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How Delta's CFO outlasted the CEO in a shakeup.
Roy Harris, CFO Magazine
December 1, 1997
In a perfect world, Delta Air Lines Inc. CFO Thomas J. Roeck Jr., along with Ronald W. Allen, would be doing some first-class celebrating these days. As chairman, president, and chief executive officer of the nation's third-largest airline, Allen presided over a breathtaking two-year rise from the ashes--a turnaround symbolized by its record $854 million profit for the latest June 30 fiscal year.
Slashing long-term debt by nearly two-thirds, from a 1994 peak that approached $4 billion, Tom Roeck (pronounced "Ro-ick") paved the way for the prolific return to black ink. Roeck also played a critical role in helping directors understand the complex financial route by which he and Allen flew the company through four excruciating years of market challenges and losses.
"Some of the financing deals were educational to me," says R. Eugene Cartledge, head of the Delta board's finance committee and retired chairman of Savannah Foods & Industries Inc. "I'd never heard of them before." As a case in point, he cites Roeck's handling of an $800 million deep-discount convertible preferred note offering in 1993. "Tom is not a guy who immediately blows your socks off," adds Gerald Grinstein, the airline's nonexecutive chairman, who was Roeck's CEO at Western Airlines Inc. in 1987, when the Los Angeles based carrier was bought by Delta. "But he is a person who over a long period of time you come to trust." Says Grinstein, principal of Madrona Investment Group, a Seattle venture capital firm: "He answers questions without guile, and he never misleads."
But forget any Allen-Roeck celebration. Ron Allen officially left the airline on July 31, after a Delta career spanning 34 of his 55 years. His early retirement was forced when the board, unhappy with various aspects of his management, failed to provide him with a new long-term contract.
As for Roeck, he remains senior vice president and CFO, at least for now. Delta recently lured Leo F. Mullin, former vice chairman of Commonwealth Edison parent Unicom Corp., to Atlanta as Delta's president and CEO. Whether Roeck will stay on as CFO remains to be seen-- Mullin could decide to import a finance chief as he assembles his own team. At this point, though, Roeck is in the highly unusual situation of running afoul of his CEO only to have the CEO get the boot.
Grinstein, who de-clined to discuss Allen's departure, did confirm that Allen had authorized an executive search to replace Roeck earlier this year, despite Roeck's popularity with board members. Indeed, directors had become aware of the trouble between the two, and the clash was one source of the board's displeasure with the CEO.
Roeck declined to be interviewed for this story; through a spokesman, he cited Delta's transitional period as the reason for not commenting. Allen did not return phone calls, and at a press conference last May, he gave only a sketchy account of his departure. As he had on numerous prior occasions, Allen introduced Roeck without any hint of the trouble between them. And Delta directors? While they refuse to discuss Allen, they can't seem to heap enough praise on Tom Roeck.
FINANCE AS "NERVE CENTER"
Of all the CFOs he has known at Delta, "I put Tom at the top," says Jesse Hill Jr., chairman of the audit committee and now Delta's senior director. "He has done an outstanding job," especially in reducing debt and formulating an aggressive cost structure to fight the competitive war with Southwest Airlines Co. and other lower-cost carriers. "The finance department has to be the nerve center" for such strategies, says Hill, a retired life insurance executive. "At every meeting, the principal report, other than the comments of the CEO, comes from Tom Roeck; he's the one we focus on."
But after a certain point, Roeck's CEO certainly didn't focus on him. Interviews with recently departed Delta managers, including some who worked in finance, paint a picture of a headquarters where Roeck was often excluded from Allen's inner circle. As a result, Roeck sometimes found himself treated badly by other top-level executives closer to Allen; finance department members formed mixed allegiances; and the role of finance at the airline suffered.
"It's amazing when your CFO has been one of the main leaders of a return to profitability-- and has the admiration and respect of the board and a lot of folks at the company, and clearly Wall Street--and behind the scenes the CEO is trying to get rid of him," says James H. Sanregret, who left a post as the airline's risk management head recently to become CFO of NewCare Health Corp., a health care provider in Atlanta. These executives portray a Delta run for the most part by long time managers who had risen through the ranks, as Allen had, at an airline with only one year in the red since World War II.
