The Man Who Seized the Throne at Phibro-Salomon (Fortune, 1984)
To his admirers, John H. Gutfreund of Phibro-Salomon Inc., the giant commodities-trading and securities company, is a Buddha-like figure, awesome and inspirational. To his detractors he is more a painted devil, devious and brutal. Outsiders can identify either group quickly. His fans pronounce his name “Good-friend,” the version he prefers. His enemies tend to say “Gootfriend,” spitting out the t. “It’s difficult to tell who’s right about him,” says one top Wall-Streeter who has close and “otherwise astute” contacts inside both camps. “There are so many people with so many axes to grind, positive and negative. But they all agree on one thing: at Phibro-Salomon. he’s king.”
That he is. The coronation, moreover, announced after a board meeting last August, still is being hailed as the coup of coups. Above all else, observers marvel at the speed with which Gutfreund, 55, managed the ouster of David Tendler, 46, his onetime boss. It has been a scant three years since Tendler, who reigned over Phibro’s world-wide commodities-trading empire, instigated the merger with Salomon Brothers, the securities firm that Gutfreund headed.
“I didn’t set out to be the No. 1,” Gutfreund insists. “It somehow became my responsibility.” But having recognized that, he admits he made a determined bid for the job this past summer. Making his play put Gutfreund “at risk,” he says. “I stuck my neck out. If I’d lost—well, that would have been the choice of the board and I would have moved on.”
If he had, it would have been his first career change ever. Apart from a two-year stint in the Army—he was a private first class in the military police in Korea—he has never worked anyplace but Salomon Brothers. He was hired fresh from the Army in 1953 by William R. “Billy” Salomon, a member of the firm’s founding family, as a $45-a-week trainee in the municipal bond department. Salomon was a friend and golfing partner of Gutfreund’s father, Manuel, who owned a New York trucking company and wholesale meat business. Raised in Scarsdale, an affluent New York suburb, young Gutfreund went to the local high school, where he was a member of the literary, debating, dramatic, and glee clubs. He listed these activities on his college application along with his fondness for swimming, tennis, canoeing, and “hot jazz, classical music, and modern Negro poetry and theater.”
Despite all this, and service in the Boy Scouts, Gutfreund’s first choice, Harvard, turned him down. Instead he went to Oberlin (class of 1951), where he earned a bachelor’s degree in general literature and English, won a letter in soccer, and led the Mummers Guild, an acting group. (Harvard was to pay for rejecting Gutfreund. He has been one of Oberlin’s most generous benefactors, though his money has always been ear-marked for what he once described as “pragmatic enrichment… to bring writers, artists, and performers to the campus. I’m not interested in buildings.”)
Gutfreund’s interests and education would seem to have qualified him for a career in academe, or perhaps on the stage, rather than the tough competitive world of investment banking. lie in fact considered teaching literature. Yet he took to trading as though born to it, distinguishing himself quickly on the municipal bond desk. After he was made a partner at age 34, he began to shove Salomon into new territories. The firm had been little more than a bond-trading house, and Gutfreund wanted to make a mark in the underwriting business. First he went after the scraps of the trade: the bond issues, usually of utilities, that were put up for competitive bidding. He was so successful that he then was able to elbow Salomon into the more prestigious and profitable business of underwriting issues for a negotiated fee. In doing so he propelled Salomon into the inner circles of investment banking. When Billy Salomon retired as managing partner in 1978, he tapped Gutfreund to head the firm.
Salomon had occasion to regret his choice four years later when Gutfreund led the move to sell the 71-year-old partnership to Phibro for $554 million. Only after the deal was done did Gutfreund break the news to the man who hired him. Salomon, deeply distressed to see his family’s firm gobbled up, received less than $10 million from the sale. Gutfreund’s share, including cash and Phibro securities, was valued at $32 million. Though Tendler and Gutfreund got the same title, co-chairman, and each continued to head his part of the business, Tendler was designated chief executive.
Not only did Gutfreund agree to play second fiddle, he had the poor judgment or poor luck to sell out at the worst possible time. Before the merger, Phibro’s profits dwarfed those of Salomon, but falling commodity prices changed that. Oil, the main source of cash for Phibro’s expansion, became less profitable as the world shortage turned to glut. Simultaneously Salomon’s pretax earnings, driven skyward by extraordinary trading volume during the bull market that began in August, zoomed to $362 million in 1982—almost triple what the commodities business earned that year.
In response to the sinking profits, Tendler began a gingerly attack on costs at Philipp Brothers, an old name for the commodities business that was restored with the merger. “Instead of hacking, he snipped,” says a former division head. “He understood the need to cut costs and trim the staff, but he just couldn’t do it. He built Phibro, he knew everybody, he just couldn’t face seeing them out in the street.” The gap in performance between the two components of the company continued to widen. Buoyed by Salomon’s strength, Gutfreund made his first move: in mid-1983 he began to lobby board members to be designated “co-chief executive.” By September he had the title.
