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Entrepreneur Gordon Cain Airs Views On Competitiveness and Jobs Q U.S. producer of nitrogen and urea, with ordon Cain, the leveraged buyout α assets Sterling acquired from a variety of specialist and entrepreneur, rarely $ owners, including Olin, for $500 million. speaks in public. But he did so at S The company went public last year, raising the end of May, raising many tantalizing ° $293 million, and now trades on the New issues concerning taxes and their effects on York Stock Exchange. job creation, limitations on politicians' However, it is the Cain Chemical deal terms in office, effective employee managethat gave Gordon Cain a place in the hearts ment, and employee profit sharing. and minds of chemical industry employees. Cain, 81, raised those issues at the In 1987, Cain and the Sterling Group ar fourth annual Othmer Luncheon in New ranged the purchase of $1.1 billion in assets York. He revisited those issues again with from PPG Industries, ICI Americas, Corpus C&EN associate editor Marc Reisch last Christi Petrochemical, and Du Pont to form month in an interview at Cain's Greenan ethylene, glycol, and polyethylene gi way Plaza, Houston, office. ant—Cain Chemical. One year later, Cain Cain was present at the Othmer Lunsold the business to Occidental Petroleum cheon in May, sponsored jointly by the for $2.2 billion. The Cain Chemical sale Othmer Library-Chemical Heritage Founmade Gordon Cain a hero. Employees who dation, the American Chemical Society, owned 15% of the company stock through Société de Chimie Industrielle, and others. an ESOP walked away with a minimum of The luncheon was a celebration of chemical $100,000. Cain himself walked away with history and the contributions of Donald about $100 million. Othmer, 89, who helped create the modern Cain has not limited the deals he has chemical industry with more than 150 arranged to the chemical industry. He is a U.S. and foreign chemical process patents. partner in UltrAir, a new domestic sched Like Othmer, Cain is also an industry uled airline, with flights between Houston, pioneer, but Cain's expertise is in the forLos Angeles, and Newark, N.J. He has also mation of new commodity chemical operaarranged deals involving a women's bath tions. Like Othmer, Cain is a chemical engineer. He was at one time vice president and chief operating of- ing suit company and a jewelry maker. ficer of Conoco's chemicals and plastics businesses, well before Du Pont purchased Conoco. As head of the Sterling Group, a lever-In your Othmer Luncheon speech, you said that the aged buyout firm he formed with Frank ]. Hevrdejs in 1982, Cain chemical industry could become a better internation staged a number of well-known chemical industry buyouts. (A lev-al competitor with the elimination of a traditional eraged buyout is a financing technique in which the assets of an management structure. How is that possible? acquired business are pledged as collateral against the buyer's I don't mean to focus on the chemical industry, but our indus loan.) His record on leveraged buyouts in the chemical industry istry is changing substantially. The changes are resulting in our the envy of any captain of industry. And he is the darling of many being much more competitive. We are moving away from a chemical industry employee who owned stock in a Cain-led what I call the military hierarchical type of organization struc buyout through employee stock ownership plans (ESOPs). ture, into a looser management structure with far more em phasis on teamwork than we've had before. Managers are be Cain and the Sterling Group arranged the purchase of Conoco Chemicals from Du Pont for $500 million to form Vista Chemicalcoming less like bosses, and more [like] leaders and teachers. in 1984. After going public in 1986, Vista was purchased in 1991 Is that why you believe in ESOPs? by German chemical and energy conglomerate RWE-DEAfor $590 An adjunct to this change is employee stock ownership million and the assumption of $563 million in debt. Cain also arthrough ESOPs. In all my deals I put in profit-sharing plans. ranged the purchase of Monsanto's Texas City, Tex., petrochemical Now, interestingly enough, ESOPs did not do much good complex to form Sterling Chemical in 1986. The styrene and acryloin the beginning. [Production quality expert] W. Edwards nitrile producer went public in 1988, raising $200 million. In each Deming deserves far more credit for changing industry case, employees from upper management on down benefited as these than he has gotten. Because while his work focused largely companies raised money for investors and also enriched employees. Between 1984 and 1989, Cain and his Sterling Group quietly on quality, it really resulted in a different approach to the way we do things. And I think he was the catalyst who assembled another leveraged buyout, Arcadian Corp., the largest