In general, Roeck's department "left a bad taste in their mouths," as Sanregret puts it. Allen, especially, "didn't understand finance at a very deep level," says James Mathews, who until recently was Delta's treasurer and is now CFO of CARE, the international relief and development organization, also based in Atlanta. The Delta CEO, who had come up through the personnel department, seemed to lack interest in matters financial, and tended to surround himself with familiar faces who shared his interests on the personnel and marketing sides of the business. "Sometimes, he'd have to just throw his hands up. He'd say, 'Tom, I want you to go figure out how to pull $50 million out of costs,'" Mathews says.
Indeed, Allen emerges in some accounts as the classic fair-weather navigator, handy at the controls during Delta's good times, but ill- suited to see it through stormy conditions. His blind spot about finance, these critics say, kept Allen from taking the prudent suggestions of a CFO experienced in dealing with adversity. And by interpreting Roeck's early warnings as symptoms of a problem with the finance chief himself, Allen forced Delta into adopting more severe financial measures later on--in the process, perhaps, dooming himself in the eyes of the board.
"He took a shoot-the-messenger approach," according to Mathews. "Tom was the first one to routinely be in the situation of bringing Ron Allen bad news, and Ron Allen didn't like bad news."
Sanregret agrees. "If you don't like what a person is telling you, eventually you're not going to like that person," Delta's former risk manager says. And noting Roeck's popularity with directors, who seemed less than friendly to Allen in his last days at Delta, Sanregret muses: "I wonder if jealousy played into this at all."
While no one knows what Roeck said to Allen behind closed doors, the CFO's former associates say he stood by his boss in company forums--despite slights from the CEO. "I always saw Tom very much trying to be supportive of Ron Allen," says Mathews. "He made an effort to put Ron in front of the Wall Street crowd. I think Tom did an awful lot to make Ron look good."
The tale of Tom Roeck's embattled relationship with Ron Allen began more like a corporate love story. "Until the 1990s, Tom was one of Ron's absolute favorite executives," and even something of a protégé, says Mathews, a manager in Delta's investment department when the former Western CFO came aboard. Then, Allen and the other top brass saw the Southern Californian as a breath of fresh air. Beginning as Delta's finance-administration vice president--one of three slots a tier below CFO--Roeck was quickly identified as a hot prospect to fill the top finance post when it became vacant. When longtime CFO Robert Oppenlander retired in June 1988, Allen gave Roeck the job.
The roots of their subsequent alienation almost certainly lie in the different professional disciplines the two men chose, and the circumstances of the airlines at which they practiced them. Unlike Delta, Western had suffered through turbulent years that put Roeck in the position of busily seeking creative financial solutions to its competitive problems. "We actually completed a different transaction every month [at Western]," says Doug Swets, who was Western's vice president and treasurer and is now vice president of finance at Continental Graphics Holdings Inc., an information processing firm in Los Angeles.
Ultimately, the financing plans worked, as did attempts by Roeck and Grinstein to get employees to trade some wages and other benefits for delayed incentives. Western gradually rebuilt itself into a solid company-- and one fitting nicely into Delta's expansion plans.
Allen's tenure at Delta, in contrast, had been almost exclusively smooth sailing. As Allen climbed the ranks in the personnel department, eventually becoming CEO just after Western was acquired, Delta managed to rack up profits year after year. During that time, Delta sealed its reputation as the best airline for service, with a contented group of employees noted for their Southern hospitality. Its largest competitor, Eastern Air Lines Inc., fell apart in the late 1980s. Eastern folded in 1991--though fare wars associated with its death throes punished Delta's revenue base. Delta's ambitious domestic and international growth plans were virtually unchallenged as it entered the 1990s.
Indeed, "Ron had never seen anything but success at Delta," says Mathews. "We didn't even know what an operating loss was, or a tax credit. It wasn't even in our literature; it was just foreign to us," adds Sanregret.
A PAN AMERICAN BLUNDER
But when reality did hit home, it hit hard. Not only did a recession take a heavy toll on air travel as the decade started, but the Gulf War exacerbated the problem for carriers with large international route structures. In a case of monumental bad timing, Allen had just engineered the purchase of European and other routes from bankrupt Pan American World Airways Inc. In fiscal 1991, Delta was shocked by the first in what was to become a string of net losses: a whopping $324.4 million.