Today Gutfreund describes the new arrangement as a “two-headed monster.” It certainly did nothing to boost morale at Philipp Brothers—”they thought they were about to be taken over by the folk down-town,” says Gutfreund. Meanwhile, the atmosphere was exuberant at Salomon, where possibly the very same idea was being entertained. Results for 1983 intensified such feelings. Philipp Brothers’ revenues, spurred by a slight recovery in commodity prices, topped $27 billion, a record, nine times Salomon’s $3 billion, another record. But the securities firm still earned far more, $415 million compared with $260 million.
The two-headed monster, meanwhile, spotlighted the differences in the management styles of the two men. Says one of the few people close to both: “David likes to work things through on a one-on-one basis. He’ll talk to person A, B, or C but never see them collectively. He likes to assemble bits and pieces, putting the fabric together that way. Unless A, B, and C talk to each other, nobody but David knows what’s going on. John likes to work in concert with groups of people and make the final decision after finding a consensus. And he’s much more patient. David’s more inclined to reach impulsive resolutions.”
Not surprisingly, a former Phibro trader sees it differently. “John Gutfreund (he pronounced it “Gootfriend”) carries a big whip, seeks power, and doesn’t care who he hurts. He’s into dictatorship; Dave’s into dialogue.” Even Gutfreund’s good friends admit that when he’s around, nobody else presumes to make a decision. Others go further, saying he has a cutting tongue and uses it to lash subordinates who speak out of turn in the presence of clients. Usually the rebuke is couched in humor and the client doesn’t notice, says an executive at another investment bank who has witnessed several such instances. The subordinate sees through the “joke,” though, and perhaps with a sudden pallor stops talking.
One friend talks of Gutfreund’s “supreme self-confidence,” and another, Morgan Stanley managing director Fred Whittemore, cites an example. One day several investment bankers held an important meeting with a prospective client whose business they hoped to share. At one point, one of the bankers who was being pressed for a decision resorted to what Whittemore calls “the old Wall Street trick,” often used to gain thinking time. “He announced, ‘I must go and consult my partners,’ and left the room. When he returned he asked John: ‘Do you want to consult your partners?’ John said ‘yes,’ but he stayed in his chair and closed his eyes. Then he said: ‘She usually agrees with me. We’ll do the deal.'”
Inevitably such a man would not relish sharing power with Tendler. And by early this year it was becoming increasingly apparent to the board that the parent company was rudderless. With six of the 20-member board from Salomon and seven from Philipp Brothers, the outside directors held the power. Speculation continues on how Gutfreund played his hand with them, particularly about how he managed to win over South Africa’s gold-and-diamond Oppenheimer family. The family controls more than 20% of Phibro-Salomon stock through a Bermuda holding company, Minerals and Resources Co. (Minorco). Minorco’s representative on the Phibro-Salomon board was Henry R. Slack, the American-born son-in-law of the family patriarch, Harry Oppen-heimer. Slack said recently that Phibro-Salomon “was not being properly run.” In Slack’s view, “It was both John and David’s fault.” Slack insists that Minorco is a “passive” investor. And Gutfreund is equally insistent: “very, very passive—more like an institutional investor.” Both men deny that Gutfreund politicked, let alone connived, for Oppenheimer backing. “When difficulties arose, John spoke to all the directors, and I am only one of them,” says Slack. “I would rather not talk about individual Phibro-Salomon managers. I will say that John is a friend. He’s intellectual, frank, and tries to do things with the widest consensus.”
Last May, Tendler made a fatal move. “An abortion,” says one director. “The catalyst of all that followed,” says another. In any event, the company announced that a group headed by Tendler might buy all of the commodity business with the exception of oil and other energy-related operations. Then, without explanation, came a second announcement that the proposed deal was dead.
At this point Gutfreund offered his neck. The board, however, had little urge to swing the ax. “It was obvious we needed one person with the single power of decision, otherwise there’d be chaos,” says director William E. May, retired chief executive of American Can. But the board, May says, “didn’t want to rush into the wrong decision; we’d done that once”—an allusion to what he calls a “two-headed cow.” So an ad hoc committee of four outside directors was formed to examine all the options. In addition to May, the group included Robert Z. Zeller, a retired partner of the investment banking firm of F. Eberstadt & Co.; Hank Greenberg, chairman of the insurance giant American International Group; and Henry Slack.
On August 6 it was all over. In what one board member describes as a “mumbled vote with no nays,” the directors agreed to flip-flop the original settlement of power. Tendler was demoted to running Philipp Brothers and nothing else—and would be reporting to Gutfreund, the sole chief executive of Phibro-Salomon. A few weeks later Tendler invited Gutfreund to his office. There, in a session that lasted “just a few minutes,” Gutfreund says, “David said that he thought it would be best for the company if he resigned. It wasn’t acrimonious, and there was very little dramatics.” Did he try to talk Tend ler out of the decision? “No.” (Tendler declined to be interviewed by Fortune.)