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BUSINESS started the breakup of the traditional management structure into more of a teamwork structure. Whatever he did to improve quality is less important than what he did to change the way we get things done. He had a unique approach. He thought that people on the job might know as much about how to do things as the bosses know. Then you are saying that as workers believed they had a part in the running of their company, profit sharing meant they would become even more involved in running a business? That is right. In your Othmer speech, you mentioned the free-enterprise system and the pursuit of economic selfinterest, along with Adam Smith, the 18th century author of "The Wealth of Nations." How do they fit into the picture? After the Bible, and the Koran, and a few other religious books, Adam Smith's 'The Wealth of Nations" has probably been the most influential single nonreligious book ever written. And he had a very simple idea. And that idea is that the collective decisions of the people on economic matters, something we now call the market, is the most accurate way to allocate resources and set prices, and determine economic policy. And it sounds on the face of it a little bit selfish and un-Christian. But its great benefit is that it works. What happens if, in the interest of economic self-inter estj people pollute the environment? Well, all of this has to be within a framework of law and morality. I don't excuse business people from the normal rules of morality or the law. I have no problem with constraints on business that protect the rest of the community. I have a problem with restraints that may cost more than the benefit that you get from them. The Delaney amendment [which prohibits the presence of even minute quantities of potentially cancer-causing additives in food] is about as dumb a thing as you can find, because we've developed analytical techniques to find stuff we couldn't find before. If you set your mind to it, you could make table salt a carcinogen. If business people are not excluded from the normal rules of morality, they should not be able to avoid responsibility for their actions. Yet in your speech you lauded the limited liability corporation. Why? The limited liability corporation does not limit the liability of the corporation. It limits the liability of the stockholders. If you had to be liable for everything that General Motors does, you couldn't afford to buy GM stock. And so we would never have raised the money we have raised to develop our industry without the development of the limited liability corporation. Many people believe that the limited liability corporation just provides a blind behind which robber barons can hide. That is nice rhetoric. Maybe some people have hidden behind the corporation. But we couldn't have the kind of industrial development we have had without the limited liability corporation. Now one of the unfortunate things about it is that it separated ownership from control. 26
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Who is really in control at GM or any other large industrial company? As a matter of fact, management controlled GM until very recently. Management interest and stockholder interest are not always the same. Is there a way to keep management more in line? I think we are moving in that direction now. The public pension funds in particular are getting much more active in corporate governance, as evidenced by there having been a dozen chief executive officers kicked out in the past three or four years. And this is all the result of increased activity on the part of stockholders. Stockholders for a long time were absolutely silent. But now they're beginning to wake up. They seem to be influencing management to wring every lust dollar out of the business by, in some cases, getting rid of the older, more experienced people and hiring younger, less experienced workers. Well, you know, some of that may be happening, but I really haven't run across much of it. We haven't laid off any people in any of the deals we have done. This may have happened sometime, but I guess it is fairly rare. What has happened is that the management of a large part of our industry got badly overstaffed, and so there has been a rather significant wringing out of middle management. When it is all over, I guess there will be about half as many people in middle management [as] there once were. A middle manager's function is to transmit instructions down and information up. Our computer information systems have made the information transfer part of the job unnecessary. And the movement away from a hierarchical type of management to a more teamwork kind of management has eliminated a need for a lot of these bosses. These changes are not temporary and are not the result of someone trying to save money. How will the elimination of many middle managers change corporate structures? There is not going to be lots of middle management jobs that people just stay in for their entire career. I think the probability that people will work their entire career at one place is much less than it was before. The pyramid of management is flatter than it was before, and so I think young people going out in the world today ought to keep in mind that they may not stay at one company forever and they must keep in mind other options. In other words, a worker can't lay back and expect the corporation will take care of his or her needs? Yes. You will have to keep up with your field and be prepared to do something else. I don't think that anyone these days can afford to assume that when he or she finishes college he or she is educated. I think a normal career, if anyone does anything worthwhile, is going to have to involve a lot of learning along the way. Getting back to big pension funds, why do you think they have become so prominent in corporate governance matters today? Most of the public pension funds have become what you would call index investors. They buy the [stocks that make up the] Standard & Poor's 500 index. Private investors, if they are
