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Tough Calls
By Dick Martin AMACOM Books
Copyright © 2005 Dick Martin
All right reserved. ISBN: 0-8144-7243-5
Chapter One
Understand the Power of Symbols One of the biggest mistakes CEOs make is to neglect the emotional impact of their words and actions. The feelings that people attach to their opinions endure long after the rational arguments on which those opinions were based have been forgotten. Individuals or companies that evoke those feelings acquire symbolic power that can be displaced only by other, more powerful symbols. The most dangerous place to be is between clashing symbols.
Trivestiture
In September of 1995, Bob Allen and his wife, Betty, were guests of honor at the New Castle, Indiana, high school homecoming. Allen, whose father owned and operated a children's clothing store in New Castle, was the local boy made good. After graduating from Wabash College, where he met and married his wife, he went off to work for the telephone company as a manager for Indiana Bell. Now he was chairman and CEO of AT&T, traveling by corporate jet and golfing on national television with stars of stage, screen, and Wall Street. But he had never lost touch with his old friends in New Castle, and, as he waved to them from the football stands while Chrysler Newport High School played Kokomo, few would have guessed that he had a care in the world.
Actually, Allen harbored a secret that would make the financial markets swoon, and before leaving for New Castle, he had instructed his trusted lieutenants back in New Jersey to prepare to announce it in just two days.
Allen's plan had evolved in unprecedented secrecy over the spring and summer. At first, he had confided his intentions only to the company's chief counsel, John Zeglis, and its chief financial officer, Rick Miller. They, in turn, had engaged one of the company's outside law firms, Wachtell Lipton, and its long-time investment banker, J. P. Morgan, to run the numbers, do the research, and draft the necessary legal documents. The AT&T executives didn't even use their secretaries to prepare their memos; they wrote them out in longhand. Allen went so far as to carry documents home to burn in his kitchen sink.
By Labor Day, only about forty of the company's most senior officers had been briefed on the plan. Allen was going to ask the board of directors to split the company into three parts: an equipment manufacturer built around the venerable Western Electric company, which AT&T had controlled since 1881; a computer company built around the NCR Corporation, which AT&T had acquired in a hostile takeover just three years earlier; and a communication services company, which would carry the AT&T name.
In one stroke, Allen would extricate himself from a computer company acquisition that had never really worked out, free his manufacturing division from the increasingly contentious conflict of trying to sell equipment to local phone companies that considered AT&T their biggest potential competitor, and position the largest part of the company to focus on communication services. Resolving these last two issues had taken on greater urgency, as Congress seemed increasingly likely to pass a telecommunications reform bill.
The news release announcing what would come to be known as "Trivestiture" was issued on the morning of September 20, 1995. Shortly after the news hit the wires, Miller briefed a small group of financial analysts in a conference room at AT&T's official headquarters at 32 Avenue of the Americas in downtown Manhattan. It was clear that they liked the plan. Whether because they coveted the investment banking fees that would inevitably flow from the restructuring or because they honestly believed that it would unlock shareowner value, or both, they had difficulty containing their enthusiasm. The markets would confirm this, increasing AT&T's stock market value by $6 billion in two days. The analysts' questions quickly passed from "what" and "why" to "when." As agreed, Miller told them that we anticipated making an initial public offering of shares in the equipment manufacturer "sometime in the first half of 1996."
"Why so long?" they asked.
Separating the books of the three companies and giving each of them its own balance sheet was a monumental task. Together, the companies had revenue of $80 billion, debt of $20 billion, 300,000 employees, and facilities in all fifty states and around the world. They had contracts with each other, shared intercompany debt, and used each other's intellectual property. Miller, the proverbial "numbers man" who had made his reputation by helping Penn Central come out of bankruptcy and leading Wang Laboratories into it, did not normally find enthusiasm contagious. Thin, angular, and gray in hair and pallor, he was all edges and seemed too ascetic to get excited about anything but a checkbook that balanced to the penny on the first try.