Accounts differ about what Roeck thought of the 1991 Pan Am route deal. Some remember him at least raising questions about its high cost; Delta paid $416 million and took on additional debt of more than $150 million. "He slowed it down, and raised some good hard questions," says board member Jesse Hill, adding that "his warnings were well founded." Gerald Grinstein, though, says the CFO supported the purchase, at least in the final presentation Roeck and Allen made to the board.
Whatever their positions on Pan Am, however, the relationship between the CFO and CEO of Delta definitely began to deteriorate.
With Roeck, financial trouble was hardly something to be avoided. Western had familiarized him with flowing red ink, emergency financing, downgrades by debt-rating services, and the weighing of cost-cutting alternatives.
Members of his finance department at Delta say Roeck pressed for financial and operational measures that might prepare the airline for the difficulties the CFO saw developing, but that Allen was resistant, sure that Delta's reputation would carry it through any hard times. Directors remember Roeck and Allen presenting a united front at board meetings. But they took special comfort from the experienced Roeck's lucid appraisals and his quiet, measured tones.
At corporate headquarters, Allen let Roeck explain things to the troops. When John Lauber joined Delta as vice president of corporate safety and compliance in 1994 (he is now vice president of training and human factors at Airbus Service Co.), he says, "It was clearly Tom who'd been assigned to put it right out on the table and say, 'This is what we've got to do.'" In the CFO's eyes, the job amounted to administering doses of reality. Roeck's style is to "absolutely bend over backwards on full disclosure," says Mathews. "Tom always wants a trail of what was said. Not in a finger- pointing exercise, but he wants people accountable."
THE COST OF LEADERSHIP 7.5
Allen's early attempts at dealing with losses and fare-cutting competition from Southwest and ValuJet Airlines Inc. were far too tepid. Lacking a clear prognosis for Delta, Allen instructed Roeck to go slow in managing the carrier's financial problems, and not to sacrifice the growth plan or Delta's vaunted service. In February 1992, the airline put in place a mild three-year cost-saving program; it dissolved when revenues failed to come back as predicted. Indeed, Sanregret recalls that as the losses mounted, Allen actually moved to increase the size of the steaks served on- board from three ounces to four, hoping customers would pay extra for quality. But despite the bigger filets, "people weren't willing to pay $1,000 for a flight," he says. "They wanted to pay $99."
Roeck, believing the old Western model of life- threatening competition was playing out again, saw a new paradigm emerging for Delta--one that required sweeping financial reconfiguration. Unable to impose the needed cost controls, he turned his skills to finding the least painful way to increase debt, which soared past $3.7 billion in fiscal 1993 from a mere $720 million at the end of the prior decade. It was then, as Roeck's belt- tightening measures belatedly had to be adopted in even more extreme form, that Allen's growing distaste for his CFO seemed to bloom into a full-fledged dislike.
At last, in 1994, Delta began its Leadership 7.5 program, designed to trim 20 percent from operating costs. Airlines benchmark this in terms of available-seat miles (ASM), the cost of flying each passenger seat a mile. At the time, its 9.26-cent ASM cost was far above Southwest's, for example, reflecting Delta's higher salaries, greater in-flight amenities, and lack of concern about competitive pricing.
Leadership 7.5 fell short of its 7.5-cent ASM goal, reaching its lowest point of about 8.54 cents in 1996. Still, the cost cutting was blamed for turning off customers--the resultant understaffing sacrificed a measure of Delta's hallmark service--and for devastating employee morale with layoffs and benefits cuts. Meanwhile, Roeck's financing piece of the Delta puzzle received high marks from directors. Appreciating the need for flexibility, the CFO had seen to it that even as long-term debt ballooned, it was designed to be retired fairly easily when the financial skies cleared.
