Barbarians at the Gate

by Bryan Burrough

  But by the late sixties the days when Reynolds could rest on its laurels were coming to a close. Gray, the last direct link to Mr. RJ’s mantle, died in 1969. Two senior executives considered likely successors also died, and Gray was succeeded by his cousin, a weak-willed financial executive named Alex Galloway. Galloway proceeded to lead Reynolds on a disastrous diversification campaign that, in a deterioration similar to Nabisco’s, would have far-reaching effects on the company’s core tobacco business.

  At the suggestion of a former Winston-Salem businessman named Malcolm McLean, Galloway bought Sea-Land, a shipping company McLean owned. Given a seat on the Reynolds board, McLean next suggested that Galloway buy a small oil company named Aminoil, which Reynolds acquired the next year. The idea was that Aminoil’s oil would be transported aboard Sea-Land’s tankers. The next year Galloway, in a move to reflect the company’s diversification, changed the company’s name to RJ Reynolds Industries and, over the next decade, poured more than $2 billion into Aminoil and Sea-Land, building the latter into the world’s largest private shipping line. Taken for granted, the tobacco factories slowly fell apart.

  During his short caretaker reign, Galloway was largely under the sway of McLean and other powerful outsiders. The question of his successor became a matter of interest to one of them, a Reynolds director named J. Paul Sticht. Sticht was a rare outsider on the board: there were only two others when he joined in 1968. Rarer still, he was a Yankee who grew up in a boardinghouse outside Pittsburgh, the son of a German-immigrant steelworker. Sticht worked in the mills during high school and, after attending a nearby liberal arts school named Grove City College, went right back. He became a shop steward in the union and rose to become foreman. But behind his soft-spoken demeanor and blue-collar background, the fires of ambition burned as hot as any factory furnace.

  Sticht soon left for the white-collar world, taking a job in personnel at Trans World Airways and, later, at Campbell Soup. There he quickly climbed the corporate ladder and by the late 1950s joined Federated Department Stores, the big Cincinnati retailer. By the mid-1960s, he was president and chief operating officer. Then, blocked from getting the top job—some say he was fired—Sticht took early retirement in 1972 at the age of fifty-five.

  He had joined the Reynolds board at the request of Charley Wade, who had befriended him years earlier while comparing notes on union-busting tactics. Now, in 1972, Sticht lobbied against replacing Galloway with his heir apparent, a financial man named David Peoples. After consulting the board’s three other outside directors, Sticht told Galloway they would all quit if Peoples was chosen. A search committee was formed to select a new successor, and Sticht, with time on his hands, was named its chairman. After months of exhaustive searching, Sticht’s committee decided on a surprise choice to lead Reynolds into the late seventies: Paul Sticht.

  Actually, Sticht would be the number-two executive, but in a new, hydraheaded executive structure he would come to wield influence far beyond his station. His titular superior, a homegrown tobacco man named Colin Stokes, was a classic Reynolds executive: his father had been head of the leaf-drying house under Mr. RJ. A chain-smoking forty-year Reynolds veteran, Stokes had worked his way up from the factory floor and knew everything about cigarettes, but next to nothing of the world outside North Carolina. Stokes proved to be putty in Sticht’s hands.

  The difference in the two men who steered Reynolds through the 1970s was symbolized in their attitudes toward corporate jets. The company had kept a pair since the 1950s, when it painted one the color of a Camel pack and the other a Salem pack. They were used so sparingly that one veteran pilot recalled logging only thirty-seven minutes of flight time one month, long enough to get a jet aloft and make sure it was in working order. It reflected not only Reynolds’s egalitarian spirit but its executives’ preference to stay home. Stokes and his friends particularly hated going to New York, and Larry Wassong, one of the company’s New York ad men, would go to great lengths to ease the pain, arranging for Reynolds executives to be met at the airport, to have reservations at their favorite restaurants, to make sure they didn’t end up on a Manhattan street corner befuddled. Mostly Wassong went to Winston-Salem himself.