All the problems with taxes and the problems of raising capital for entrepreneurial companies are holding down job creation
unhappy with a company, sell the stock. But if you are an index investor, you can't sell the stock. So if as an index investor you wind up with stock of a bad company, the only thing you can do to improve [the value of your holdings! is to try to improve the company. In a sense, they didn't have any choice. Are you saying the pension fund managers would he subject to criticism if they did not become index investors, because they would be doing something unorthodox and jeopardizing pension money? Yes, that is right. But you know the California pension fund, the New York pension fund, and some of the others have been major factors in some of the changes [at companies] you have read about—IBM, GM. Do you think the Securities & Exchange Commission should play apart in opening up the way companies are run? I think it should. Up to now, the SEC has been a guardian of the status quo. It should have been a factor in the improvement in corporate governance. It has been no factor. In fact, one of the things the hostile takeover movement did was to make all of our institutions rally around the status quo and try to protect poor management. If something went bad in a company, and you were a big stockholder, you were barred from talking to other big stockholders about what to do. So the SEC has been as big a protector of the status quo as anybody else, when it should have been doing something different. Now it has relaxed the rules permitting stockholders to talk to each other.
time and debate. If, on the other hand, President Clinton and Congress go through with what they've indicated they would do by making major reductions in spending, then we've made a major step forward. Do you think the way the tax increase is set up now is unnecessarily complicated? Oh yes. They've done nothing to simplify the tax code. How would a simplified tax system help industry? We have a tax system right now that takes 120,000 1RS employees to administer. It takes several million tax lawyers and accountants to interpret. And the result is that a substantial part of any executive's time is spent dealing with taxes rather than producing and selling goods. It's not only complicated, there are also uncertainties about the tax code. Every year there is a change. I think there have been 27 changes in the tax code in the past 10 years. The tax code also encourages the use of debt instead of equity. This makes our economy more brittle. When companies are highly leveraged, their reported earnings vary a lot wider than they would if they were not highly leveraged. Also, the double taxation of dividends means that it discourages investment. The problem the country has right now is jobs. And jobs are not created by big companies but by small entrepreneurial growing companies. All the problems with taxes and the problems of raising capital for entrepreneurial companies are holding down job creation. It is interesting that you say companies are more brittle when they are highly leveraged and that the system encourages debt. Yet so many of the companies you helped foster were also brought in with high debt loads. We were doing that because under the current tax system it is cheaper to have debt than it is to have equity. And that, too, encourages raiders and takeovers because of the tax advantages of encouraging larger debt. I am in a different position on raiders than most people. I think for the most part, although there might have been a few unfortunate cases of what I'll call hostile takeovers, takeovers have been beneficial. I think that there has been a substantial improvement in the productivity of all American business. And I think the takeovers were a factor in this improvement.
Do you think the Clinton Administration will put in place a new SEC that would encourage shareholder participation? I really don't think this Administration understands the SEC or the market. So I would not put any hope in the Administration's doing anything worthwhile.
Yet as a result of many of these takeovers, a number of large corporations have contracted in size and dropped a number of employees. Now there are fewer jobs as a result. This is bad from the point of view of the employees who get dropped. On the other hand, it is a sign that our productivity is improving and our competitiveness in world trade has improved in the past 10 years or so. The price of the improved productivity has been a reduction in the number of people [employed].
