-and reach-that even he hasn't shown before. With the fresh acquisition of York International, Barth is hugely expanding Johnson's bet on manufacturing as well as its traditional commitment to facilities management. He only began investing in hybrid power trains for vehicles after the market took off. Barth also would like to create unprecedented manufacturing and management synergies among Johnson's now-separate automotive-component, auto-power and climate-controls businesses.

At the same time, Barth and his directors concede that his biggest challenge remains automotive interiors- in which a supplier fabricates many of the automotive cockpit components and then integrates them into a massive module that the original equipment manufacturer slides into the vehicle frame on its own assembly line. Johnson has been making hay there for 20 years, but the industry downdraft has already dragged most of its competitors down, and the Big Three U.S. automakers collectively are in their worst shape ever.

                                           

"The auto industry is sort of fragile right now," admits Barth, 60. It'll be a major challenge for the company to "continue to have growth that's significantly beyond how the market is growing. There will be some winners and some losers. So we have to be very careful how we work our way through the significant investments that we make."

Though it's now a $32-billion behemoth and industrial Wisconsin's largest corporation, Johnson always ran somewhat under the radar. Headquarters is an undistinguished, low slung complex in a nondescript part of suburban Milwaukee. Barth's predecessor, James Keyes, was a no-nonsense bean-counter who focused on boosting nuts-and-bolts performance- not on ringing up style points. Similarly, Barth, an unprepossessing 37-year company veteran, "isn't the star of a board of directors' movie," as Paul Brunner, chairman of Spring Capital in Stamford, Conn., and a Johnson director since 1983, puts it.

Yet, he has raised Johnson's profile and infused its top job with a personality and a spirit never seen before. The acquisition of York, a maker of heating and ventilation systems, transformed Johnson into a multibillion-dollar player in a new market for the company virtually overnight. In February, President Bush bolstered Johnson's power technology operations with a personal visit to the company's new hybrid research center in downtown Milwaukee. And Johnson has been garnering recognition lately as one of America's most-admired corporations.

"It would have been easy to just sit on the ball," says William Lacy, a Johnson director and former CEO of MGIC Investment. "But [Barth] made the company move."

"For the first time in our history, we have three really world-class businesses," says Barth, who is considering a corporate re branding to reflect and enhance the company's broader new status and higher profile. "Not that they weren't always good-but life is long, and sometimes you're on top and sometimes you wish you were. Right now, they're sort of all in sync. Now, my job is to try to leverage what we do well, somewhere in the company, across all our businesses."

Bringing Up Barth

While its higher visibility and broader aims constitute heady new territory for Johnson, Barth is a decidedly old school leader with a continued focus on the auto-interiors business. He began his career as an engineer in Pittsburgh with plastics supplier Hoover Universal, designing automotive components in the late '60s. He joined Johnson after the latter acquired Barth's employer in 1985. And for a while he ran the Hoover business that manufactured 99 percent of the world's plastic milk bottles and a huge share of its two-liter soft-drink containers (before Johnson disposed of that $1 billion operation in 1997).

In acquiring Hoover Universal, Keyes flipped the growth switch that led Johnson to leadership of the interiors business. By 1989, Barth was heading the interiors group and helping spread Johnson's tentacles into door trim and headliners. He spearheaded acquisitions that brought expertise in instrument panels and in the electronics behind the creature comforts that were becoming increasingly important to automakers and their consumers.

Overall, under Barth's leadership, the interiors business grew from about $1 billion in annual sales in 1990 to more than $15 billion in October 2002, when Barth succeeded Keyes as CEO. And today, auto interiors still generates about two thirds of overall corporate sales.

By building Johnson's interiors enterprise from scratch, Barth avoided the legacy of restrictive work rules and high overall labor costs that plagued rivals Lear (which recently restructured), Delphi (the extremely troubled former GM unit) and Visteon (née Ford's parts business, and similarly bogged down). Johnson also got a head start in interiors integration on the company that has since emerged as its main rival, Canada-based Magna International.

What's more, Barth managed to continue to invest in the R&D crucial to this sector. "Unlike most other suppliers, Johnson has done a good job of not following the Big Three into the same death spiral of cutting innovation and quality and technology," says Ronald Tadross, automotive analyst for Bank of America Securities.

Industry observers also point to Johnson's emphasis on manufacturing efficiency as a major advantage. Barth and others have pushed Six Sigma and lean-manufacturing techniques for 20 years, and applied software expertise from the controls business to optimize information technology. "They're very pragmatic, looking for continuous, incremental improvements, much like the Japanese," says Pam Lopker, president of Carpentaria, Calif.-based QAD Inc., Johnson's global manufacturing-software supplier since 1990. "They keep driving down costs continually and don't try to boil the ocean all at once."

                                 

Driving Global Growth

Beginning 20 years ago with the seating business, Johnson developed technology-sharing relationships with automakers in Japan, facilitating the company's mastery of efficient manufacturing. Today, analysts estimate that 35 percent of Johnson's automotive interiors revenue in North America comes from Japanese-owned "transplants," the highest portion among U.S. interiors suppliers. "When Toyota and Honda and the others came here, we didn't have to introduce ourselves," Barth observes. "We already had relationships in place."