  Sticht, however, was born for corporate jets. He had phones installed on them, and personally made sure they had ample food and drink. Sticht took it as his mission to show Stokes new, far-flung places like Chicago and Boston. He formed an international advisory board, which included men such as Bunichiro Tonabe of Mitsubishi and Hermann Abs of Deutsche Bank. Twice a year these and other foreign business titans were brought together with Reynolds executives to discuss global issues in exotic locales. Sticht was determined to wrench some of the provincialism out of Reynolds.

  It was a dream-come-true for an ambitious man: one day an out-of-work retailer, the next a captain of industry. Sticht loved rubbing shoulders with the corporate elite at the Business Round Table in New York and U.S. Chamber of Commerce in Washington. He loved dropping the names of the people he hobnobbed with. Some muttered that he was more interested in the trappings of business than doing business.

  For all his whirl of motion, Sticht procrastinated terribly on decisions and tried to sidestep executive-suite conflicts. He preferred to come off as being above the fray: part statesman, part Dutch uncle. His voice was soft, his manner reserved. He remembered chauffeurs’ names and asked after pilots’ wives. In his courtly style and worldly ways, Sticht in some ways was a perfect bridge from the old, parochial Reynolds to the modern world.

  But as an outsider, he was never well received by Winston-Salem’s old guard. Sticht, a nonsmoker, would occasionally light up a pipe, but it seemed more for effect than pleasure. On weekends a Reynolds jet would fly him to his Palm Beach home in winter and his New Hampshire home in summer. His wife, Ferne, was rarely seen in Winston-Salem. It was something of an insult to people who expected Reynolds top brass to be at the center of the town’s civic and social life. Sticht wasn’t at first admitted to the upper-crust Old Town Club, and was relegated instead to the new-money crowd at Bermuda Run.

  Dominating Colin Stokes, Sticht navigated Reynolds through the tumultuous 1970s, a period that would transform the company from a family-dominated business into something approaching a modern conglomerate. He consolidated his power by ousting three top executives in a Watergate-era scandal involving illegal political contributions. Sticht took control of that mess and another that broke on its heels—$19 million in illegal rebates paid by Sea-Land overseas—and in the process cemented his control over the company.

  There was a terrible foreboding, among some, that the fall of the company’s good Moravian standards and the rise of Paul Sticht meant ruinous change. “You watch,” warned Stewart Robertson, a local stockbroker. “We’re going to have a bunch of Yankee carpetbaggers come in here. They’ll have never seen this much money, and they won’t know what to do with it.”

  The next thing anyone knew, Reynolds was overrun with Yankees. The company had been under growing pressure during the seventies from its chief rival Philip Morris, whose Marlboro brand was growing in leaps and bounds, and Sticht was convinced that more sophisticated marketers could beat back the challenge. For the first time, he brought a slew of outsiders to Winston-Salem, including Jim Peterson, the former president of Pillsbury, to head the domestic tobacco business; Morgan Hunter, a senior vice president of American Cyanamid, to be president of Reynolds Tobacco; Bob Anderson, a Lever Brothers executive, to head tobacco marketing; and J. Tylee Wilson, a Chesebrough-Pond vice president, to run first the food businesses and later the company’s long-overdue entry into overseas markets.

  The newcomers, Northerners almost to a man, stood out painfully at Reynolds. “It’s not the end of the earth,” they joked of Winston-Salem, “but you can see it from here.” They mistook gentility for weakness, slowness of pace for lack of acumen, and Southern accents for dimwittedness. “They would treat brilliant people as backwater rubes,” recalled Larry Wassong, the
ad executive.

  For all their self-assuredness, the New Guard proved astoundingly inept at selling cigarettes. When cigarette ads were banned from the airwaves in 1971, Reynolds had to scrap its catchy jingle, “Winston tastes good like a cigarette should.” For years Sticht’s new hires flailed about to find a proper substitute, torturously reworking the line for print ads: “There’s a lot of good between ‘Winston’ and ‘should.’” Bob Anderson compounded the problem by yanking Reynolds’s brands off billboards, a crucial source of cigarette advertising.

