KEN CHENAULT: THE RISE OF A STAR
Ken Chenault helped bring AmEx back from the brink. Now, he may be on the brink of even bigger things
At Bowdoin College in the early 1970s, Ken Chenault spent endless hours at the Afro-American Center debating the great issues of the era with his classmates. That his peers often chose Chenault to represent them in negotiations with school administrators had everything to do with his character and abilities and little to do with his views. Unlike most other "Afro-Am" activists, Chenault argued that the cause was best served in the long run by rising to power within the Establishment instead of assailing it from without. "We all thought he'd rise to high position on the inside," says George Khaldun, Chenault's roommate. "The joke was that when we all had to go to jail for our radicalism, at least we knew Ken would be there to bail us out."
As it happened, no one needed bailing out, but Kenneth Irvine Chenault has met his classmates' lofty expectations and then some. Today, he is president and chief operating officer of American Express Co., a $19 billion pillar of corporate respectability and possessor of one of the world's premier consumer brands. Chenault, 47, has held American Express' second-highest executive post since February, 1997, and also sits on its board of directors. Early this year, his authority was enlarged to include the only two operating divisions not already reporting to him. He moved even higher into the corporate stratosphere on Oct. 27, when IBM elected him to its board.
An elegant, quietly charismatic man of even temper and unrelenting drive, Chenault tends to inspire his admirers to extravagant praise. "Ken radiates such a depth of belief that people would do anything for him," says Rochelle Lazarus, chairman and CEO of Ogilvy & Mather Worldwide Inc., AmEx' lead advertising agency. "He is a true leader." Adds Amy DiGeso, a former AmEx executive who is chief executive of Mary Kay Inc.: "I can say unequivocally that I admire Ken more than anyone else I've ever worked with. I think he will be our generation's Jack Welch."
Still an up-and-comer in the corporate world, Chenault is an established star in what his friend Richard D. Parsons, president of Time Warner Inc., calls "the circle of African American professionals who have achieved." Denzel Washington was dining in a Manhattan restaurant recently when he spied Chenault across the room. The actor asked the proprietor to introduce him and followed her to Chenault's table. "My mouth was hanging open, but it seemed like Denzel knew all about Ken," recalls Geoffrey Canada, a longtime friend (and Bowdoin classmate), who was sitting with Chenault. Says basketball legend Julius Erving, who has known Chenault since boyhood: "He is a man of destiny--and a really good person besides."
Chenault worked his way up through the huge card and travel unit known as Travel Related Services Co., which generates two-thirds of AmEx' revenues and most of its profit, too. He was instrumental in not only reviving but reinventing TRS, which nearly collapsed in the early 1990s under the weight of its own hidebound complacency. "It would be hyperbole to say that we were in danger of going out of business, but I did fear that we were running out of time to turn things around," says Chenault. AmEx' stock, which scraped bottom at 17 in 1991, hit a high of 118 earlier this year and now trades at about 100.
Harvey Golub, whose 1993 appointment as AmEx chairman and chief executive was the key event in the company's comeback, has rewarded Chenault with a series of promotions and pay hikes. In elevating him to president and the newly created position of chief operating officer in February, 1997, Golub dubbed Chenault "the primary internal candidate to succeed me when the time comes." Golub, 58 at the time, hastened to add that he was not planning to retire early. He still isn't. For his part, Chenault declines to speculate on his prospects of making CEO at AmEx, or anywhere else, insisting that he is wholly focused on the job at hand--and a demanding job it is.ROOM FOR IMPROVEMENT. AmEx has three overriding financial goals: to boost earnings per share by 12% to 15% annually, to maintain a return on equity of 20%, and to increase revenues by at least 8% a year. The first two objectives have been met handily, but the team of Golub and Chenault has proven far more adept at creating cost efficiencies than at spurring revenue growth. For the first three quarters of 1998, AmEx posted a revenue gain of 7.5%, pulling its three-year average up to 6.4%. "The company has come a long way, but our performance has been mixed," Chenault concedes. "We need to improve it dramatically."
Golub's predecessor, James D. Robinson III, spent the 1980s diversifying AmEx through a series of bold but disruptive acquisitions of other financial-services firms. With a big assist from Chenault, Golub took AmEx back to basics, jettisoning many of the acquired assets and thoroughly restructuring those that remained. But now that AmEx has been restored to solid profitability, Golub and Chenault face the same question that sent Robinson on his shopping spree: Can AmEx develop the heft and global reach it needs to remain self-sufficient, or will it have to seek a merger partner?
Golub says he promoted Chenault to president because he found this challenge too daunting to tackle alone. "I could not get done all the things I needed to do," he says. "I needed help." He says he took the added step of identifying Chenault as his successor to buttress the new president's authority. In fact, it was his hope that Chenault would be seen less as his subordinate and more as a collaborator and alter ego: "What I sought was a horizontal relationship with Ken that would enable him to do more and more of what I was doing."
Golub's hope has been realized. Both he and Chenault say they have built an unusually symbiotic partnership. "If Ken and I went separately to 10 different meetings at which a decision was needed, my guess is that 9 times out of 10 he and I make the same decision, and the 10th would involve just a nuance of difference," Golub says.
