Leadership Playbook | Episode-4 | How Bob Chapman Built a $4 Billion Company Without Layoffs

Well, I appreciate the opportunity to share our message of truly human leadership with your audience. It's a privilege.

Yeah, I think for your audience, my background's pretty traditional business. I have an undergraduate in accounting from Indiana. Made a decision to get an MBA from Michigan. And did some internships during my time in college with some public accounting firms. And made a decision, you know, with the idea to when I graduated from my MBA to go into public accounting, which I did. I joined Price Waterhouse in St. Louis. So, very traditional accounting focus, MBA, public accounting. And that was what I thought I was going to do. My goal was to be a partner in a public accounting firm. So, that was a very traditional business. Nothing spectacular. And that's kind of where I was going to go until about February of '69, I'd been in public accounting two years. My father, who had invested in kind of a broken 100-year-old machinery company in the '50s, started asking me questions because now I'm actually in business and have some credibility. And had me join meetings. And in February of '69, he said to me — because we had never discussed me joining the family business ever. I never thought about it. I don't know that he thought about it. But in February of 1969, he said to me, 'Would you consider joining the company? I need somebody I can trust.' So, that's how I went from kind of public accounting into this mid-teens $18 million historic business that my father had invested $30,000 in and he owned about 60 or 70% of it at the time.

It's a great question because if you ask me, 'Why did I leave public accounting where you're doing well to join this 100-year-old kind of broken company that's financially fragile?' I don't remember thinking about it. Honestly, I was going to repeat my clients in public accounting. So, the intellectual stimulation maybe wasn't there. My dad and I were getting along well with me outside public accounting. And so, again, I'll remind you my title was somebody he could trust. So, to just give you a glimpse of this, every day when my father came in when I joined the company, he had a practice with his secretary to go down to the mail room and open every piece of mail to see if somebody was cheating him. That shows the magnitude of the issues because several of his executives some months earlier had tried to sell the company out from behind his back, which really was devastating to my dad. So, my dad was in a situation where he just didn't feel he could trust the team members. And because the company was financially struggling with old technology, there wasn't a lot of talent or new ideas. So, when I stepped in the company, it was pretty fragile financially. It was okay, but pretty fragile financially based on technology that was 100 years old. So, it was a pretty traditional old family company without much of a future when I stepped in.

You know, every year I get a chance to speak at Washington University on defining moments, and it's kind of the same question. What were kind of the defining moments? So, for your viewers, when I stepped into the company with a title somebody my dad could trust, I had the chance to work in various parts of the company. I started off in the engineering department working on projects with major companies as an interface. I wasn't engineering things. I was just acting as an interface between the customer and us. So, I got a feel for research and development and engineering. Then I got into international license agreements. I traveled to Colombia, South America, and Argentina, and Japan, where we had license agreements. Then I got into manufacturing, then I got into customer service. So, I spent about six years in what I'll call a self-created leadership development program. I was just intellectually curious about how all these things worked and how I make an impact. And I had a chance to run a business. So the journey, you know, the beauty is that I had six years where my dad was with me that I had a chance to learn a bit. And it wasn't even — we never talked about it. He just said, 'Bob, could you go work in customer service? We got a lot of problems. Could you go handle the license agreement?' So, I would do that and each one was an experience. It's a little bit like if you look at a clock and you see the hands and it seems so simple. It's 12:15. But behind the surface of those hands are gears that have to be meshed to create the accuracy of that time. So, what that six years working with my father gave me, which is very unique, I got to get behind and see how things come together. Machine shops, assembly, license agreements, technology, so that was just an unintended beautiful opportunity for me to learn the company.

So, in 1975, I'm having dinner with my dad in October and he says to me, 'Bob, your mom and I are going to Australia tomorrow to visit our joint venture. When I get back, I'm going to make you executive vice president because you're really running the company and I'm just going to acknowledge it.' It was a nice comment at dinner. I was kind of very much involved in everything. The next morning, he died. Okay? So, he never had a chance to actually do that, but because of the structure of the company, I became president that day. So, at age 30, with six years and I'm working in all parts of the business and having some meaningful success. The company's still fragile because the markets we served and those technology were very challenging. And the first person, the first group I met after my dad died and I stepped in that position, was our bankers. And they said — they didn't quite say it this way, what they meant is, 'The company's pretty fragile. We kind of had faith in your dad. You're a 30-year-old kid. We'd really like you to repay the loan.' So, basically, I lost my dad and our ability to finance our business simultaneously.