  A succession of ad agencies was thrown at the problem, each with its own ideas, each with a new direction, each doomed to fail. Cigarettes are sold on image, and for years Reynolds executives held their brand images sacrosanct. Philip Morris had gained millions of Marlboro smokers by sticking with the same cowboy image since the 1950s. Now Reynolds tried a macho counteroffensive, with campaigns portraying loggers and sailors. It tried a “working men of America” campaign, trying to celebrate the blue-collar brand it had become. Nothing worked.

  Marlboro was also winning the battle on the factory floor. The entrenched traditions that kept Reynolds on top for twenty years now kept it from changing with the times. The reconstituted tobacco long embraced by Reynolds manufacturing executives saved money but sacrificed quality. It produced a hot, harsh taste that was popular with blue-collar workers but that, by the 1970s, was being rejected by more sophisticated and youthful palates. Marlboro, by blending a smoother cigarette, won converts. Philip Morris did it by pouring money into new plants and equipment, while Reynolds stood pat. After dominating the cigarette business for so long, the Reynolds line executives had grown complacent. “Ah, what do those guys on Park Avenue know?” they said, doubting the judgment of anyone that distant from the factories and tobacco fields.

  In the mid-seventies both Philip Morris and Reynolds had a shot at purchasing a first generation of electronic cigarette-making machines that would greatly speed production. But many Reynolds mechanics weren’t literate enough to handle them; they chose to stick with older, more reliable machines they knew how to take apart and reassemble. Philip Morris jumped at the new devices. By the time Reynolds realized its mistake, all the manufacturer’s production was committed to Philip Morris plants. It was the final straw. In 1976, Marlboro passed Winston as America’s bestselling cigarette, a position it holds to this day. Reynolds held onto its lead in overall cigarette sales by a hair.

  The problems weren’t confined to the old brands, as a new-product fiasco shook Reynolds further. It was a time when “all-natural” products were popular, and shortly after losing the number-one position to Marlboro, the company decided to roll out an all-natural cigarette. They named it Real. As usual, they ignored local skeptics. “What are we doing trying to sell to the health conscious?” muttered one dissenter. “People who smoke don’t give a shit about their health.” But Reynolds’ executives were so confident of Real’s success they bypassed test markets and took it directly national. They spent millions on ads showing ruddy-cheeked young bucks enjoying a Real and passed out packs by the gross on street corners. Real, of course, was a real disaster.

  In the late seventies, Sticht officially became chief executive upon Stokes’s retirement, and Reynolds left its fifty-year-old downtown headquarters for a sprawling, glass-enclosed building erected several miles away. Reynolds, one executive declared, had arrived at “the age of mass, class and glass.” But the intrigues soon spawned within the new building would give it a far more colorful nickname: “The Glass Menagerie.”

  His only mistake, Paul Sticht would later say, was that he had gotten too old too soon. He was past sixty by the time he became chief executive, and he no sooner had the job than speculation began about his successor. The early favorite was Tylee Wilson, a man with two years’ experience running the company’s overseas business and the only one of the original New Guard to make it into the 1980s. Sticht named Wilson president in 1979. As Sticht’s number two, Wilson was responsible for the company’s entire tobacco operation. He had initially gained Sticht’s notice shepherding Reynolds’s ragtag, money-losing food businesses, bringing them to heel and managing to turn a profit. As president, Wilson began pouring billions into the gargantuan task of revitalizing Reynolds’s aging factories.

  He soon rubbed the genteel Sticht the wrong way. Wilson was a cold tactician and technician, a straight-ahead tank of an administrator who rolled over everything between him and his current objective. As a young man, he had been an Army instructor, and he brought that blunt, Prussian style to the executive suite. Wilson had a humorless laugh and a knack for tortured syntax. A Wilson sentence might begin, “I would opine that…”

  Sticht’s succession, it was clear, would be a horse race. The second entry in that race was Edward A. Horrigan, Jr., president of Reynolds’s main tobacco business. Ed Horrigan, who would leave his own indelible mark on Reynolds, was a combative fireplug of a man who liked to brag he was “born in a three-point stance.” Horrigan was typical of the new-generation executive Sticht had brought in; he ran a tobacco business without ever having smoked in his life. He had made his career marketing liquor, joining Reynolds in the seventies and, unlike many of the New Guard, fitting in well in Winston-Salem.