At the same time, Johnson stole a march on other U.S.-based suppliers in global sourcing. During the early '90s, Keyes, Barth and company already were establishing plants to manufacture components in Mexico, Asia and even Eastern Europe. And in China, Johnson's early activity garnered it a base of 12 plants and a monstrous share of the seating market, supplying six of China's seven largest automakers.

"Not only did we make a global footprint a little earlier than others, but we've done a good job of developing leadership abroad," Barth asserts. "We have Europeans running our European businesses and Asians running our Asian business, as opposed to Americanizing the world."

Johnson is "aggressive about minimizing their risk on any one OEM or any one geography, which is extremely good, strategically," adds QAD's Lopker. So when GM Chairman Richard Wagoner jawboned U.S. suppliers last year about lacking low-cost sourcing abroad, his lecture didn't cause Barth anxiety.

Still, Johnson continues to rely on American domestic automakers for the bulk of its sales, a sector where tremendous headwinds have dampened margins. In July 2006, shortly after announcing a $130 million restructuring, Barth warned that Q4 earnings would fall short of analysts' estimates by 5 to 10 cents a share. And in North America, the continued shifts in market share away from the Big Three, and toward the Japanese, portend more instability. But Barth's perpetual globetrotting to meet with customers-legendary within and outside the company-plays well in such an environment. "It amounts to a great opportunity when you've got an industry that is wounded the way the auto industry is wounded," Lacy says. "John is right on top of that."

"He's interfaced personally with all the automotive people over the last 10 years. He's constantly on an air- plane going here or there and talking with GM and Ford and Toyota," adds Paul Brunner. "At Toyota, he has the status almost of a god."

Barth's globetrotting might be viewed with skepticism, were it not so undeniably fruitful, adds Southwood "Woody" Morcott, a Johnson board member and retired CEO of Dana, another auto supplier. "If the company wasn't growing 15 to 20 percent a year, you might say that he's doing too much of it," says Morcott, who dubs Barth "the master of the industry at giving the customer more than they expect, but not putting yourself out of business."

In fact, Toyota selected Barth to keynote its 2005 global supplier conference. "Toyota has 10,000 suppliers, and the one person they choose to speak doesn't have great charisma or command, necessarily," notes Robert Barnett, another longtime Johnson director and a retired executive vice president of Motorola. "But he does have a great focus and a sincere intensity."

The "extremely strong customer focus" spearheaded by Barth acts as Johnson's "biggest differentiator," adds Neil De Koker, president of the Original Equipment Suppliers Association, a Detroit-based trade group. Tom Sidlik, head of global procurement for DaimlerChrysler, says that it's so easy for him to get in touch with Barth no matter where he is in the world "that I really have to be concerned about how important it is for me to disturb him about an issue at 3 a.m., China time."

But in the years to come, Barth's close ties with Carlos Ghosn may be more notable than any of his other relationships. Ghosn led a dramatic turnaround of a combined Nissan and

Renault since joining Nissan in 1999 and is now trying to corner GM into a global mega-alliance. Johnson already has 50 percent of Renault's global seating business and billions of dollars in contracts with GM. Barth is seeking to ratchet up those percentages. "I've known Carlos since his days as a supplier executive," he notes.

Barth also counts devotion to minority vendors as a path to improve customer relationships. Johnson is the only auto supplier that has qualified for what's known as the Billion Dollar Roundtable-companies that source at least $1 billion a year from minority- owned suppliers. Other members include GM and Ford. "If it's important to our customers, it's important to me," Barth says.

                                               

Johnson directors report that Barth will visit them in person to mull over an issue. And he continues to travel worldwide to deliver his monthly chairman's award to an honored employee. In fact, Susan Davis, Johnson's vice president of human resources, says Barth dedicates about half his traveling time to meeting with managers and other employees. The practice fosters employee enthusiasm; staffers at Johnson's high-potential management group in Beijing sang "Happy Birthday!" to Barth earlier this year in 16 different languages.

As a self-described workaholic, Barth enjoys his life as a whirling corporate dervish, who, even when pressed, can't think of a true avocation other than following Pittsburgh Steelers football. "That's the commitment that it takes to run a global business," he shrugs. "It allows you to get that last five or 10 percent."

Barth relishes handling the strategic and tactical demands of the world's biggest industry as it goes through wrenching change, in addition to heading the transformations he has initiated in Johnson's other businesses and staying on track with his push for greater company-wide synergies. While Brunner and others have advised him against serving on other corporate boards for now, Barth rejects suggestions that he may be stretching himself too thin. "I have an ability to touch a lot of things at the same time," he says, "and I am engaged." The company's increasing external recognition supports his assertion. Institutional Investor recently named Barth America's most admired auto executive, and Johnson now ranks as Fortune's most admired auto supplier. "Only recently have we been able to differentiate ourselves with our performance as we've continued to grow," says Barth. "And all of a sudden people are trying to understand how we've been able to do that."

But he doesn't have time to elaborate. He's packing for a trip to Japan.

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