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Henry Schacht Interview, Part II
SMITH: In Al Dunlap’s approach, what’s the central flaw? SCHACHT: I believe it is destructive of value as opposed to creating of value. SMITH: And destructive of value because it's disassembling companies? It's laying people off? Spell that out. SCHACHT: If you come in and slash the R&D, layoff
everybody that you don't need right now but are going to have to have eventually to run the place, take it down to the basic production facilities and then sell it to somebody else you've got to presume that somebody
will buy it. SMITH: But it won’t work for the country, won’t work for the economy. SCHACHT: No. If everybody did what Al’s
doing I’ve never met him, he may have a different view. But my view is, if everybody did that, there’d be nothing left. Who are you gonna sell it to? That kind of behavior exists on the presumption that not
everybody is following it. That does not mean that companies don’t stray off sensible behavior and don't need to be brought back to a more responsible behavior of how it allocates its assets. It doesn't mean
that there aren't managers who aren't very good at what they do, who get themselves into all sorts of bad habits, who have way too much in terms of assets, in terms of return, who are late in coming to meeting the
values that ought to be met if you're going to get capital. Capital steps in and says that performance isn't good enough and I think that's terrific. It is what you do at that point, whether you set out to either create
something that will re-balance the use of the assets in a way that will sustain itself over a period of time, and deliver what I consider the maximum shareholder value available for any sustained period of time. The
question is, is the shareholder value over the next 6 months or the shareholder value over a very long period of time? I would submit that this system counts on people talking about building the capacity to produce
goods and services over a longer period of time rather than just the most efficient thing that we can do for short-term then let somebody else worry about it. SMITH: What’s the
message from your experience at Lucent? SCHACHT: Look, Lucent is a case example, we came into Lucent, Rich McGinn, my partner and I. It was a company that was spun off
from AT&T, it was growing at about 6%. There were all sorts of issues. We didn't cut the laboratories, we didn't cut Bell Labs back. We didn't lay off a bunch of people. We invested, we raised the R & E concern,
raised the R & E investments quite substantially. When we came into Lucent, we had all different options. We didn't cut R&D, we didn't lay off a bunch of people. We didn't rip and tear. We invested. We upped
R&D. We trimmed down where things that didn't make sense, but we did it over a period of time through attrition, through selling some divisions. Behaving what I think is very responsibly… SMITH: And you did it without layoffs? SCHACHT: I think we reduced about 24,000 people. Of that, there were a less than a thousand who actually lost jobs. The
rest of them were sold in divisions. There were temps that went off to different work. There were attrition; we didn't hire people. There were some layoffs but the minimus, there wasn't any great big fuss. We invested
in the company. The stock price has tripled. And I just defy anybody to say we would have done better by slash and burn, no damn way. I ASKED SCHACHT WHETHER HE HAD EVER
PERSONALLY FELT THE HEAT FROM INVESTORS, AND HOW HE HANDLED THAT PRESSURE. SCHACHT: Cummins Engine Company is a classic case in this issue. It's brought a lot of debate about
whether the policies we followed there, in fact, were responsible and in fact were responsible to the shareholders. You don't want me to go through the whole story because it would take too long. But
essentially we made a decision in the early 80's, at the time of record profits, record sales and record profits, that the determinants of demand that had driven the company so successfully from the early 60's right
through the 80's were not at all going to be there for the 80's and 90's, and we needed to recast the company in a somewhat different light. A broader product line, much more international, and a massive investment
in new products, as opposed to running out the string and really accelerating the cash flow, as it would have been available, if we wouldn't have made those investments. It's a classic example of should you liquidate
the company, should you sell it, or do you reinvest in a strategy that you think will carry you further than the either liquidating or selling.
SMITH: Tell me the story about the keys. SCHACHT: What happened was we embarked on this process. Just after we got through, the Japanese hit the marketplace. We hit a recession,
we brought out some new products, the Japanese underpriced us by 30%, like they were doing in a variety of markets. We dropped our prices the next day by 30%, and we went heavily into a loss position. It took us a
number of years to climb out of that. During this period of time we went through two people, who turned out to be takeover attempts, and we worked our way through those, successfully. But the incident we were talking
about earlier is, I can remember clearly, a visit from a very large holder of our shares who was irate with our performance because we weren't earning any money at all, in fact we were in a loss position. His view is
that you've got to change this, you've got to do this and my answer was, ‘look you have every right to that opinion. If you have enough votes then, here are the keys.’ I picked the keys out of my pocket and put them on
the desk and said ‘be my guest. I don't have a contract, I don't want a contract. My colleague Jim Henderson and our colleagues are working as hard as we know how, you know what our strategy is, you brought the shares
knowing the strategy is. If you’ve got enough votes to get a new set of management in here to do it differently, the way you want, that is your right. You have the votes.’ But, I think one of the real issues
we've got is shareholder's ability to act without the burden of ownership. If you want to be an owner, there are responsibilities of ownership, and that responsibility has, I believe, a longevity associated with it. If
you want to be a trader, be a trader, but do not come to me and say I know how to run your company better than you do. If you want to trade my stock, trade. If you want to be an owner come sit with us and take the
consequences of your action over a longer period of time, and I would change the tax code pretty substantially. SMITH: To give advantages to people who own long-term.