Gutfreund says he now is “going to try to find the best people and encourage them to carry the load.” Obviously, the heaviest load is Philipp Brothers, where pretax profits in the first nine months of this year declined an estimated 25%. Gutfreund has appointed Englishman Alan Flacks, once a top Philipp Brothers executive in Europe, to head up the business, plucking him out of early retirement in Monaco. So far Gutfreund has gone along with Flacks’s reorganization and cost cutting. Remembered as a genial figure, Flacks has become a symbol of dread, particularly in Europe. A team of New York-based company executives recently visited London and other cities, such as Zug, Switzerland, where Philipp Brothers has offices, eyeing each operation. “The grim reapers,” said one trader in London. “You take a good look at your jacket before you put it back on. There might be a knife in it.”
In fact, Gutfreund recently cautioned Flacks “not to be too radical.” Explains Gutfreund: “I made a casual comment that we ought to be certain that those people who unfortunately have been viewed as supernumeraries are the right ones to view that way.” Meanwhile, says a Philipp Brothers insider, “traders just sit around waiting to see if they’ll be the next to go.”
Gutfreund is frank about his near total ignorance of commodities. “I’m a foreigner in that culture.” So he plans to do a lot of listening. “I’d like to help them help themselves make this business profitable in as prudent a fashion as they can.” Conceivably, the bankers and the traders will be closer physically at some point, though that too will take time, he says. Right now, “I certainly won’t discuss synergy or moving them together cheek by jowl. That just isn’t the short-term plan. Any long-term plan will have to come after I understand more.”
The self-education is being squeezed into a workday that often runs 14 hours and begins punctually at 7:10 A.M. Gutfreund’s practice is to breakfast in Salomon’s partners dining room on a soft-boiled egg and toast, and to read what he can of the newspapers: “I don’t have the luxury of reading the obituaries and entertainment sections, or the sports section—which I always used to read first. Now I read the headlines and then go to the financial pages. If I have time,” he grins, “I go into the john at the end of the day to get the other things read.”
By 7:30 A.M., he is usually at his desk at one end of Salomon’s famous “Room,” a vast two-story space at 1 New York Plaza. But often, he will walk around the floor, cigar in hand, talking business or nonbusiness with the 200 or so traders. Says one insider: “Those walks mean a lot—to everybody. John finds out everything that’s going on. People on the floor know that and are encouraged to do their best.”
Behind Gutfreund’s desk is what might be described as his ceremonial office, modest in terms of space but at least enclosed and well furnished with antiques: Chinese chairs, a revolving English library table, a brass telescope aimed over New York Harbor. All of this looks much the same as it did in Billy Salomon’s time. But there are some new touches, among them a Japanese screen—selected by his wife, he says. “She collects things, I don’t.”
The words came as a surprise. A condition for the interview was that Fortune ask no questions about his second wife, Susan, 38, a former stewardess for Pan American. Gutfreund is extraordinarily sensitive about her, perhaps because of her highly publicized social life, which he shares. Lavish dinner parties, charity balls, and a variety of brouhahas with neighbors, one involving her plan to haul a Christmas tree up the outside of their apartment building, have proved meaty copy for New York tabloids and glossy magazines. (Their Maltese dog, Willie Nelson, has so far escaped press notoriety.) Susan Gutfreund’s enthusiastic bidding at high-ticket auctions has netted her special attention—and also many treasures.
“Pretty things,” says Gutfreund. “I learn by looking. Put it this way. I love the movies, even though I only get to go once a month. The last I saw was Amadeus, which I urge on you. But what has happened in the last few years is that I now notice the scenery, where I only followed the plot before, and that’s because of my wife. In Amadeus I noticed the sconces on the wall. She’s enriched my life.”
Other enrichment is ingrained. He loves music, though he occasionally escapes to his Jaguar to listen to Mozart tapes while his wife plays her favorite arias by Placido Domingo, and their houseman his Julio Iglesias, He still finds time to read: currently he’s half-way through William F. Kennedy’s Albany trilogy. He also gives away almost 20% of his pay, he says—a considerable sum, since he earned more than $2 million last year. Some of that cash goes to politicians—most often to Democrats and most recently to Mondale for an election that left him depressed. “All this selfishness scares me,” he says. Gutfreund predicts serious problems during Reagan’s second term, particularly in the Third World. “You can’t expect the have-nots to accept an American monarchy,” he says.
On Wall Street such opinions are as rare as electoral votes for Mondale. But it just may be that Gutfreund secretly delights in thumbing his nose at icons. His successes at Salomon, after all, have stemmed from a taste for bettering blue-blooded “betters,” often leaving them hung by their own old-school ties. Some even say that, despite his protective stance, he’s actually orchestrated his wife’s violations of the Social Register’s pecking order. And for all his intellectual depths, which even foes concede, he is, in street-talk terms, a scrapper who knows that even victors can end up with the black eye. “You can’t expect to have your hair stick up,” he cheerfully observes, “without somebody pulling it.”
Research Associate: Lynn Fleary
This article was originally published in the December 24, 1984 issue of Fortune.