Value Subtracted at Sunbeam

It was the greatest turnaround in the history of business that never happened. Home appliance maker Sunbeam, which former CEO Chainsaw Al Dunlap claimed to have transformed into a retailing powerhouse, announced today that in fact it had lost money during Dunlap’s one full year there, 1997. The company, whose shares recently dipped as low as $4–down from a high of more than $50 at the height of Dunlap-mania–restated results for 1996 (which now looks better than it had before), for 1997 and for the first six months of 1998. And the numbers do not lie: Dunlap actually subtracted value from the company that he had trumpeted as his greatest triumph.

Unsurprisingly (or is it surprisingly–who can tell anymore?), investors reacted to the news by sending Sunbeam’s shares up nearly 15 percent. The thinking here seems to be that all the bad news is finally out, and that there’s nowhere to go but up. Of course, how far up the company can go remains uncertain. While Dunlap did a brilliant job of firing half of the people who worked for Sunbeam when he got there and closing two-thirds of its factories, he accomplished nothing in terms of the most important task he faced: revitalizing the Sunbeam name and improving its distribution. In fact, by stuffing sales channels with marked-down inventory and pushing goods out the door to make his quarterly results look better, Dunlap’s team wreaked havoc on Sunbeam’s sales. It’s fair to say that the company has no real sense at this point of what demand for its products looks like or what problems it needs to solve.

One would like to say that Dunlap cut into muscle as well as fat when he slashed the payrolls at Sunbeam, but it’s not clear that the situation at Sunbeam resembles that at Aetna or Union Pacific, both companies that hurt their long-term business performance with short-term job cuts. What is clear is that everything that was ever said about Dunlap is right. He never figured out how to build a company for the future. He always saw acquisitions as an easy solution to growth. And his relentless emphasis on shareholder value, which he defined as a company’s “entire reason for being,” got translated to his managers as a relentless emphasis on making the numbers at all costs.

As with so many recent accounting debacles, the scope of Sunbeam’s deception raises the inevitable question: “How did they think they would get away with it?” Dunlap, like former Cendant chairman Walter Forbes, continues to deny that he knew anything about accounting shenanigans or about channel stuffing. But obviously someone did. And there’s something stunning about the fact that even in the most transparent capital markets in the world executives assume that they can permanently pull the wool over investors’ eyes. The answer may simply be that people would rather gamble on an illusory future than be fired in the present. And whether Dunlap’s crime was willful malfeasance or studied negligence, at the very least his punishment should be his permanent banning from boardrooms everywhere.