U.S. CEOs Are Beset by Challenges as War, Ailing Economy Bring About Rapid Change
By MATT MURRAY, THOMAS M. BURTON and J. LYNN LUNSFORD
Staff Reporters of THE WALL STREET JOURNAL
October 16, 2001
At Wells Fargo & Co., this is normally budget-planning time. But Dick Kovacevich, chairman and chief executive of the San Francisco-based bank, says he had to warn his board that "whatever budget we come up with is almost meaningless.".
Five weeks after the Sept. 11 terrorist attacks, CEOs across the U.S. are still struggling to figure out how to do their job in a grim and risky new era. The days of constantly booming earnings and share prices, which helped so many CEOs prosper, have abruptly ended.
Things are constantly changing, Mr. Kovacevich says. He spends more time on the phone, polling people in the ranks and simply trying to understand the issues. "Every decision you make takes longer," he says. As for the budget, "the range of possibilities is so great," he says. "We're probably going to do five budgets next year. The first one is going to be our best guess. Normally, we'd give our board a budget and we'd be surprised if we were plus or minus 5% from that number. Now there's probably a plus or minus 30% to 40% potential."
Corporate chiefs, who were already bracing for the worst year in at least a decade, now must also grapple with an uncertain war abroad and the threat of more terrorism at home. Many say the new era will require them to shift away from the focus on short-term earnings that has become so widespread in recent years. They expect more emphasis on preserving resources, battening down for the long haul and shoring up security and employees' comfort. A lot of CEOs find themselves with incomplete information at a perilous crossroads: Should they move boldly against weakened competitors or hunker down and husband what they have?
Since Sept. 11, Boeing Co. Chairman and CEO Phil Condit has been presiding over 90-minute teleconferences a couple of times a week with the aerospace giant's executive committee, which normally meets once a month. With air travel down, the company is slashing its commercial-airplanes unit while planning for faster growth in defense-related business.
Mr. Condit recalls advice he got years ago from former Boeing CEO Arnold T. Wilson, who led the company in 1969 during its worst downturn, when it flirted with bankruptcy and laid off 100,000 of its 150,000 employees. "If you sit around and wait, you just get farther behind," Mr. Condit says he was told.
Boeing's commercial-airplanes unit almost immediately decided it would have to scale back production. Within hours of the attacks, panicked airline customers, whose industry already had been struggling, had begun notifying Boeing they would have to delay taking delivery of as many as 32 airplanes, each valued at between $50 million and $200 million.
In the first week after the crisis, Alan Mulally, head of the commercial-airplanes unit, recommended laying off as many as 30,000 of his 92,500 employees by the end of 2002, as well as cutting aircraft deliveries to about 400 from around 520. Deliveries are expected to drop even further in 2003, but the company hasn't yet said how much. Even without detailed forecasts, Mr. Mulally says, "in a way, it was very clear from the beginning that we had to reduce production as quickly as we could, because our customers are clearly not going to need that many new airplanes for a while."
Mr. Condit backed up the decision, even with limited information. "There are elements unlike anything we have seen, ever," he says. "You can't go to the World War II example because the whole economy was just flat different. ... We have no idea about some of the fundamental shifts in the business." Boeing announced the job cuts a week after the attacks.
Since then, Boeing has been criticized both from inside and outside the company for acting too quickly on preliminary information. "People send me angry e-mails essentially asking, 'Why are you so stupid?' " Mr. Condit says.
His answer: "If you don't start getting plans in place and you are waiting for more and more data, you are always going to be waiting for data."
For General Electric Co.'s chairman and chief executive, Jeff Immelt, Sept. 11 was just his second day as CEO. Despite years of grooming at GE, he found himself facing issues he had never dealt with before. Within hours of the attacks, he learned that GE had lost two workers -- at the World Trade Center and on one of the hijacked planes -- and sustained insurance losses that would come to $400 million and cause the company to miss third-quarter earnings estimates. Last week, he learned that one employee at the company's NBC television network had tested positive for anthrax and more may have been exposed.
GE's biggest businesses are doing well for now, but the economic downturn that already was pounding its smaller industrial businesses seems likely to drag on. GE Aircraft Engines, hit by the slumping aircraft industry, has decided to lay off up to 4,000 workers. The company's numbers-crunching, data-loving managers have found economic forecasts and historical antecedents like the Gulf War almost useless.
Mr. Immelt says GE managers are trained their entire careers to respond to change. "You can't ever look at business as normal or usual," he says.
But, he admits, "A lot changed on Sept. 11. It is very fluid. There's no playbook for it." Even his famous predecessor, John F. Welch Jr. "never saw anything quite like this," Mr. Immelt says. "In some ways, this event itself is so unprecedented that I'm as expert as anybody else."
At TRW Inc., the company's largest single segment -- automotive parts and systems -- already had been hurting. Now it probably will fall further faster as the ailing auto industry braces for more pain. Chairman and CEO David M. Cote is making very conservative estimates, deferring capital spending in the unit by 30% and planning to accelerate the cost-cutting, including eliminating jobs, that already was under way.