I take it, then, that you are not too happy with the recent tax bill that passed in Congress? I think the passage of the recent tax bill was a necessary step. I think the critical issue is what happens next. If this turns out to be the whole story, then we've wasted a lot of
Then how would you get people back to work? Encourage the formation of new entrepreneurial companies. I don't remember the number, but the Fortune 500 companies in the past 10 years have lost 3 million jobs, or something like that. And this isn't surprising. For when you SEPTEMBER 13,1993 C&EN
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are doing essentially the same thing—for example, making automobiles—you are pretty dumb if over the years you don't learn to make automobiles better, which means mak ing them with fewer people. And so the large, relatively static companies are always going to be losing employees. The key to job creation is in new entrepreneurial companies. It is the formation of new companies that is discouraged by a complicated tax system that also distorts the incentives. And then, too, if you did not tax dividends twice, once on the corporate level and again when the sharehold er receives dividends, would there he more money for new investments? Yes, there would be more incentive to invest. You've also mentioned that you thought it best to re duce the number of terms a politician could serve in office. Could you elaborate. I am very much in favor of the idea of limiting the terms of Congressmen. I think the founding fathers really intended for us to have citizen legislators, where the members of Congress spent only part of their time in Congress, and went back home and stayed in touch with the people. Now people get elected, and they move to Washington with the expectation of spending the rest of their lives there. And so we are being governed by a bunch of people whose main objective is to get reelected. We need to limit the time that people stay in office. To play the devil9s advocate for the moment, wouldn't limiting a Congressman's terms in office make it possible for an entrenched unelected bu reaucracy to govern? I don't think so. I think some of the bureaucracy doesn't have any power except the power it derives from Congress. We al ready have an entrenched bureaucracy. Veteran Congressmen who are heads of committees identify themselves with the bureaus much more than with their constituents. I don't think things would be as bad if we had a turnover in Congress. Sounds like you might endorse some ofH. Ross Per ot's philosophies. I agree with a lot of things he says. I have some misgivings about how much Perot is motivated by interest in the coun try and how much out of just sheer ego. What about federal government involvement in so cial issues, such as education, particularly of inner city youth? It is certainly government's place to educate. However, I think the most important single thing the federal govern ment can do to solve inner city and other problems is to re establish an atmosphere in which there is creation of jobs. And this has to do with restoring some sanity to the tax code, and making capital more readily available for the es tablishment of new businesses. And the way it can do this is to quit diverting so much money to nonproductive uses mainly through government spending. You also made some comments in your Othmer Lun cheon speech that, after World War Π, the U.S. lost a lot of competitiveness to foreign companies. We just got fat and lazy. 28
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Yet the chemical industry seemed to remain pretty competitive. It was an exception. I'm not sure why, but I'll speculate. I think we are much more technologically oriented business than most. A lot of things, like steel, sound technological, but steel is not really high tech in the sense that the chemical in dustry is. I think that we stayed competitive far better than the rest simply because of the high level of technology re quired in the business. It is a business you can't do poorly. Is that a reason why the chemical industry remains a primary engine of export? Yes. And we never lost our competitiveness like the automobile industry did. I think one of the reasons is that all along the chemical industry was very competitive internally. The inter company competition in this country kept everybody lean. You once said that you didn't think you could run the businesses you acquired from Monsanto and Du Pont any better than they did. But yet you have run them better and turned those operations around. We have not made any significant improvement in operating efficiency such as in thermal efficiency or anything like that. The places we have made improvements have been in such things as use of capital. We run with lower inventories than they have run with. We run with lower receivables. We man age our payables so that we don't have large demands on the working capital. I wouldn't claim for a minute that we pro duced styrene any better than Monsanto produced styrene, or ethylene any better than Du Pont. I think we have managed the people and capital better. Are you planning any more leveraged buyouts? I've gotten less active in the leveraged buyout business. My associates are just in the process of buying the Purina Feed business. Is it more difficult to do leveraged buyouts today be cause of the fix banks are in? No. It is a little different in that you have to put more equi ty in than you did before. We did a lot of deals with less than 10% equity. Now you have to put up about 20% equi ty in the deals. But that is about the only difference. For good deals, banks are just about as open now as they were before. I'm less active [in this field] because I've done that and I want to do other things. I'm becoming a little more active in what I call venture capital. High-technology ven ture capital, mainly things originating from Baylor Medical School and the University of Texas Medical School in bio technology. The venture-capital projects you are interested in are a lot different than assembling major chemical pro duction plants. These things would be small. Most of them are things you would get someone else to do. Most of them are things you would never build a plant to make. More than likely we would get them going and turn them over to someone in the business. But [the biotech developers] need help in get ting from the laboratory to the point where they have some [commercial] value. At least at the moment, the projects are pretty much medically, biologically oriented. •