SCHACHT: I would let people trade anytime they want. But, I wouldn't give them the votes until after they've held the stock for a period of time. I’d say 2 years but, that may be too
long. Then I would say to them if you hold the stock X your capital gains rate would be one, it would go down to zero if you hold it a long period of time. But try to reunite the owner and the manager. This has
really cropped up as we began to talk about earlier. Because many many years ago the system, almost inextricably and certainly without any alternative available, separated the role of the owner and the manager. Back in
the days when the owner was the manager, you certainly had very different behavior because the people had to live with the consequences. If an owner elects to destroy to their benefit, they live with the consequences.
But right now what we is the trader saying ‘I want you to behave in my interests at the expense of everybody else’s interests, if necessary in order to maximize my interests.’ I don't think that's healthy. And I think
we are out of balance in favor of the trader, as opposed to the investor. SMITH: What do you make of where we are when we had six years of an economic boom, a few people getting
tremendously rich and the middle class is back to where it was in 1989? SCHACHT: This won't work. This can't work. You cannot have a society that is increasingly
distributing its wealth to a very very few at the expense of a growing number who are increasingly disaffected and have no chance to get from pool A to pool B. This society was built on a sense of common wealth, and it
was built on a capacity of people to be mobile. You could start of modest means and the educational system and the economic opportunities allowed you to move based, not always perfectly and there's all sorts of
really marvelous stories and there are stories that never get told that weren't quite fair, but by in large the great hope of this society was that you could be of humble birth, you could be of no sort of, no given
capacities in terms of wealth, and you could make it to the very top of the society.But we are getting well away from that, to where we have a growing number of disaffected folks who are saying, ‘hey wait a minute -’
SMITH: You mean in the middle. SCHACHT: In the middle. We're emptying the middle. A very few people used to be in the middle yet are
amongst those very few of us who are doing extremely well. An awful lot of other folks, their wives have gone to work, they no longer can take their vacations, they are having troubles getting their kids through school.
And they’re saying ‘hey, what's this all about?’ And, this is not going to last. You cannot have the very few of us making these enormous amounts of money, and a large and larger number of folks feeling that the
system of which they are the majority is treating them less fairly then they feel is equitable, and I think they are right. This isn't going to last.
SMITH: How do you expect it to play out? SCHACHT: I think the governance system will eventually change the distribution, redistribution pattern, and I think the quicker the
better. And I think those of us who are enjoying the benefits of all of this ought to be advocates of this, as opposed to the deniers of the issue that is so pressing. We cannot have a society that we have ever growing
pool of folks who feel like the society is not treating them equitably, and a very small number of folks who are getting extraordinary benefits out of the society and nobody in between. My predecessor at Cummins Engine
Company was an eighth grade graduate, and he became president of the company. That just isn't likely to help right now, and we simply have to get back to where a meritocracy rules this common wealth that we started
with, and away from this individual wealth accumulation at the expense of everybody else. Even though I certainly am a beneficiary of that, it just isn't going to last, and it shouldn't. We'll either fix it
voluntarily or the system itself will fix it in ways that’ll be ugly, unpleasant, and not very interesting for everybody. So we've got to get our act together, and the leadership of this country has got to start talking
about that to say this can't last. And it shouldn't last. And you look at the distribution of income in this… SMITH: You don't see that happening, you don’t hear -
SCHACHT: It's got to start happening, and the business community has got to start saying ‘Time out, folks. We've got to change this. We cannot allow it.’ SMITH: But I mean there are all kinds of voluntary decisions being made within corporations today about numbers of stock options and relative pay scales, I mean that's not what's going on. It's not just a
public debate, its what people do when they make their decisions - SCHACHT: No individual firm can afford not to have the talent it needs to run, and the people aren't
going to go for less then the going amount. So what we've got to do is fix it on a societal basis, and those of us who are the beneficiaries of this enormous wealth accumulation have got to be the people saying, ‘Stop
it.’ SMITH: What’s that mean, raising tax rates, re-regulating? SCHACHT: Readjusting progress rates, changing the capital gains
tax. The reason you can't change the capital gains tax is that we've got the progressive rates too low, way too low. And it's produced an enormous burst of discretionary income for those of us who are earning enormous
amounts of money. But they have to go back up. And I would be an advocate, probably virtually alone, of re-establishing the progressive rates and lowering substantially the capital gains rates and then redistributing
the capital accumulation across ownership. I think the people who are working in these enterprises have got to become the owners. It's the only way to redistribute this stuff. So we've started stock options for
everybody in the company, okay it was only a hundred, but it was a start. We're trying to get the option and the incentive compensation down to everybody. We're arguing, we're starting a conversation with our bargain
for employees about, look, we've got to trade off guaranteed income for parts of the pie. And we can do that. This isn't going to last. This is going to blow up in our faces, and those of us who are benefiting are
certainly enjoying it for the time being, but there is no way a society can have this much of its accumulated wealth distributed to these few people. It isn't just baseball players and movie stars anymore. And this
whole idea of pay for performance has back fired on us, because nobody expected this market to be what it is, so we put all these stock options out for, and say if the shareholder does well, you do well. It's just gone
beyond any reasonable expectations. The numbers are just out of sight. [Back to top] |