Pretty challenging, but the beauty is that, and I'll share this with you. I've learned the nature of my personality. I have a lot of common sense. I'm very creative and I have a very positive attitude. I'm a very optimistic person. So, if you blend those three together, a lot of what you're going to hear is the result of those three qualities that I am blessed with. And so, my dad passes away, the banks want out, and my reaction is to grab a hold. So, he died in October, we were three months into our financial year, had nine months to go. I grabbed a hold of that company from that stimulus of the banks pulling on us, and I laid off people, I downsized, I cut costs, I focused on improving earnings, and we had a record financial performance for the full 12 months. The best year in the history of the company in the first nine months that I was in charge. Because I was driven by this intensity. My dad dying, the banks pulling on me, it created me to focus on — I'm not going to go down like this.

So, that's great. But, I paid off the banks. And now, I'm sitting here with my MBA, and I'm thinking, how do I grow this company? And about that time the oil crisis was occurring and I actually hired somebody who worked on the space shuttle to help us develop solar energy for our products to use in our products. Then we had a product line that did electronic inspection of empty containers and we worked with the Carlsberg Brewery in Denmark and then Miller Brewing Company wanted to work with us. So a whole bunch of new organic initiatives were very exciting. And dramatic. I mean it was just here I am 32 years old and all of a sudden I'm going to Denmark and seeing this technology we're developing in Italy to see this filling technology with Miller and on the roof of the brewery of Anheuser-Busch with August Busch talking about solar energy. How can it get any better? And my banks now liked me a lot, okay, because I'd paid off the debt. And so we began growing from 18 — when my dad died we were 18 million. And we started growing dramatically with solar energy, electronic inspection and filling systems and our core markets picked up at that same time because all of a sudden the ecology movement people talked about returnable glass so all of a sudden the breweries started buying returnable bottles — anyway, whole combination positive. My banks said to me, 'Bob, just make sure you tell us the amount of money you need to grow because we really like what you're doing.' So the banks made it easy for me to finance this organic growth in all these new initiatives.

And naturally with all new initiatives it was exciting. And what we didn't realize is was the organization ready to embrace that level of growth from years of stagnation, decline, no technology — to 18 to 72 million. It felt really good, but that masked the challenges. It's called a cumulative risk. It wasn't that if you looked at any one of those initiatives I've described, they all seemed incredibly solid. But collectively, the collective risk was significant. So, in about 1983, each of those initiatives — so we peaked at 72 million. And then we started experiencing our traditional markets got softer. The solar energy issues — started having issues with the solar panels warping. The filler systems had some issues with foaming and Coca-Cola. So, anyway, each of those incredible initiatives that were major corporations experienced issues. And in October of '83, my auditors came to me in the course of doing the audit. We had peaked at our borrowings at 22 million to finance all that growth. I had worked it down to 17 million because I was uneasy at 17 million even though the banks said it was great. And our auditors came to me and said, 'Bob, we've seen in the audit that you've got some issues with warranty and inventory. And it looks like you're going to record a three and a half million-dollar loss for the year.' And we were about 55 million. And I immediately called the senior credit officer of our bank, and this is another major learning. And I said, 'John, we need to get together. We got some issues.' So, I sit down with the senior credit officer, not just our lending officer. And I said, 'John, the auditors have just made me aware we've got some Italian inventory that is obsolete. And we've got some warranty issues that if you add them all together, we're going to report a $3 million loss. Now, we already paid our debt from $22 million to $17, but I just want you to be aware.' And John, senior credit officer of a major bank, looked at me and said, 'You know, Bob, we consider you one of our best clients. We really believe in you. And just be sure you learn from this and understand what happened.' Very good response.

About maybe 10 days later, that same auditor came to me and said, 'Bob, we found some more items. Looks like the $3.5 million loss is going to be $5.5 million.' So, I called up John, and I went back to the bank, and I said, 'John, I just want to make you aware that the auditors have found some more — it's non-cash. It's writing down some inventory and some warranty.' And he said what you don't really want somebody to say to you from a bank, 'Let me call you back tomorrow.' Okay? Same guy that told me how much they valued me. Called me back the next morning and said, 'Bob, we want our money back right now. And your credit line is frozen. You cannot borrow another nickel.' And you meet the person you never want to meet. You're not the guy that lent you the money, but they call the workout guy that wants the money back. And he doesn't take you to Cardinal baseball games. He doesn't take you to dinner. He calls you and said, 'When are we getting our money?' That's the only line. And so, we spent from October of '83 to August of '84 living day-to-day on cash. If a check came in from a customer, $100,000, we had to decide who we were going to pay and who we were not going to pay because we could borrow nothing.

