Journey Without Maps

This trio of current and former CFOs took companies public in 1985. Here's what they've learned since.
Kris FrieswickMarch 17, 2005

At first glance, one might think that the changes in a CFO’s responsibilities during the past two decades have been radical. After all, the world of finance moves much faster now than it did in 1985, even as rules have tightened and stakes have climbed.

But when we asked three CFOs who took companies public in 1985 to tell us what they learned in the ensuing 20 years, their answers revealed that in essential ways, the job has remained the same. At the same time, the career paths of these three men have been very different — reminding us that the past two decades have offered unprecedented opportunities for talented financial executives.

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Carleton Holstrom
Age: 69

1985: CFO of Bear Stearns
2005: Entrepreneur, board member, philanthropist, “retired”

Carleton Holstrom began his career in 1962 as a commercial banker, but he came to dislike his prospects. So he jumped to investment banking seven years later, when the bull market of the time was about to peak. “I figured everyone was making tons of money in investment banking,” says Holstrom, “and the minute I got there, the market crashed.”

He soon found himself to be a mediocre investment banker as well, an opinion apparently shared by his bosses at Bear Stearns. They asked him to move to an administrative position. And until 1977, the year he took on the CFO role at Bear Stearns, “we managed the firm from the trading desk between 4 p.m. and 4:15 p.m.,” he says with a laugh. “The business was getting too complicated to have an informal management structure.”

By the start of the 1980s, Bear Stearns faced two challenges: Older partners wanted to cash out and retire, and the company needed more capital to keep up with the competition. Holstrom had secured loans from banks and insurance companies, but Bear Stearns had limited access to capital markets. Going public was an option, but the partners faced a big potential tax hit and weren’t eager to publicly disclose the firm’s financials. Soon, “we were using Band-Aids and baling wire to allow the firm to grow,” he says.

Between a rock and a hard place in 1985, Holstrom and his controller, Bill Montgoris, eventually devised a way to create a corporation while temporarily retaining the partnership and going public for a good price — all without creating taxable gains for the partners. “At the time, there was very little precedent for doing a tax-free exchange between a partnership and a corporation,” recalls Holstrom. The partnership continued to exist for several years after the stock sale, and held the stock on behalf of the partners until it was clear that there was a stable market for it. “That opened up the public markets to us,” says Holstrom, “and that became increasingly important as the business exploded.”

Holstrom retired two years later, leaving the CFO’s job to Montgoris, who moved up in 1993 to become Bear Stearns’s COO. Holstrom went to work for several charities, became chairman of Rutgers University, and served on two boards at the University of Wisconsin.

Soon Holstrom and several new business partners set out to launch an educational software firm, Scientific Learning Corp. He says that obtaining venture capital for it was as hard as anything he did at Bear Stearns. He estimates that he and the company’s co-founders visited at least 100 venture-capital firms before one, Warburg Pincus, agreed to provide funding. “Everyone was focused on the Internet,” says Holstrom, “and we didn’t have a dot-com at the end of our name.” But the company managed to go public in 1999, and unlike many dot-coms, it’s still in business today. Holstrom continues to sit on the company’s board.

His experience leaves him skeptical of many financial products. “Don’t get too fancy,” he advises. “There’s a place for derivatives, interest-rate swaps, and that sort of thing. But you don’t want to go too far down that path. You have to remember that selling those things is Wall Street’s business. Understand that when you’re sitting across the table from someone trying to sell you a new financial instrument, they’re selling you something that is guaranteed to make them money.”

But Holstrom says the single most important rule he kept in mind during his career was to remember to have a life, which for him meant spending more time with his family. He learned that back in April 1978, when he and the other 40 partners in Bear Stearns assembled at the Harmonie Club in New York to celebrate the famous career and impending retirement of Salim “Cy” Lewis, the firm’s 69-year-old founder and chairman.

Holstrom, then 42 and the newly installed CFO, remembers the event like it was yesterday. Senior partner John Slade was presenting Lewis with his ceremonial retirement watch. “John said to him, ‘Cy, I know you’ve always wanted a watch. By the way, you’re not supposed to give older people watches. Bad luck. Besides, it’s no fun getting old anyway.’ Cy got up and said, ‘Well, it sure beats the alternative,’” says Holstrom. The words had barely left his lips when Lewis dropped to the floor, leveled by a massive stroke. He died several days later.

Stay in Control

M. Jay Walkingshaw
Age: 55
1985: CFO of TriStar Pictures
2005: Founder, Walkingshaw Associates

In 1974, M. Jay Walkingshaw, then an associate in the controller’s department at Time Inc., was called on to help bring financial discipline to Time’s struggling hotel pay-per-view division. Walkingshaw proceeded to cut costs at the behest of his mentor, Austen Furth, a former circulation manager for Time who had been reassigned to the division. After the pair streamlined and stabilized the business, the division was merged with a company called Spectradyne.

The two then turned to Time’s fledgling Home Box Office Inc. business, which at that time was also a cash sinkhole, though it had fewer than 40 employees. Helping turn HBO into one of the country’s most influential and profitable cable channels was “a real wild ride,” says Walkingshaw. Part of the ride involved the development of advance purchases of distribution rights on new movies from the major studios. Traditionally, the cost of such rights rose or fell depending on how successful the film was during its initial release. Walkingshaw helped to pioneer the practice in the cable industry of prebuying the rights before theatrical release and, even, in some cases, before film production started.

