September 1993 | Volume 44, Issue 5
If Rodney Dangerfield weren’t a comedian, he’d probably be an executive. They don’t get any respect either. Alexander Graham Bell invented the telephone and has, naturally, a long entry in the Encyclopedia Britannica and numerous cross-references. But his father-in-law, Gardiner Hubbard, who merely invented AT&T, made Bell by far the richest inventor of the nineteenth century, and gave the country a phone system that has been the envy of the world ever since, goes entirely unmentioned.
Even the government gets into the act. Recently, the Clinton administration proposed that executives be the sole job category in the United States that, in effect, is subject to government wage controls, by limiting the deductibility of executive salaries from corporate income taxes.
Now, certainly, some executives are overpaid, especially when the top management of a company controls the board of directors and the executives thus get to set their own salaries. But there are also overpaid movie stars and sports figures. Somewhere in the world there is probably an overpaid historian, although I’ve never met one.
But what’s a good executive worth? Well, sometimes he or she has been worth the whole company.
Henry Ford invented the mass-market automobile, and his engineering genius created both a great fortune and one of the world’s largest corporations. But toward the end of his life, his slapdash, highly idiosyncratic, and increasingly paranoiac approach to management went a long way toward wrecking both. Under Henry I, costs were estimated, to the extent they were estimated at all, by weighing piles of invoices. It was Henry Ford II—no genius, just a first-rate executive—who created the modern Ford Motor Company (1992 sales: $100 billion) out of the chaos left by his grandfather.
Or consider Sears, Roebuck. Having given their names to one of the most famous corporations in the world, both Richard Warren Sears and Alvah Curtis Roebuck are immortal. But it was the now nearly forgotten Julius Rosenwald who turned Sears, Roebuck from a shapeless, inefficient, rapidly expanding corporate mess into the retailing titan of much of the twentieth century. Indeed, there is probably nothing wrong with the modern-day Sears, Roebuck, that a modern-day Julius Rosenwald couldn’t fix, if only the company could find one.
Rosenwald was born in Springfield, Illinois, where his father managed a clothing store, in a house only a block away from Lincoln’s, in 1862. Leaving high school after two years, the young Rosenwald eventually moved to Chicago and opened a company that manufactured men’s summer wear in 1885. The company flourished from the start, but ten years later he sold out to purchase an interest in the even faster growing Sears, Roebuck.
Richard Sears, trained as a railroad telegrapher, had discovered he could sell in 1886, when he was twenty-three. A C.O.D. shipment of watches had been refused by a local jeweler in Redwood Falls, Minnesota, where Sears was agent for the Minneapolis and St. Louis Rail- road. Sears made a deal with the shipper and sold the watches himself. Soon he was ordering more and within six months, Sears had made five thousand dollars—no small sum in 1886: it was enough to buy a comfortable house.
He quit the railroad and set up the R. W. Sears Watch Company. When watches started coming back for repairs, he hired Roebuck, a self-taught watchmaker. Before long they were partners and selling jewelry as well as watches. Sears began issuing a catalogue and offering more merchandise.
It was soon obvious that Sears had a deep, intuitive feel for the commercial needs and aspirations of the people of rural America, and a genius for writing catalogue and advertising copy that awakened those needs and aspirations. The 1892 catalogue had 140 pages and offered everything from wagons to baby carriages, shotguns to saddles. Sales that year amounted to $276,980.
Over the next two years, in the teeth of the great depression of the early 189Os, the catalogue expanded to 507 pages, nearly all of it written by Sears himself, and sales to $393,323. But profits did not expand commensurately. Swift corporate growth is often a messy affair, and many promising concerns do not survive the economic equivalent of adolescence. Sears, Roebuck’s growth was messier than most, in no small part due to Richard Sears himself.
He was given to writing copy for merchandise he did not have in stock but which he thought might find a ready market. Being the genius he was, he was usually right.
Sometimes Sears got a bit carried away with his catalogue descriptions and strayed far beyond the literal truth. This, in turn, precipitated many returns of merchandise, always the greatest profit-gobbling threat to the mailorder business. Sears learned his lesson —in later years he was fond of saying that “honesty is the best policy; I know because I’ve tried it both ways”—but hyperbole was always to be his stock-in-trade.
