The following report is a study prepared by Lens Inc., an investment management firm in which both authors of this book are Principals. This study shows how informed and involved shareholders may add value to their target companies.

July 1992. (Stock Price, 7/1/92 – $40.50).

Eastman Kodak first selected as a LENS “focus” company. Kodak was unnecessarily diversified into non value-adding businesses, with a record of long-term under-performance. Kodak’s problems included:

Debt. Kodak’s balance sheet has deteriorated seriously over the last ten years. As of late 1992, Kodak’s total debt stood at $10.3 billion, having doubled since 1988. The ratio of debt to total capital was nearly 60 percent.
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Unrelated diversification. The $5.1 billion acquisition of Sterling Drug in 1988 has never produced the anticipated returns. Analysts speculated that the money-losing copier division could also be sold.
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Long-term under-performance in its core businesses. According to Business Week, “The company angered Wall Street by assuming that the slowdown in its core photographic market in the 1980s was only temporary. Its cost structure was predicated on a return to growth that never materialized.” Contrary to analysts’ predictions, Kodak assumed growth in its core photo business of 6–8 percent. Actual growth was nearer 2–4 percent.
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Poor long-term strategy. Since 1982 Eastman Kodak has undertaken four separate restructurings, including billions of dollars in write-offs. Yet (according a PaineWebber market analyst) the company has under-performed the S&P 500 Index by 200 percent since 1982. During the last decade sales growth has been at an annual rate of 6.7 percent, but earnings, which in former times were running around $3.00 per share, had dropped to virtually break even in 1991. Over the last four years Kodak has spent $5.2 billion on R&D, and has made $8.2 billion of capital expenditures. Long-term debt increased $5.2 billion, total debt $6.1 billion, and shareholders’ equity rose by less than $100 million. Management has not been able to convert massive expenditures into additional value for shareholders, despite the several restructurings.

August 1992 (Stock Price, 8/3/92 – $43.37)

LENS Principal, Robert A.G. Monks, wrote to Kodak’s CEO, Kay R. Whitmore, identifying Kodak as a company where the involvement of credible shareholders could add value. Monks wrote:

In Eastman Kodak’s 1991 Annual Report you [Mr. Whitmore] describe the company’s underlying precepts: “We will not participate in a market or enter into a business simply because we possess the techincal competence to do so. Our goal is the number one or number two positions in markets where rates of return consistently exceed the cost of capital.” It is not apparent that Eastman Kodak’s position in chemicals, drugs, or copying is at the top of their respective industries; nor is there indication of progress towards that goal in the performance of recent years; it is clear however that the rates of return achieved are not among the leaders. . . . Kodak still has the dominant position in photographic markets throughout the world, but competition is growing. Is it better able to confront its formidable competitors in that field as a diversified conglomerate or through the focused creation of a competitive corporate culture?

November 1992: (Stock Price, 11/2/92 – $41.37)

Three LENS Principals met with CEO Kay Whitmore and other senior managers to discuss Kodak’s competitive position. Both sides agreed that the meeting was frank and constructive. In a letter following the meeting, LENS outlined its specific concerns with the company’s strategic direction:

The financial results of Eastman Kodak in recent years could objectively indicate to an outsider that management has:

followed a policy of building an empire measured only by gross size;

thrown larger and larger amounts of money at Kodak’s core problem – competition for market share – seemingly without a strategy;

invested heavily in diversification in an attempt to sustain corporate growth and restore shrinking margins; and,

allowed the development of a vast bureaucracy;

Kodak’s diversification efforts have been generally unsuccessful to date. Cost of acquisitions, and of the huge research programs and capital budgets, have been financed by a nearly five-fold increase in debt, while shareholders’ equity has remained flat. Growth has remained slow, and margins have fallen drastically, Management has taken six special write-offs, totaling $4.7 billion, in less than eight years, with little or no improvement in margins.

The letter was accompanied by a detailed financial plan (available on request) outlining a six-point plan for improved shareholder value:

increasing the realization on assets and sales,

resuming earnings growth,

shifting the usage of cash flow to reduce debt and allow dividend increases as soon as prudently possible,

restoring the company’s financial strength by reducing debt,

focusing the attention and energies of the board and the management on Kodak’s core business, and

distributing unrelated assets to Kodak shareholders.

The plan also recommended some “governance reforms” to create a constructive relationship between the managers and owners of Eastman Kodak. The recommendations were to:

introduce confidential voting;

end the system of staggered board elections to provide for the annual election of all directors;

improve the ratio of insiders to outsiders to provide for a genuinely independent board; and

separate the positions of chairman and CEO.