"You always think, jeez, if I wait longer I'll have better information," says Mr. Cote. "You end up having to make a call. Making them on that magnitude is a little scary and there's always the possibility you'll be wrong. You could lose people you'd like to keep." Still, he argues, "you're better off facing reality and acting."
While that unit cuts, other TRW businesses, such as its satellites and defense systems, seem poised to grow faster and sooner than Mr. Cote had anticipated. With an expected increase in demand and federal funding, "they're out there trying to hire thousands," he says. "For our company, it's like you need two different headsets. In one section, this is going to cause us to boom. In the other it's just the opposite."
Mr. Cote says he has spent more time than usual talking to customers, peers, defense officials and anyone else who seems to have a handle on the economy. He expects the trough to be deeper than most analysts predicted before Sept. 11, but he thinks a federal stimulus package and tax cuts will spur an upturn in only three to six months.
Still, he cautions: "I would not put money on what I thought the economy was going to do next year. You think you're planning conservatively, you hope you are, you go on the basis of your best judgment and then you spend your time scared to death you're wrong and how will you react?"
Even within the same industry, some CEOs are taking different tacks. Bill Marriott, chairman and chief executive of Marriott International Inc., made his first cut on the afternoon of Sept. 11: He canceled the company's advertising for the next few weeks. "We knew that people were going to have a fear of flying for the next several weeks," says Mr. Marriott.
In the days since, he has found other quick cost cuts. He has pared back customer research, new computer programs and additional hotels that were in the planning stages. Soon after the attacks, Marriott cut between 300 and 350 staffers at its Washington, D.C., headquarters, less than 10% of the total. "That was tough," Mr. Marriott says. "In the field, we've tried hard to retain as many people as we could by putting them on very short workweeks."
Stephen F. Bollenbach, president and chief executive of Hilton Hotels Corp., is holding off on cuts and predicting a quick rebound from recession by late next year. "I just thought, as horrible as these things were, the American people are so resilient," he says. He admits he is acting in good part on "a theory -- it was only a theory. But we put that theory in place, so we would know how to answer specific questions like whether to do layoffs, and whether to go ahead with development projects."
Most so far have been a go. Mr. Bollenbach told workers to continue the $40 million remodeling of Hilton's San Francisco hotel. Right now expensive new carpeting is being installed, and Mr. Bollenbach says he figured, "Instead of doing five floors at a time, why not do 10?" When staffers asked whether Hilton should proceed with plans to add meeting and ballroom space to New York's Waldorf-Astoria, "we said, 'Of course, complete it,' " Mr. Bollenbach says.
There have been some modest cuts. The company decided to delay construction of time-shared condominiums in Las Vegas and Orlando, partly because Mr. Bollenbach figures this won't appreciably delay sales of time-shares. He jokes that the decision was "a hedge against me being wrong."
A few Hilton hotels have trimmed staff as well. But Hilton hasn't ordered any companywide layoffs and doesn't expect to. With the comeback he expects, "it made no sense to lay off core staff," Mr. Bollenbach says.
Elsewhere in the hotel industry, the attacks killed a planned merger between FelCor Lodging Trust Inc. and MeriStar Hospitality Corp., respectively the No. 2 and No. 3 real-estate investment companies. "It was the terrorist attacks, plain and simple," says Thomas J. Corcoran Jr., FelCor's president and CEO. A MeriStar spokesman agrees that "the only thing that killed the merger was the terrorist attacks."
FelCor, of Irving, Texas, was to have bought MeriStar, of Washington, for $1.1 billion in stock and cash and $1.6 billion in assumed debt. On the night of Sept. 10, FelCor had just mailed out prospectuses to shareholders.
Early on the morning of Sept. 11, Mr. Corcoran, who had an appointment near his house, was at home watching the news. Like everyone else, he was stunned by what he saw, but its effects on his own business weren't immediately apparent. "I don't think the merger even occurred to me," he recalls.
But when he got into the office, one of his first tasks was to call the Securities and Exchange Commission because the SEC needs to sign prospectuses. The person on the phone at the SEC said the agency was in the process of evacuating its building. From that moment on, it dawned on Mr. Corcoran that the events unfolding in New York and Washington were more far-reaching than he had believed.
Beginning Sept. 17, when the stock market reopened, FelCor shares, which had traded in the low $20s, plummeted as far as $11.90. FelCor shares were quoted at $15.60, up 59 cents, in 4 p.m. composite trading Monday on the New York Stock Exchange.
And people began staying away from hotels in droves. FelCor shares stayed low long enough to trigger an escape clause in the merger, which had been announced in May.
Mr. Corcoran says he and MeriStar CEO Paul Whetsell "hid from each other" for a while. They talked about renegotiating, Mr. Corcoran says. But essentially, things were just too volatile, in Mr. Corcoran's view, to put the merger before shareholders. "It's hard to tell your shareholders that everything's OK, when the stock is off," he says.
In looking ahead, "our focus had to be on our own business, on getting hotels up and running," says Mr. Corcoran, whose company owns Embassy Suites, Crowne Plaza and Holiday Inn hotels. "The merger became a distraction. It was immensely distracting." On Sept. 21, the two companies pulled the plug. |