But when he came to lunch in the executive dining room, just before a scheduled news conference, he told Allen that the meeting with analysts had gone very well. "They just thought we should move faster," he said. Then, in an almost offhand way, as he reached for the pickles, he added, "Why don't we say we'll do the IPO by the end of the first quarter?"
Thus were sown the seeds of a public relations crisis that would ignite a national debate on corporate responsibility and make AT&T and its chairman symbols of corporate greed.
A Matter of Numbers
Setting up three new companies was a once-in-a-lifetime opportunity to clean their books of obsolete equipment and facilities. Low-performing divisions could be sold off. Each company's workforce could be resized to its new competitive environment, and the separation charges could be wrapped into one magnificent write-off that would give all three companies as close to a clean slate as the accounting rules would allow. And if an extraordinary write-off was in the offing, why wait to do it in the middle of the next year and complicate continuing results? Why not do it on the last business day of the current year so it would all be charged to 1995? Wouldn't that give everyone the cleanest possible jumping-off point?
So on January 2, the first business day of 1996, AT&T greeted the New Year by announcing a restructuring charge against 1995 results of about $4 billion after taxes, about half of it to pay for the elimination of 40,000 jobs.
Miller had hoped that the job reduction would be the biggest in history and had us do the research to prove it. He was disappointed when we discovered that General Motors, IBM, and Sears had already copped that distinction. We were in fourth place. Bummer. Nevertheless, as designed, the announcement suitably impressed Wall Street. But those of us on the softer side of the executive table-in Human Resources and Public Relations-were more than a little uneasy. A downsizing of this size was unprecedented even for AT&T, which had developed a reputation as the incredible shrinking company ever since divesting its telephone company subsidiaries twelve years before.
Much of the previous downsizing had been accomplished through voluntary programs, but, although AT&T's separation benefits were among the best in industry, fewer people were raising their hands to be let go. An early retirement offer several months earlier had attracted only 3.6 percent of eligible managers. Furthermore, while in prior downsizings as many as 30 percent of the people whose jobs were eliminated were able to find other positions within the company, this time Human Resources estimated that a far smaller percentage would find such a safe haven. The current estimate was that as many as 30,000 people would be let go.
We took pains to ensure that the news release and the accompanying internal communications were as straightforward as possible. We made a clear distinction between the positions being eliminated and the number of people who were likely to be affected. We spelled out the reasons for the downsizing as best we could, division by division. And we detailed the separation benefits being given to everyone affected in an effort to demonstrate how compassionately it was all being done.
The first day's news coverage was relatively straightforward and neutral, although most newspapers led with the 40,000 figure. The New York Times's headline was typical: "Job Cuts at AT&T Will Total 40,000, 13% of Its Staff." And as if taking its cue from our own CFO, the story's opening lines continued, "The AT&T Corporation announced the biggest single job cut in the history of the telephone business yesterday, and one of the largest corporate work-force reductions ever."
If AT&T's bean counters were cheered by the prominence given the raw numbers on the downsizing, its public relations and human resources staffs were ecstatic that most of the coverage also included their messages. While conceding that "the AT&T downsizing still has far to go," the Washington Post continued that "thus far it is unfolding as what outplacement expert [Chuck] Albrecht [president of the nation's largest outplacement firm] called a 'textbook example' of how to do a layoff in today's economic climate. 'It's an excellent process,' he said." The New York Times used an Allen quote from the news release acknowledging "how wrenching it will be for employees and their families," and then its reporter added that the company really had little choice but to slim down "in response to changes that are expected to rock the communications industry over the next few years-in particular as AT&T and other long-distance carriers prepare for the regional Bell telephone companies to attack the $80 billion long-distance market."
The Wall Street Journal said that "the magnitude of the cuts stunned even some veteran AT&T-watchers," then went out of its way to give Allen an opportunity to explain himself in the third paragraph of a 1,777-word story. "'This is not one of my favorite days, but then I'm not one who is in so much pain as some of our workers,' AT&T Chairman Robert E. Allen acknowledged yesterday. 'But to the extent we can get in trim, we'll produce better margins, more flexibility and more cash flow ... to defend our markets and attack others.'"
