Finding Top Talent: A New Leading Man for Kmart
from Autumn 2000
by Susan Caminiti
There’s a good chance that no one even noticed the four men and one woman strolling the aisles of a Kmart in northern New Jersey on that warm spring morning last May. Dressed casually, the group made its way past the colorful collection of Martha Stewart kitchen towels and tablecloths, around the vast grocery section offering specials on whole wheat bread and kids’ cereals, and toward the rear of the store where diapers and baby strollers lead to the camping gear and 10-speed bikes.
Yet this was no ordinary shopping trip, nor were these ordinary shoppers. The mission was to find a new CEO. Four of those walking the aisles were the Kmart outside directors who comprised the search committee: former Time Inc. Chairman J. Richard Munro; Lilyan Affinito, former president of the Maxxam Group, a forest products and real estate company; James Adamson, CEO of Advantica Restaurant Group; and former Union Carbide CEO Robert Kennedy, who headed the committee.
The fifth person walking the aisles was Charles Conaway, president of CVS, the drugstore chain, who by this point in the search had the inside track for the job. The four board members listened intently as he offered opinions about what he saw on display and how he might do things differently if he were running this particular store.
Like most CEO searches, Kmart’s had involved all manner of clandestine activities. Late night phone calls to candidates’ homes, discreet communication via executive search firms and other third parties, cautious expressions of preliminary interest in the job, tentative questions about compensation packages, and, as the search began to narrow, dinners among board members.
Selecting a CEO is one of a director’s most critical responsibilities, and the process is fraught with tension because so much is at stake. This was especially true at Kmart. It has never recovered from the licking it took from Wal-Mart during the ’80s, and the job of CEO was beginning to look a bit like a revolving door—bad for any board’s reputation. But by the time of the New Jersey visit, the search committee was in the home stretch. It was now down to whether Conaway had a feel for the store. Could he identify what Kmart needed to change or improve? Merchandise displays? Customer service? Did he know what a blue-light special was? And how about technology? What should Kmart do differently, better, smarter? In short, now that their front-runner for the job was on Kmart premises, safely out of sight of CVS’s headquarters in faraway Woonsocket, Rhode Island, was he transmitting the right vibe?
Conaway offered no magic bullets that day, no here’s-how-we-finally-beat-the-pants-off-Wal-Mart prescription. But what he did say confirmed the search committee’s faith that he had the right stuff—the mix of marketing, merchandising, and technical skills to turn Kmart around.
As the top operations guy at CVS, Conaway had been responsible for the solid performance of a chain with 4,100 stores, nearly double the number of Kmarts, and revenues of $18 billion, versus $36 billion for Kmart. CVS earned $635 million last year, and Kmart $403 million.
Conaway also knew how to control costs at a huge retailer, a talent Wall Street analysts felt was sorely missing from Kmart’s leaders in the past. Finally, at 39, he had the stamina to get the job done. One director said of him: “That’s some thoroughbred.”
At the end of May, Robert Kennedy flew to Rhode Island for a breakfast meeting with Conaway. The search committee chairman had two pieces of information in his head. First, the board had decided that it wanted Conaway as its next chairman and CEO. Second, Kennedy knew that Conaway, provided Kmart met his terms, wanted the job.
That latter piece of intelligence was vital. Some companies have announced such appointments only to see them blow up in their faces when a candidate, however enthusiastic during the courting process, publicly renounces the appointment. In June 1999, Joseph Galli, Black & Decker’s CEO, signed an agreement to become CEO of PepsiCo’s Frito-Lay. The appointment got a lot of publicity. But Galli soon changed his mind. Two days later, Amazon.com announced Galli would be joining that company as president and COO. As it happened, that didn’t last long either. In July, Galli moved again, signing on as CEO of VerticalNet.
Kmart wanted to avoid that sort of public embarrassment. Says Hal Reiter, president of Herbert Mines Associates, the executive search firm that brought Conaway to Kmart’s attention: “Before the board went ahead and offered him the job, they wanted me to ask him flat out, ‘If the offer is acceptable, will you accept it?’ I did, and he said ‘yes.’”
Kmart announced Conaway’s appointment on May 31, noting that it would be effective immediately. In a statement, outgoing Chairman and CEO Floyd Hall said, “Chuck Conaway is recognized as a dynamic executive who understands the complexities of large, multi-site retailing. His financial acumen, operational and leadership abilities will serve Kmart’s shareholders, customers, and employees well as the company pursues its performance objectives and future strategies.”
For Hall, these words were something of a professional death rattle. He was not being succeeded by a protégé or even by someone he had helped to recruit. But Hall, now 62, had come to Kmart in a similar way, joining the company in 1995 after the board ousted long-time CEO Joseph Antonini. Antonini’s big mistake: underestimating Wal-Mart, which clobbered Kmart with lower prices and better selection and grabbed Kmart’s slot as America’s biggest discount retailer. Hall was a veteran of the retailing businesses and had headed B. Daltons bookstores and Grand Union, among others. He got the Grand Union job after its owner, the late financier Sir James Goldsmith, took him on a tour of one of the stores and asked him—much as Kmart directors would someday ask Conaway—how he’d do things differently.
Hall was hired by essentially the same board that is now putting its trust in Conaway, and he had set ambitious plans to save Kmart. For a while, it looked as though he would make it. He overhauled nearly every store and set up an online shopping website, www.bluelight.com. Perhaps most important, he immediately recognized the value of the Martha Stewart Everyday brand, which he had inherited from Antonini. One of the first things Hall did in the job was to call the indefatigable doyenne of taste and suggest that each could be getting more out of the other. Today Kmart sells a gush of Stewart goods—towels, paint, kitchen equipment, and gardening tools among them—that together brought in nearly $1 billion last year, 3% of Kmart’s total sales—and more than twice as much as when Hall took over. (For more on Martha Stewart, see page 37.)