"Tom came up with programs that got Delta through the toughest time in its history," says Eugene Cartledge, who was particularly impressed by the 1993 issuance of 3.23 percent convertible notes, issued at a discount of 28.2 percent. (When the notes were redeemed last year, long-term debt was pared by $626 million.) Grinstein, for his part, compliments Roeck on a broad-based 24.7 millionshare employee stock option plan, which Roeck designed in conjunction with a 1996 stock buyback to eliminate any dilutive effect. "In terms of a high point in his relationship with the board," Grinstein says, "that was it."
In general, adds Sanregret, "Tom pulled the right strings. That's what endeared him to the board, and to the rest of us in finance."
THANKS FOR SHORTING US
And to Wall Street. John Pincavage, an analyst at global investment bank SBC Warburg Dillon Read Inc., recalls his shock at putting out a short recommendation on Delta in 1994, then receiving a call from Roeck commending the report. "I had written that unless these guys do a major restructuring of their costs, they're just going to disappear," Pincavage recalls. When Roeck came on the line, though, he said: "John, I want to thank you. That [report] effectively galvanized management's thinking internally."
With Allen, though, Roeck's star continued to sink--even as the finance strategy Roeck engineered finally helped Delta return to profitability. In fiscal 1995, the airline turned a $294 million profit, equal to $4.07 a share; that compared with a $409 million loss, or $10.32 a share, while revenues edged up just under 1 percent, to $12.2 billion.
When the CEO formed an executive council in September 1995--"to oversee the company's day- to-day operations and to refine Delta's long- term strategies for profitability and growth"-- incredibly, Roeck wasn't on it. To some executives, every word explaining the council seemed an arrow in Roeck's heart. The three executive vice presidents in the group "have the experience and insight to help shape the long-term strategies and plans we need to thrive and grow in our fiercely competitive industry," Allen said. Roeck, still a senior vice president while two members were elevated to executive vice president, "will work closely with the executive council."
Grinstein considered the exclusion of Roeck an ominous sign. "It was an event that told me where that relationship was going," he says. "In the contemporary corporation, I always think the CFO has to be an integral part of the picture. It's tough for me to imagine [Roeck] being an integral part without being on that council."
Not everyone on the Delta board was troubled by Roeck being left off the council. "I don't know how the organization chart looked, [but] in my mind, Tom Roeck was still a key member of the management team," says Cartledge. But it was clear enough in finance. "What a joke!" says Sanregret. "I've never heard of this, where you form an elite group of officers and leave the CFO out. That shocked all of us."
Mathews believes that "once the executive council got formed, it poisoned [other corporate officers'] relationships with Tom." Allen put him "in the middle of situations that were really impossible. Tom would have to challenge other members of the team...who outranked him."
One former Delta executive recalls operations executive vice president Harry C. Alger making Roeck a subject of ridicule during a meeting of 20 top executives. As Roeck prepared, with a staff member, some background data being sought by Alger, Alger told Roeck and the aide to "either shut up or get out of the room," this executive says. The CFO, according to this person, "gave a little smile of acknowledgment, nodded his head, and kept on going." (Roeck says through a spokesman that he doesn't recall such an incident; Alger declines to comment.)
Mathews, who won't comment on the incident, notes that divisions did appear between finance and other disciplines at Delta, just at the time when cooperation was needed. "It was kind of scary," he says. "I think Tom had the support of finance," but supporting Roeck "became an uncomfortable position" in a Delta environment with so much anti-Roeck hostility.
If there was any doubt of the chasm between Allen and Roeck, it was erased when word began to circulate early this year that the CEO had hired a search firm to replace his CFO.
Some news reports said that Allen kept his search a secret from the board, and that discovery of this by the directors was the final straw in the decision not to grant him a new contract on August 1. Others think Allen's terms were too rich, or that he offended the board in other ways. Grinstein, who won't comment on any of the reports, does dispute that Allen's decision to launch a CFO search surprised the board. "I knew it," he says, "and to the best of my knowledge, the board knew it."
THE DECISION AHEAD
With new president and CEO Leo Mullin mum about his management plans, it's anybody's guess whether Roeck will be staying on at Delta. "Time is short," says Grinstein, recognizing the new CEO's need to put together the right team of executives. "And they have to make changes. If I were a CEO, I'd want to have my own CFO."
