I got a call the other day from a head hunter looking for a new CEO.
“Look, I’m not going to lie to you. Acirema Incorporated is a blue chip firm but it is in deep doo-doo. The succession planning is pretty complicated so they are looking now for a CEO that can take over when the current CEO retires in 2016.”
“It seems sort of far off but okay, what’s the deal?”
“It’s a classic turnaround.” He chirped enthusiastically. “The firm is essentially bankrupt and needs a strategy to get back in the black. The company is spending about a third more than it is generating in revenues. The line of credit with the bank is strained and getting worse as the firm comes close to violating some of the very liberal banking covenants. The expenses are running over from two poorly conceived overseas joint ventures and a debt refinancing that went south. The rest of the money goes to finance active and retiree benefits and pensions, new products, customer services and interest on debt the firm has borrowed.”
His voice got low and he was whispering into the phone. “ I shouldn’t be telling you this but these guys have about an 8:1 debt to earnings ratio – which is alarming – but the bank that holds the debt has given loose terms and has not raised too much concern about the potential for default. Acirema has a problem looming with its pension and retiree medical benefits as the CFO made bad assumptions about how much money they would have in the future to pay for commitments to current and retired workers. Investment yields have been bad and the lower returns mean fewer dollars to pay without dipping into principal. They now realize they made a massive accounting error when they assumed people would draw only three to four years worth of benefits before dying. The average worker is now receiving benefits for almost thirteen years – six times what Acirema budgeted. The new CEO is going to have to fix that.”
“How?” I asked
“That’s why they pay you guys the big bucks, I guess. I’m just a head hunter on a commission.”
He continued having memorized the entire terms of reference. “So, the firm is underfunded in its medical retirement plan to the tune of almost twenty-five times our annual revenues. Management can’t honor these commitments with the union and the new CEO is going to have to break the news to the collectively bargained groups who may threaten to strike. There’s a lot of waste – endless committees and departments. You can work at the firm twenty years and retire and get 90% of your former salary as a pension. You can then come out of retirement and get a new salary AND your pension. It’s crazy.”
“Jesus” I said.
The recruiter laughed. “We wanted to offer him the job but could not find his number. Your two predecessors have really messed things up. Revenues are down and many want to raise the price of company services and cut the stock dividends to shareholders but management is not sure if shareholders will go for it. If they don’t raise revenues, they have to cut dividends deeper and lay off staff. Acirema is heavily unionized and cutting expenses could create huge problems – even an industrial action.
The board of directors is dysfunctional and divided. The truth is they have never made money – only made a profit five times in fifty years – but the firm is deeply respected and has done more to influence our industry in the last two hundred years than any other peer. The board has a low approval rating from our shareholders but they keep reelecting them. We need a Chairman and CEO that can lead.
Shareholders don’t have a realistic understanding of the economics of the industry in which the firm is now entering. The next phase is the proverbial “Fourth Turning” – an unraveling phase that precedes a winter crisis that will eventually open up everyone’s eyes to the need to change. Whoever joins the firm as CEO in 2016 will most likely be grabbing the helm right when the wind is at gale force and the barometer is dropping.”
“Wow, Mrs Lincoln! ” I said sarcastically “Other than that…”
“Here’s the good stuff: The job pays $400k a year plus a $50k expense account. You get to use the corporate house for free and we have a luxurious, multi-acre estate that is available to you for meetings and weekend getaways. You get $200k as an annual lifetime retiree benefit. The firm will give you use of the private jet and helicopter and unlimited vacation – although you will probably never take much.
Now I won’t lie to you. It’s not for everyone. You have to be ideologically strong and determined with the unions, employees, shareholders and the board. Your job is to break up cartels of indecision, pay down the debt, create a blue print for 4% growth and do not let your competitors turn you into a silver medalist role in the industry. It takes guts, charisma and a slightly masochistic personality. What do you say?”
I did not have to think long. “It sounds like a great opportunity but I am not sure anyone could fix that firm.”
He sighed. “Yeah, that’s what everyone else has said. You’re the four hundredth guy in the private sector I have called. No one wants to touch this one. Could you give me any names?”
“Well”, I said. “You need someone who will break eggs and not care about making friends. This requires a benevolent dictator. A “Fourth Turning “ leader is less of a visionary and prophet and more of a commander and tough guy. I’m too empathetic and right brain. You need a Lee Iacocca.”
“Hey, not a bad idea.” The recruiter said. “He’s still kicking, isn’t he. Do you have his cell number?”