For HBO, prebuying distribution rights meant guaranteed access to films at a fixed price, regardless of how successful the film was. For the studios, the practice meant guaranteed distribution-rights revenue, regardless of whether the film bombed. The more stable film inventory helped build the company into a must-see cable channel, and by 1980, HBO had 600 staffers and was “coining money,” says Walkingshaw.

In 1981, Walkingshaw departed for another turnaround project: Teleprompter Inc., a start-up cable company headquartered in New York. But Time lured him back in 1983 by offering him the CFO position at TriStar Pictures, a new joint venture with Columbia Pictures and CBS. To get the studio rolling, he helped raise $1 billion. The venture partners supplied only $200 million; the rest came from a bank line and the presale revenue from movies in production — the flip side of the deal he helped pioneer at HBO.

Walkingshaw then installed tight controls over the hundreds of millions of dollars that flowed through the studio during production. Those controls enabled him and his staff to break with “50 years of old Hollywood ways of doing things.” As a result, he says, TriStar “rarely had overruns of any notable size.”

TriStar went public in 1985, shortly after the studio’s first movie, The Natural, was nominated for several Academy Awards. By the time the company was acquired by Sony Pictures in 1989, its stock price had more than quintupled. But then TriStar’s headquarters moved from New York to Los Angeles. Walkingshaw, born and reared on the East Coast, resigned. After briefly consulting for Sony, he set up his own finance consulting business. The job has taken him around the country, to companies in various industries, including technology, medical devices, manufacturing, and entertainment.

Since his original stint at Time, Walkingshaw has learned much about the need for discipline and a firm grasp of vital data. He learned a different lesson in 1997, a few weeks after the birth of his daughter, Samantha Grace, when he was diagnosed with prostate cancer. The thought of not being around to see his daughter and his son, Max, grow up “threw me into a funk,” says Walkingshaw. The disease gave him an incentive to spend more time with his family, and being a consultant allowed him to do so.

When Walkingshaw was finished with his surgery and his four months of treatments and recuperation, he ramped up his consulting practice again. But recently he has come to miss being able to see a project through to completion. He now hopes to find a permanent finance position, though he acknowledges, “It’ll be hard to find a job that will measure up to those I’ve had in the past, and to find someone who wants to give me that job.”

Build a Foundation

Richard Galanti
Age: 48
1985: VP of finance at Costco
2005: CFO of Costco

By 1983, Richard Galanti had spent four years as an investment banker at Donaldson Lufkin Jenrette in New York, working 80 to 100 hours a week on a variety of deals, from capital raising to M&A, meeting with senior executives, becoming a “Master of the Universe” — all the things one would expect from a Stanford University MBA with brains and ambition. The last thing he ever expected was a career in retail.

Yet when a retail project showed up in DLJ’s offices, Galanti usually found himself working on it. He happened to be in the office the day executives for a new retail company came in, seeking a second round of mezzanine financing. The company’s previous vice president of finance hadn’t worked out, they told Galanti; would he like the job? He didn’t hesitate to say yes.

The new retailer was called Costco Warehouse Corp. In the following months, the company would open 4 “warehouse club” stores. Twenty years later, Costco is a retail juggernaut, with 450 stores in seven countries and $50 billion in sales. Galanti still works there, as do the two executives who invited him aboard — chairman Jeff Brotman and CEO and president Jim Sinegal. Galanti now holds the title of CFO, but the job description is essentially the same. What has changed, he says, is his attitude toward the job and how he does it.

“When I came to Costco,” says Galanti, “I was this hotshot investment banker. I thought I knew everything. I thought I understood retail, having grown up in a grocery business. But what I’ve learned is that in all businesses, there are a lot of very bright, very talented, competitive, hard-working people who didn’t go to fancy schools or work on Wall Street.

“What was important to this company,” continues Galanti, “wasn’t how well I talked to investors or if I could save a few basis points on a loan — although that was nice, too. What was important was this: Were the key user groups getting what they needed?” The users in Galanti’s world are the buyers and store managers who need accurate data at their fingertips on a daily basis. Everything else is gravy.

Without understanding their industries inside out, CFOs can’t really know what people need, says Galanti. “The biggest challenge to me was leaving my comfort zone, which was finance and investor relations, and focusing instead on what was important to the company’s day-to-day operation,” he says. That meant creating meaningful information tools, shortening the monthly closing cycle, and getting all the bills paid correctly and on time — in short, the fundamentals. The key word here, says Galanti, is “meaningful.”

“Our president [Jim Sinegal] says that there’s no point doing something well that shouldn’t be done at all,” Galanti explains. “We periodically go back and see who is using all the reports we generate. We’re constantly going back to revisit what we’re doing to make sure we should still be doing it.”

The biggest challenge was learning how to manage people and communicate effectively, he says, skills in which CFOs are generally considered to be less than proficient. “I was lazy and weak in the verbal side in school,” Galanti laughingly admits. “I stayed away from anything that required a term paper. The day I joined DLJ, I learned that everything is about communication.” But he wouldn’t really master those skills until he moved to Costco.

Galanti has learned other important lessons during the years since Costco went public in 1985. Many of them have involved a humbling from his Master of the Universe days. “I learned that it’s important to hire people who are smarter than you are,” he says. For example, one of his first hires was a controller 20 years his elder, with 20 years’ experience in retail.

Another hard-won lesson: how to manage people. “On Wall Street, everyone is managing themselves on projects,” Galanti says. “You become a CFO and you have to learn to manage others. There are far more people issues on the job than anything else.”

Kris Frieswick is a senior writer at CFO.

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