Here again, though, Roeck's popularity with the board could help. "I'm in favor of CEOs calling those shots," says finance-committee chairman Cartledge, "but he'd have to go a long way to find a better one than Tom. You've got to use your assets." Audit-committee chair Hill says, "If I were coming in to be the CEO at Delta, I'd be most delighted to have Tom Roeck stay on." He adds: "You don't bring in CFOs just for the sake of a team."
An argument for keeping Roeck may be that Mullin is new to airlines and needs coaching in the industry's financial structure. The selection of a CEO without airline experience "could make a big difference," Grinstein said in an interview conducted before Mullin was named. "I don't think the handwriting is necessarily on the wall" for Roeck. While Delta is now among the healthiest of U.S. airlines--fiscal 1998 first-quarter earnings set another record--it is hardly immune to future reversals. In fact, SBC Warburg Dillon Read's Pincavage is only neutral on Delta. "The sense you get looking at airline earnings," he says, "is that you can't figure out how they're going to get any better next year." But others suggest that Mullin should look more closely at the Roeck- Allen relationship.
Robert A. Peiser, former CFO of Trans World Airlines Inc. and now CEO of Western Pacific Airlines Inc., in Denver, believes Mullin faces a tough decision. After such a case of friction between the finance chief and the chief executive, Peiser says, "the CFO has to illustrate to the new CEO where his loyalty is." *
AN EXECUTIVE COUNCIL WITHOUT THE CFO?
In excluding Roeck, experts believe, Delta was way off course.
Most management experts think leaving the CFO off a corporate executive council, as Delta Air Lines Inc. CEO Ronald W. Allen did in 1995, is a big mistake. But they believe steps could have been taken--by the company, its board, and CFO Thomas Roeck Jr. himself--to correct the situation.
The exclusion "just doesn't make good business sense," says Eugene Beard, vice chairman of The Interpublic Group of Cos., in New York. That goes double for asset-based companies like airlines, and especially one that was attempting to pull out of a nose dive after four straight years of losses.
Beard adds, though, that "the CFO is not all pure in this thing. Any CFO that's worth half his salt is going to say, 'Why am I off this committee?'" And, ultimately, he'll say it to the board. Had Beard been the one excluded, he says, he first would have appealed privately to the CEO, then made a pitch through management friends on the operations team. "If the operating people like you," he says, "they'll push very hard for you and win over the CEO." Finally, "I'd go to the board and say that this is an intolerable situation." At Delta, he suspects, the result would have been the board telling Allen, "We want this guy on the committee."
Challenging the CEO--whether over the composition of an executive council or any other major topic--is part of the CFO's duty during board appearances, says Joseph Graziano, former finance chief of Apple Computer Inc. "When I moved from Sun [Microsystems Inc.] to Apple in 1989, one of the first things I did was take on the company's business model," he says. "There were a lot of people who wanted to take my head off," notes Graziano, adding that "it was like walking into a church and saying there was no God." Top Apple officials eventually agreed with him. But challenging the board "can be a painful process for an individual who doesn't have some thick skin," he says. (A later Graziano confrontation met with less success. In October 1995, he proposed to the board that CEO Michael Spindler be removed from the by-then-troubled computer maker. Instead, Graziano was himself ousted the next day, although Spindler and all of the board members have since been replaced at the "new" Apple.)
CEOs may also see some clear lessons in the Delta experience, suggests John C. Fletcher, who heads seminars on CFOboard relations for the National Association of Corporate Directors, in Washington, D.C. "There is a new paradigm, in which a more active board relies increasingly on the CFO," he says. "But some CEOs are not really happy to have such full disclosure to the board." Fletcher, former dean of the Lake Forest Graduate School of Management, near Chicago, and managing director of Delta Control Group (no relation to the airline), a consulting and training firm in Wildwood, Illinois, explains that these chief executives must learn that the era of the passive board is over.
Of course, it's possible that Allen was right all along, and Roeck had reached a point at which he didn't belong either on the executive council or in the CFO slot.
"Marriages break up after 25 years, too," says Robert A. Peiser, now CEO of Western Pacific Airlines Inc., in Denver, and former Trans World Airlines Inc. CFO. "Circumstances can change, and a person can outgrow the particular skill set that's needed in a job. Or the guy can get tired."