It was all too much for Roebuck, who possessed the very quintessence of the bean-counter mentality. In what may well be the worst investment decision in the history of American capitalism, he sold his interest in Sears, Roebuck to his partner in 1894 for $25,000. (Years later, at the beginning of the Great Depression, Roebuck, by then broke, applied for a job at the company that had once been half his. Asked if he was any relation to the founder, he admitted he was the founder and was immediately hired for promotional purposes.)
But Sears, a salesman who “could sell a breath of air,” was preoccupied with writing copy and dreaming up new items for the catalogue. He still needed someone to count the beans and bring order to the sprawling, often chaotic company. Sears found a new partner when Aaron Nussbaum, who owned a firm that made pneumatic tubes, called on him hoping to sell a tube system. Nussbaum sold the system and bought into the company with his brother-in-law, Julius Rosenwald. Sears, Roebuck’s astonishing growth began immediately.
In 1895, Sears did a gross business of almost $800,000. By the turn of the century it was $11 million, surpassing Montgomery Ward, a company that was twenty years older. But Sears did not get along with Nussbaum. In 1901 he demanded that either Rosenwald and Nussbaum buy him out, or that he and Rosenwald buy Nussbaum out. Rosenwald had to choose between his brother-in-law and the man he knew was indispensable to the continued success of Sears, Roebuck. He chose Sears and together they bought out Nussbaum’s one-third interest for $1.25 million, fifty times what Roebuck had sold his half-interest for only seven years earlier.
Yet Sears was now expanding so rapidly that they were able to pay Nussbaum off in only two years. No small part of this success was due to Rosenwald’s executive abilities.
He instituted new systems that made sure orders were processed promptly. Incoming orders were weighed (they averaged forty per pound) to indicate how many clerks would be needed. By 1906, when Sears, Roebuck moved into a vast new plant in Chicago, orders were averaging 20,000 a day, 100,000 a day in the Christmas season.
Each day of the week was assigned an order slip of its own color, so that delayed orders would stand out and get first attention. Conveyor belts and gravity chutes were installed to speed the flow of orders and merchandise, bringing everything together at an assembly point. Henry Ford inspected this system and was mightily impressed. The following year he adapted the assembly-line principle to automobile manufacturing and changed the world. (One can only wonder if he noticed the weighing of incoming orders and misapplied it to invoices.)
Rosenwald was also way ahead of his time in employee relations. In 1916 he established the Savings and Profit Sharing Pension Fund of Sears, Roebuck. Employees could contribute up to 5 percent of their salaries and the company contributed a portion of the profits according to a sliding scale (the more profits, the greater the percentage contributed to the fund, up to a limit of 10 percent). From the beginning, much of this fund was invested in Sears, Roebuck stock. So the Pension Fund not only greatly fostered employee loyalty—a hallmark of Sears for years—it also gave the employees a strong self-interest in the success of the company.
And succeed the company certainly did. By the mid-twentieth century, Sears, Roebuck was part of the very warp and woof of American civilization. The writer S. J. Perelman said that its catalogue had the same affect on him as madeleines had on Proust. Sen. Gene Talmadge thought that the Georgia farmer had only three friends in the whole world: Jesus Christ, Sears, Roebuck, and, of course, Gene Talmadge. Franklin Roosevelt joked that the way to convince the Soviet Union of the superiority of the American system would be to bomb it with Sears, Roebuck catalogues.
Unlike poor Roebuck, both Sears and Rosenwald died immensely rich, thanks to Sears’s genius as a salesman and Rosenwald’s genius as an executive. The salesman left $25 million when he died in 1914, and the executive $17 million in 1932. Of course, by that time Rosenwald had given away to worthy causes fully $63 million.
Most of the article on Julius Rosenwald in the Dictionary of American Biography , the standard multivolume reference work on great Americans of the past, is devoted to detailing his endless charities. But guess how much of the article is devoted to his talents as an executive, talents that made his vast beneficence possible: exactly one sentence.
As I said, executives get no respect.