A Bullet Dodged
As we shut off our PCs that night in the PR department, we felt we had dodged a potentially fatal bullet. But as it turned out, we had focused too much on the newspapers that were tucked into the seat pockets of the limousines that ferried AT&T executives between home and office. We took too much comfort in the fact that most of our "messages" made it into print, albeit at the end of long stories. We should have paid more attention to the evening news broadcasts, which were how most people heard about our downsizing.
For example, after reporting that AT&T had announced a cut of 40,000 jobs, CNN's World News went on to say that "The latest rounds of corporate cutbacks have left many people fearing that they may be the next to be fired." NBC's Tom Brokaw predicted that "if what happened today to 40,000 workers at AT&T is any kind of barometer of what's ahead, it will be another long, anxious year for the American middle class." The television news anchors tied AT&T's downsizing to the feelings of insecurity and fear that were rattling working people in every community.
On one level, objective economic data suggested that everything was fine-inflation was at historically low rates (2.7 percent), and unemployment, which had declined in the last four years, was at relatively low levels (5.8 percent). But what the statistics could not show was that many Americans were feeling increasingly worried, frustrated, and angry. In the previous ten years, more than one-third of Americans (35 percent) either had lost their own job or had an immediate family member who lost a job. Almost one-quarter (22 percent) of Americans worried that they would lose their job in the next twelve months. Despite low inflation, real incomes were being squeezed; all but the top 10 percent of wage earners had seen their real income decline. Optimism about the national economic outlook had taken a negative turn in December of 1995, and only three out of ten Americans believed that their children would be better off then they were.
In addition to coming on the first business day of a new year, the AT&T downsizing touched a nerve. As then Secretary of Labor Robert Reich put it in a New York Times op-ed just two days after the announcement, AT&T "is but one in a long list of companies that have delivered large numbers of pink slips in recent years, despite record profits." (Emphasis added.) People could understand why companies in trouble had to let people go. But AT&T was recording its most profitable year in history. What was going on here?
Pat Buchanan, news commentator turned populist presidential candidate, thought he knew. "I was not discomfited by the shutdown of the government," he told an Iowa Republican caucus, "but I was discomfited when I read that AT&T is laying off forty thousand workers just like that, and the fellow that did it makes $5 million a year, and AT&T stock soared as a consequence, and his stock went up $5 million."
As he moved his campaign to New Hampshire, Buchanan turned Bob Allen into a symbol of corporate greed that tapped into working people's very real fear and anger. In the process, he gave us all a mini-lesson in mob politics: Remind people they're scared and/or angry and blame it on an enemy they don't like in the first place. It doesn't even have to be the enemy you're running against, although it's helpful if you can tie the two together somehow.
Media coverage of AT&T's downsizing increased and became increasingly critical, with negative stories outnumbering positive two to one. For example, Newsweek's Allan Sloan wrote that, while AT&T's downsizing made sense, AT&T's executives should share the pain. In reporting the story, Sloan even schlepped out to New Jersey so that he could look Allen in the eye when he asked if he thought it was "fair" for Allen to draw a million-dollar paycheck when workers were losing their jobs. Allen just glared at him and said it wasn't his job to decide what was fair.
Symbolic Meaning
Ironically, Allen genuinely worried about the people who were affected by his decisions. He expressed his feelings to Sloan, as he had to others. "I feel bad about it," he said, "but I don't know what to do. I wouldn't see any value of going on TV and crying and showing my sorrow for the world to see." Sloan wrote that Allen seemed "like a decent and moral man," but also seemed to be totally out of touch with the "unfairness" of continuing to draw a fat salary while he laid people off. "Symbolism is terribly important," wrote Sloan, "and so is a sense of shared sacrifice.
Continues...
Excerpted from Tough Calls by Dick Martin Copyright © 2005 by Dick Martin. Excerpted by permission.
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