But the company stock price never reflected Hall’s improvements. On May 31, the last day of his watch, shares traded at $8.50, versus $14 at the start of his term.
Unlike Antonini, Hall initiated his own departure. He seemingly gave up on his turnaround plans last year and announced that he wanted to step down. He said he planned to retire, but a dozen or so other business interests—including the Museum Store, a chain he founded before joining Kmart—will doubtless keep him busy. And he never did move to Troy, Michigan, just north of Detroit, where Kmart is based, although he had a furnished townhouse near the headquarters. Instead, he commuted weekly from his home in New Jersey aboard a sizable corporate jet. “It’s in my contract,” he once joked. “I don’t fly in small planes.”
By the time of Conaway’s appointment, Hall was very much out of the loop. His successor was ushered into Hall’s Troy office and the two men shook hands. The king was dead; long live the king.
The smooth transition spared Kmart from the public damage inflicted by CEOs who won’t go (think Lee Iacocca, who wouldn’t let go of Chrysler’s wheel) or who have to be pushed out (Procter & Gamble’s Durk Jager, who agreed to take the rap for a plunge in the stock price).
Although many companies identify their probable next CEO well in advance—something good boards always do—they still turn to search firms as a matter of due diligence and to make it clear to potentially litigious shareholders that they’ve done their best to find the best. The secrecy that surrounds any search becomes double-edged, and that suits the headhunting industry just fine. Says Les Berglass, chairman of the executive search firm Berglass Grayson: “My life is about secrets. I’m very careful about whom I discuss business with. I won’t talk in front of car service drivers, and I certainly won’t talk business in an elevator.”
Reiter’s firm maintained a high degree of secrecy in the search it did for Kmart, an assignment it received in April. For a while, the candidates didn’t even know what job they were being interviewed for.
Reiter and his partner, Herbert Mines, began the search by putting together a first-round roster that included 30 to 35 possible candidates. But the list soon shrank. “Sometimes a director just knows from past work experience that a particular person really wouldn’t be appropriate for the job,” says Mines. At Kmart, the search committee saw the list and immediately scratched off many of the names as unsuitable, unqualified, or just plain unwanted.
Typically, other names join the preliminary list as the search continues, but Conaway was there from the start. In late April, when the list was beginning to firm up, Reiter set up an interview to find out whether Conaway met the client’s needs—and how interested he was in becoming the CEO of a major retailer. At this point, Conaway had no idea which company might want his services, nor indeed where he might have to relocate his family.
This last point could have been a problem, since not everybody is eager to move to Troy. However, halfway through the conversation, Reiter asked Conaway where he went to school. “When he told me the University of Michigan and that he had grown up in Lapeer, not too far from Kmart’s headquarters, I was about to explode,” Reiter says. “It was like all the stars were lining up.”
Within 30 days after starting their search, Reiter and Mines had reduced the roster of names to about 15. Still far from a final selection, the search committee decided the best way to maintain secrecy—they didn’t want to spook potential candidates or their employers—would be for the headhunters to conduct the next round of interviews at their Park Avenue offices.
At this point, Reiter and Mines identified the client. For some candidates, this was enough. They immediately took themselves out of the running, saying that the challenge of turning around Kmart was too immense. Reiter and Mines eliminated others. “Some candidates made us feel either uncomfortable with their concept of the business or their ability to take on a challenge this big,” says Mines. That left a half-dozen strong contenders. It was now early May.
Once again, the search committee went through the strengths and weaknesses of each candidate, among themselves and with the rest of the board. The list soon dwindled to three. Two were active CEOs who were already running companies. The third was Conaway, and though his experience as a company president and COO put him in junior standing compared to the others, he was also younger, which meant he was potentially more energetic. This gave Conaway the edge, and the committee knew it was time for the final test: the accompanied tour of a Kmart store.
Even this late in the process, Reiter and Mines were still digging, talking by phone to the three finalists’ former bosses, colleagues, and anyone they had worked with who could keep a secret, trying to gather as much intelligence as they could on each man’s management style. “If ever there was a point along the way where there could have been leaks, this was it,” says Mines.
By the end of May, not only had Conaway emerged the winner, but he’d done so without news of his selection and acceptance leaking to the press.
The lid also has been kept tightly down over the details of his five-year contract and the extra perks Kmart had to offer to get him. After Kennedy made the offer and Conaway accepted, the compensation negotiations were “smooth and straightforward,” says one person close to the deal. Conaway’s wife and two daughters are moving from Rhode Island to Michigan.
No matter what his compensation package—Hall’s was $3.7 million—Conaway will earn it. The challenge ahead of him is enormous. He is moving to take maximum advantage of the honeymoon period granted most new CEOs. In late July, he announced a $740 million pretax charge for inventory clearance and the closing of 72 stores. Kmart also will invest $460 million to upgrade its information systems.
But it will take more than this to turn the company around. First quarter earnings were down from the same period last year by nearly 61%, to $22 million (bad news for Hall), and Kmart warned analysts that the second quarter (Conaway’s watch) would be down, too. So it was. Kmart lost $448 million for the period, versus a $92 million loss for the same quarter last year.
Martha Stewart remains a strength, as do some smaller brands that Hall brought in, such as Route 66. But overall, says Robert Buchanan, a retailing analyst at A.G. Edwards, “I don’t see any good reason to shop at Kmart.”
Kmart’s board members are anxious for Conaway to change that kind of thinking. Their reputations are on the line, too. They’re now on their third CEO in five years, and this buck stops in the boardroom.