Finally, the letter said that LENS would be filing a shareholder resolution at the Eastman Kodak 1993 Annual Meeting. The resolution proposed a by-law amendment to create an advisory committee of the company’s largest, long-term shareholders.

January 1993 (Stock Price, 12/31/92 – $40.50)

Kodak’s management took a series of steps that demonstrated a new commitment to the company’s owners. Business Week wrote: “Insiders say Kodak Chairman Kay R. Whitmore has concluded that only radical surgery can rescue the company . . . ‘Shareholders have been the most underserved of our constituents’ he confesses.” The new measures included:

The appointment of a new chief financial officer, Christopher J. Steffen Steffen came to Kodak in January 1993, having helped create successful turnarounds at Chrysler and Honeywell. Significantly, Kodak broke its traditional rule of promoting insiders, Steffen being the highest ranking outsider appointed since 1912. His recruitment was greeted enthusiastically – Kodak’s stock improved 17 percent in a matter of days. Business Week dubbed Steffen the “$2 billion man” for his contribution to the company’s market value.
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An overhaul of the core imaging business In a letter to Monks, Whitmore described the strategy as “an aggressive action plan . . . which is quite consistent with much of what we discussed when you visited with us last November here in Rochester.” The strategy was based on an admission that growth in Imaging would be a sluggish 2–4 percent, and that cash flow would have to be increased in other ways. To this end, Kodak announced it was cutting R&D spending, revamping overseas operations, and paring some 2,000 employees from its Rochester headquarters. These measures were expected to lower net costs by over $200 million a year. The plan received widespread approval: “It’s a belated recognition that Kodak is no longer growing its core business,” said Eugene Glazer of Dean Witter. “This is a business strategy that really fits with reality,” said PaineWebber’s Kimberly Retrievi.[i]
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A new compensation plan for senior executives The plan requires 40 top managers to buy stock in the company equal to one to four times their current salary. Whitmore personally pledged himself to achieving holdings of four times his current salary, or $3.8 million, within five years. The plan was applauded by investors across the board. “There’s nothing that gets manage-ment thinking like a shareholder than being a shareholder,” said LENS Principal Nell Minow.[ii]
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A new Corporate Directions Committee The committee will consist solely of outside directors, and has a straightforward charter: “to assess Kodak’s competitive position and develop plans to increase shareowner value.”
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A new long-term strategy. Two weeks after his appointment as CFO, Steffen said that he expected to have a business plan ready in about six months. He intends to cut the debt-capital ratio from its current 59 percent to around 30–40 percent, and he said he wouldn’t rule out asset sales to achieve that goal. The stock jumped a further $2.63 on the news.

The response of the investment community to Kodak’s measures was very positive. By the end of January 1993, the company’s stock had risen to $49.88.

February 1993 (Stock Price, 2/26/93 – $53.62)

As a result of the giant steps Kodak’s management took to gear the company to improved performance, coupled with the company’s genuine desire to address shareholder concerns, LENS agreed on February 26 to withdraw its shareholder proposal calling for a shareholder advisory committee.

Kodak was not long out of the news, however. On April 28, just eleven weeks after his arrival in Rochester, Chris Steffen resigned as Kodak’s CFO. Mr. Steffen found that his ideas were perceived as too “revolutionary” when others wanted a more “evolutionary” approach. When Steffen abruptly resigned (causing Kodak’s stock to lose a over $5 in a single day), Kodak shareholders questioned the company’s commitment to change.

During the two-week period between Steffen’s departure and the company’s annual meeting, investors demanded that Kodak explain why Steffen had resigned, and why they should trust incumbent management to lead the company to success. Ultimately, many institutional holders recognized that CEO Whitmore had not sought Steffen’s departure, and that his commitment to change had not weakened. At the annual meeting, Whitmore spoke to shareholders about the “constructive” and “helpful” role LENS and other investors had played over the previous year. He said, “It provides us an external point of view that we have to listen to with care.”

Ultimately, the independent directors at Kodak were not convinced that Mr. Whitmore would be able to fulfill the commitment made to shareholders to improve Kodak’s performance significantly. On August 6, 1993, the independent directors announced that Mr. Whitmore would step down upon the naming of a successor, and on October 27, 1993, they announced the appointment of Motorola CEO George Fisher as Kodak’s new CEO. On the day of the announcement, Kodak’s stock rose $4.87 to $63.62.

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[i] Joan E. Rigdon, “Kodak Expects Slow Growth in Core Business,” Wall Street Journal, Jan. 20, 1993, p. A4.

[ii] Marlene Givant Star, “Investors Give Nod to Kodak Stock Buy Rule,” Pensions and Investments, Jan. 25, 1993, p. 74.