And so, the beauty is that crisis, which was severe. So, I went from the talk of St. Louis and my growth to the talk of St. Louis to my collapse, okay? Not fun in your 30s. And we finally got refinanced in August of '84 by a guy in a dark suit in an alley with an envelope called asset-based lender. That's where you basically sign your life away to borrow. So, we just got refinanced. And I went — and this is something that I think your audience will enjoy. I went to my finance team and said, 'Guys, I'm proud of our history in the brewing industry, but our history does not give us a future. We need to start doing acquisitions so we can find product lines that give us a better future. I'm not an engineer, I can't design a product line.' I had no experience in acquisitions, but I had studied a company called Emerson Electric that grew through acquisitions. And so, it's an idea. And so, we could have looked to acquire companies that have a better future. With no experience, my finance team looked at me — and this is why I'm here today. My finance team looked at me and said, 'Bob, sounds like a great idea. We just have one problem.' I said, 'What's that?' He said, 'Bob, we have no money. Do you understand that, Bob? We have no money.' And so, when I told you about my personality, here's where the dots connect. I looked at this finance team. They were absolutely right. I said, 'I didn't tell you I needed money. I told you we need to do acquisitions.' And I walked out of that room unencumbered by the fact that I didn't have a wallet. And I went out and I began buying companies. Okay? And you'd say, 'Yeah, well, how do you buy companies without your wallet?' Yeah. You buy things nobody else wants and they'll almost finance them for you. But I found companies that I thought in the long term we could hopefully fix. And so we began in 1985 looking for acquisitions as a means to give us a new foundation for growth.

That was the defining moment. And again, as I said to you, we had no money, so we bought pretty much broken companies, put them together. It was doing okay, but the core business, the historic business that had created the problems, was still sick because the market was still sick. And my British team running our operation in Manchester, England flew over concerned about their future because of our financial challenges. And they'd been very involved in these acquisitions, and they said, 'Bob, what would you think if we could spin off 35 of the 55 million, take it public in London, and the proceeds, we estimate, would allow you to pay off all the debt of your company and have $2 million in the bank, and own 30% of the British company?' Well, I said, 'That sounds like heaven.' Yeah, well, I mean, it just — I was so tired of this financial burden over my head. And so we launched in October of '86 the idea. And the idea originally was, you know, $35 million company is kind of over-the-counter. It's not the full London IPO, but it's a secondary market. By the time we got to May of '87, the launch, we had passed all these hurdles and got it to a full IPO on the London Stock Exchange. And again, we had estimated that we would net $2 million after paying off all that. We launched it. People sent in $1.1 billion in cash trying to buy our $28 million of equity we were selling. And the interest we made on that $1.1 billion that we held until it was allocated and distributed paid for the IPO. And instead of having $2 million in the bank, we ended up with $20 million in the bank.

And it was our board — we had a very strong, still have, but had a very strong board, and they said, 'We have never seen anything like this.' I mean, they were overwhelmed. And Harvard wrote a case study on that IPO because it was — how do you buy a bunch of small broken companies, put them together, and it is overwhelmingly in demand in the London Stock Exchange. So

What drove that demand? Well, it had a — there's an old expression you need steak and sizzle. Steak — we had bought a company that made returnable milk bottles in England, a company called Dawson, where they returned their milk bottles and they would go into a bottle washer and then they'd fill them again and the milk man would deliver them again. So we bought a milk bottle washer and filling company in England. And something that puts foil membranes on the top of bottles in England. So we bought several kind of traditional businesses, but we also had that electronics business that was doing well. So it had a little bit of sizzle in the electronics business. And what the investment bankers described it to the investors as a sunrise to sunset business. The sunset business was the bottle washer business for milk bottles in England. The sunrise was the electronic inspection business that was doing well. So you put them all together and the numbers look good when you put them all together when you don't focus on it. So that's what they liked, nice size. And we had obviously when we bought these little companies because, you know, when you think you're about bankrupt and you're betting the farm, you put incredible intensity into making sure they worked. And they did. We far exceeded our expectations. So here we sit in October of '87, $28 million in the bank. A $20 million historic bottle washer pasteurizer business — again still in it. So we had the private 100% owned private company and 30% of the public company.

