Contents
[hide]
|
Basic Information of Al Dunlap at Sunbeam
Author: Brian J. Hall, Rakesh Khurana, Carleen MadiganPublisher: HBR
Case Number: 9-899-218
Publication Date: Apr 12, 1999
Course Category: Leadership & Managent
Case Summary of Al Dunlap at Sunbeam
Al Dunlap was known for his hard-nosed approach to turnarounds, which typically involved radical restructuring and downsizing. He documented his “take-no-prisoners” style in his book, Mean Business. He was hired to turnaround Sunbeam in 1996. The stock hit an all time high at $53, 2 months later, Dunlap was fired. The stock fell to $16 the day he was fired.“Rambo in Pinstripes”
Sunbeam stock rose 49% the day Dunlap was announced to be the next CEO. Michael Price and Michael Steinhardt (controlled 42% of Sunbeam’s shares) bought the company from Allegheny Int’l in 1990 and saved it from bankruptcy.
Sunbeam was believed to be a dying brand, failing to keep pace with competitors like Black & Decker. Most of its customers were older. The factories were aging and there were no IT systems. Turnover among factory workers was high at over 50% and its board of directors was voted one of the worst boards of 1994.
Dunlap was hired because he had a well established track record for rescuing ailing companies. He worked his way up from the factory floors and coined the term “ivory tower disease”, referring to inept b-school educated managers who can’t make decisions about processes occurring layers of management below them. His nicknames were “Chainsaw Al” and “Rambo in Pinstripes” because of the aggressive way he fired top executives and large portions of the workforce to turn a company around.
Dunlap’s most famous turnaround is perhaps Scott Paper, where he fired 10,500 people – 35% of employees and 71% of the corporate staff. He helped raised the stock price form $38 to $120 and sold the company for more than a $6 billion shareholder gain, in less than 2 years. He believed layoffs should only be done once, right away, and severely – get it over with so employees won’t be paranoid later.
Stakeholder vs. Shareholder
Dunlap championed himself as the shareholders’ savior and believed many company bureaucrats ran the company for their own good rather than the shareholders. He disliked “stakeholders” model where managers were accountable to employees, the community, etc. instead of to the shareholders.
Peter Cappelli criticized Dunlap saying, “Dunlap doesn’t create value. He just redistributes income from the employees and the community to the shareholders.”
Dunlap believed that managers should always have their compensation tied to performance. At Sunbeam and Scott, his compensation was directly tied to the stock performance and he made over $100 million. He believes he’s a superstar, like Michael Jordan and that most other CEOs are overpaid.
Sunbeam
Dunlap invested $5 million into Sunbeam when he joined, took no signing bonuses opting for stock options instead. His salary was $500K, but his options were valued at over $16M. (See Table 1A and 1B on page 6 for very relevant information). He made the board of directors do the same thing. He hired his friend Elson to the board of directors and made him invest $100,000 also.
First phase was successful, stock up to $25.37, plans to cut 12000 workforce in half, reduce the product lines by 87%, close 18 of the 26 factories, consolidate administration, and sell off several divisions, cutting $225 million/ year from operating expenses. He also announced he would double Sunbeam’s sales over the next 3 years.
Director of Product Dev. Said it was impossible with a lead time of 6 months (16-18 usual) and at 33% R&D. Sunbeam bought Coleman, First Alert, and Signature Brands in March 1998. Dunlap doubled his salary from $1M to $2M and said “You can’t overpay a good executive.”
“Chainsaw Al Gets the Chop”
The three acquired companies were troubled. Sunbeam also began to use the “early buy” or “bill and hold” program for gas grills and other seasonal products. They offered retailers low prices on these items during winter months, then stored the grills in warehouses until retailers put them on the shelves. These were accounted in the sales even though none were shipped or paid for.
Next spring, sales were down and stock fell 25%. Dunlap announced another round of layoffs, 40% of workforce. Wall Street kept putting pressure on Sunbeam, and Dunlap blew up a few times at the media. Sunbeam was accused of “inventory stuffing” and a board of directors meeting was called.
When asked how the 2nd quarter sales were, Dunlap gave vague answers and when pressed he threatened to quit. The board was suspicious why he was so eager to resign and investigated Dunlap. June 13th, at the next meeting, Dunlap was fired. Many people were happy.
Dunlap defended his leadership stating that he was not an accountant and that he had no involvement in the audits. Also, he states that he joined Sunbeam with a heavily incentivised package tied to his performance and he always meant to turnaround Sunbeam.
Case Analysis of Al Dunlap at Sunbeam
Questions:1. Consider Dunlap’s statement on page 3 of the case:
Stakeholders! Every time I hear the word, I ask, “How much did they pya for their stake?” Stakeholders don’t pay a penny for their stake. There is only one constituency I am concerned about and that is the shareholders.
Do you agree with Dunlap’s view of shareholder primacy? Explain.
Even though stakeholders didn’t pay a penny for their stake, their interests are still valuable to the shareholders as they are the ones that drive shareholder profit. Without the employees and the culture of the firm, there is nobody left to perform the labor that creates value for the company.
If you believe that stakeholders do have rights that are qualitatively similar to those of shareholders, what specifically are those rights? How do stakeholders obtain or earn those rights?
Stakeholders should be compensated according to performance as well. Give them option grants, that way the value they create is partially being returned to them as well. Their rights include the right to be compensated fairly for the value they create for the company.
2. In the context of Dunlap’s strong arguments, how should a company create a vision and mission statement? Should they even bother? What should go into a mission statement? Are vision statements, mission statements, statements of core values, even worthwhile?
Companies should create a vision statement, mission statement, or core values statement that is conducive to the success of the community, but oblivious to earnings or profits. Statements based on revenue or profit are meaningless because every company’s goal is to “Create more profit and value for the shareholders”. This does not inspire or unite the employees under a common goal. Of course if the mission statement conflicts with profit-making, then the company cannot be in business.
3. Describe the first compensation package offered to Dunlap? Was it well-designed? What are the strengths and weaknesses of the package? What type(s) of behavior did it motivate?
The compensation package first offered to Dunlap was good at what it was designed for, giving him no signing bonus and a $500K salary, but well over $16M in options. This incentivized him to solely focus on the bottom line and driving the share value of the stock up. It was great for shareholders as they only cared about the value of the stock, but was very short-sighted as there was no incentive to create long-term value in the company. Company culture and employees had no value in this model, and in fact had negative value, encourage behavior that sacrificed employees and culture in order to drive up the stock price.
4. Was the second compensation package offered to Dunlap well-structured? Was it excessive? Was it necessary?
The second package offered him a $1M salary increase to $2M and 300K more options. It was excessive and unnecessary since according to himself, his pay should solely be tied to his performance and this would be captured in the insane amount of stock he already owned. The additional cash salary goes against his own philosophy.
5. Did the board make the right decision in firing Al Dunlap?
It’s easy to say yes now in retrospect, since we can now see that he was cannibalizing his own workforce, operations, and even future sales all for the short-term solution of increasing the bottom-line right now.
6. Is this an example of effective or poor corporate governance? Should we view his exorbitant pay and ultimate firing as an example of the market doing its job to reward good performance and then punish bad performance? Or are you worried that the upsides supported by market forces are producing incentives that promote unhealthy governance? Be prepared to argue your position in a class debate.
Not gonna touch this one.
No comments:
Post a Comment