  He was born in Brooklyn, the son of an accountant who was hard-pressed to find work during Horrigan’s Depression-era childhood. He got into the University of Connecticut on a football scholarship; although only five foot seven, by his own admission he “liked to hit people.” Horrigan got through UConn working summer construction jobs, then joined the army. In Korea, Horrigan led a platoon of 200 men at the battle of Old Baldy. The North Koreans were dug in on a hill, mowing down Americans as they tried to take it. But the young lieutenant kept regrouping and finally led his decimated unit on one final assault. Horrigan took out a machine-gun nest by himself, and his platoon took the hill. He won a Silver Star for valor, but his wounds knocked him out of combat for the duration.

  After Horrigan came home, he marched through a succession of marketing jobs, until being lured to Reynolds by Tylee Wilson after heading the Buckingham liquor unit of Chicago conglomerate Northwest Industries. At Reynolds the two old soldiers were natural allies, at least at first. Together they commiserated over drinks about Reynolds’s plodding ways. Horrigan chafed at Reynolds’s gentlemanly, Southern work ethic. “We need a stronger sense of urgency here,” he told his troops. Horrigan was brimming with pep talks for the troops: They were going to fight Philip Morris on the beaches, in the air, at the convenience-store racks, everywhere. When they began to make progress, Horrigan got a good measure of the credit. Subordinates didn’t question him without risking a tirade; behind his back, they called him “Little Caesar.” These were not the gentlemanly qualities Sticht preferred. Nonetheless, Horrigan was a contender.

  A third candidate for Sticht’s crown was Joe Abely, the suave chief financial officer recruited from General Foods. Abely most looked the part of a chief executive, with a distinguished silver mane. He also had the best pedigree, with law and business degrees from Harvard. He was on the Council of Foreign Relations, which appealed to the statesman side of Sticht. But Abely had a personality that made Wilson seem warm. While he didn’t meet the gentility test, Abely worked closely with Sticht on acquisitions and performed the useful task of bringing financial systems out of the dark ages. (Sea-Land’s accounting system, it was discovered, consisted of stuffing invoices in shoe boxes.)

  After a century of “one-for-all,” the Sticht succession scramble split Reynolds into warring camps. No longer did people pull together for the company. Now they looked after the interests of the executive they hitched their star to: Wilson, Horrigan, or Abely. Preparing for a financial analysts’ meeting, Wilson and Abely quarreled over who would speak first, a squabble Sticht finally had to settle. At a rehearsal for presentations to a companywide conference, Abely had run over his allotted time when Horrigan stomped into the room. “What’s that cocksucker doi
ng up there?” he stormed. “It’s my time.” Abely ordered a feasibility study on spinning off Sea-Land. Wilson, to whom Sea-Land reported, got wind of it and confronted John Dowdle, the treasurer, who was doing the study. “I’m sorry, I can’t tell you about that,” Dowdle said. “Abely will fire me if I tell you.” Horrigan hired a public relations firm to get him nominated for the right kinds of business and humanitarian awards to enhance his résumé. Horrigan’s big score: a Horatio Alger Award.

  The succession mess would have a lasting effect on the business, fueling an insidious practice known as “loading.” Loading wasn’t unique to Reynolds; every tobacco company did it to some extent. Just prior to its regular semiannual price hikes, Reynolds regularly offered huge volumes of cigarettes to its customers—wholesalers and supermarket chains—at the old prices. Customers loved it because they could sell low-cost cigarettes at the new, higher prices. Reynolds loved it because it cleared away unwanted inventory, kept the factories humming, and, most important, produced large, artificial, end-of-quarter profits.

  The problem, of course, was that loading was as addictive as nicotine. In order to top profits aided by loading, the company had to load even more—and so on, ad infinitum. It created huge inventories in the hands of wholesalers and retailers. When those inventories couldn’t be sold, one of two things happened, neither of them good. The cigarettes could be shipped back to Reynolds for credit, forcing the company to swallow the expense of reprocessing the tobacco into fresh cigarettes and, likely as not, reloading them. Or they could sit around for a few months, growing stale. As Reynolds grew more and more addicted to loading, more and more smokers were drawing on stale Winstons. Many would switch over to Marlboro.