And I sat back for nine months and thought about what did I learn from that — my dad dying, growing from 18 to 72 million to dramatic decline to 55 million, our bankers pulling on us, we survived that, what we learned, and then starting to do acquisitions with no money. I mean I virtually said what did I learn? And what am I good at? And I came to the conclusion: I'm good at fixing businesses. In our industry that had problems with leadership or the good installed base or the good recurring revenue. And there were plenty of businesses that you could buy like that because our industry was kind of challenged. So I said, I'm no longer going to be dependent on any one customer like we were. So, I look for diversity. This Emerson Electric had a thing about don't be concentrated in any one industry, any one market, any one customer — should something change, your company gets hurt. So, I've focused intensely on diversity of markets, products, and technology, and companies that were challenged that most people wouldn't want to buy that I could at a reasonable price. And the dream that I presented to our board was to go from 20 million to 100 million, and that seemed like a dream. That business model designed in 1988 not only got us to 100 million, got us to 4 billion.

So, I would say to you — my challenges, the things I've shared with you, my unbelievable growth, my traumatic decline, my unbelievable recovery, the IPO in London — if you stop occasionally and think, which is what I did, what did I learn? What am I good at? And what am I not sure I'm good at? And focus on what you're good at. And so, I came out of that having experienced near-death financially, which is not pretty. And said, 'I'm going to design a business model that never happens to me again.' So, and again, when Ford designs a new F-150, they take it out in the worst terrain they can, see how it holds up, and then make whatever adjustments. Well, if you design a business model, drive it into the '08-'09 downturn, and see how it performs. Bank of America, and people like General Electric all experienced traumatic challenges in their business model in '08-'09 in the financial crisis. Our company's shares went up 11% in value. We let nobody go and we got through it strong. So, our business model, which is the foundation of our responsibility as a leader, has performed in the worst economic crisis of my life, which is '08-'09, as well as the COVID challenges, as well as the tariff challenges, and we've actually experienced a 12% compound growth in our share price. We have a simulated public share price. We're privately held, but we have a simulated public share price, which is — I think we're trading just below 10 multiples. And that we can use to evaluate this. So, we've actually outperformed Berkshire Hathaway in that 25 — I think they were 9.8%, we were 13 or 14%. So, the answer is my challenges, which were traumatic, but with my positive attitude and creativity, formed competency and the confidence to create something unique. If I had not had my challenges, I would not have the opportunity to come out of it strong.

The most significant defining moment occurred right around 2000. That was prior to 2000. The lens through which I — people from my education and my experience, I saw people in our company as functions for my success. I needed that engineer. I needed that sales exec. I needed that machinist. And I was a nice guy. Managed the company, but it's very traditional. The lens through which I saw people, they were functions for my success. Remember I took management classes, got a management degree. And I got a job in management. So, what do you do? I thought I was to manage people. I thought that's what we do. And that's why I had a good education. And so, that traditional way served me well. I mean, we were doing well financially. And then around 2000, at a wedding, one friend of mine was walking his daughter down the aisle, and everybody's oohing at how beautiful she looked, how handsome the young man looked up at the altar. I had a revelation. And the lens through which I saw the 12,000 people in our organization was reversed. Instead of seeing our 12,000 people as functions for my success, I said, 'All 12,000 people that are part of our organization, my span of care — they're not engineers, accountants, receptionists, clerks and labor. They're somebody's precious son or daughter. What's their place in my care? May I treat them in a way that has a profound impact on their life?' So, that revelation occurred at a wedding. The lens through which we see people affects the way we treat people. And so, I didn't think there was a problem. You know, I didn't respond to a problem. It was a revelation. So, I didn't say, 'Well, gee, management needs to change. We need to stop seeing people as functions.' It was simply a revelation that occurred while I had the team. The way we see people affects the way we treat people. If you see them as an engineer or accountant as a function, then when it comes to layoffs or firings, it's not personal, you do things like that. So, that's why the transformation from management to leadership. I define management as, from my experience, the manipulation of others for my success. Leadership is the stewardship of the lives you have the privilege of leading. Dramatically different view of those words from my experience.