The effectiveness of the Golub-Chenault combo is surprising only in that AmEx' CEO has never been considered an easy man to work with. A cerebral sort who spent nearly 15 years as a McKinsey & Co. consultant before joining AmEx, Golub takes a blunt, uncompromisingly analytical approach to business that tends to inspire respect and fear in roughly equal measure. He made his mark running AmEx' Minneapolis-based money-management arm, acquired in 1984 and now known as American Express Financial Advisors. His ascent to chairman and CEO of the parent company was followed by a sizable exodus of senior executives, especially from TRS.
A former management consultant himself, Chenault is said to be as hard-driving and pragmatic as his boss. Unlike Golub, though, he has always been able to engage the emotions of his colleagues as well as their intellects. "Harvey is a brilliant man, but Ken has the hearts and minds of the people at the TRS company," says Thomas O. Ryder, a longtime AmEx exec who recently became CEO of Reader's Digest Assn.OPEN DOOR. An extensive survey of current and former colleagues suggests that the Chenault personality is mercifully free of the rough edges that usually accompany vaulting ambition. Not one could recall him losing his temper or even raising his voice. He makes time to chitchat with secretaries when he telephones their bosses and has taken it upon himself to mentor dozens upon dozens of promising AmEx managers. A methodical, inclusive decision-maker, he leaves his door open to subordinates and encourages them to speak their minds. "With Ken, there is no game-playing, no politics whatsoever," says Norma Arnold, a 23-year AmEx vet who joined Prudential Insurance Co. last year.
It must be said that Chenault has been conspicuous at AmEx not only for his accomplishments but for the color of his skin. Like many large corporations, AmEx has made a belated effort to make its workforce more racially diverse. Minorities now make up 17% of the company's managers--a figure that was much lower when Chenault began his rise through the ranks. While Chenault supports AmEx' remedial campaign, he is loath to be seen as its product, friends say. "Ken wants one day to be known as the best CEO, not the best African American CEO," says John Utendahl, founder and CEO of Utendahl Capital Partners, Wall Street's largest black-owned investment bank.
In fact, Chenault's career does not give off the slightest whiff of racial preference. He entered AmEx with sterling credentials and, by all accounts, rose on the strength of talent and hard work. The real issue is the opposite one: To what extent was his rise made more arduous by race? This is a question given added meaning by AmEx' identity as an icon of upper-class affluence. In America, membership does indeed have its privileges, and they have never been evenly distributed between black and white.
The question of how race has factored into his corporate career is not one Chenault cares to address. But even some of his closest chums wonder to what extent his extraordinary self-composure is a product of bias-hardened stoicism. "There has to be struggle within Ken--he's only human--but I have never seen it," says Khaldun, who has maintained close contact with Chenault ever since college. "Even in our most vicious debates at school, he never lost it. It's just unreal. I don't know where he gets it."
Like father, like son. Ken revered his father, Dr. Hortenius Chenault, who died in 1990 at age 80. Not long after his father's death, Ken told Newsday that he was the most determined person he had ever known. "He overcame every possible type of obstacle," he said."USEFUL BALANCE." The son of a butler and a maidservant, Hortenius Chenault grew up in a small, mostly white town in Ohio and graduated from Morehouse College with honors. In 1939, he earned a degree in dentistry from Howard University and passed the New York state dental licensing exam with the highest score recorded to date. During World War II, Chenault enlisted in the Army, but segregation blocked his path into the multinational Allied Dental Corps. Undaunted, he befriended a group of foreign officers and entered the corps through an international arm.
Chenault married an African-American dental hygienist, Anne N. Quick, who hailed from an affluent and accomplished South Carolina family that had founded a cargo-shipping business in the early 1900s. In 1947, Hortenius and Anne Chenault settled in Hempstead, N.Y., where they raised four children. Born in 1951, Ken was the second of three brothers and a sister.
Ken's boyhood coincided with the peak of civil rights activism on Long Island, and the movement was a frequent topic of conversation at the dinner table. "My father's basic view was that you really needed to concentrate on the things you can control," Ken recalls, "and what you can control is your own performance." Unimpressed with the education afforded blacks in Hempstead's nominally integrated public schools, the Chenaults sent their kids to a small private school, the Waldorf School of Garden City, N.Y. "It created a useful balance for me," Chenault says. "In Hempstead, my environment was predominantly black, while the school was predominantly white."
Chenault attended Waldorf from kindergarten through 12th grade. "As early as middle school, real qualities of leadership became obvious in Ken," recalls George Rose, one of his teachers. "But at the same time, there was a certain quiet within him that won everyone's respect." Chenault was elected class president in each of his last four years, and as a senior captained the basketball, soccer, and track teams.FAST TRACK. After a year at Springfield College, Chenault transferred to Bowdoin College in Brunswick, Me., at the urging of a Waldorf teacher who had gone there. It was 1970, and America's college campuses were seething with protest. Chenault added his voice to demands that Bowdoin recruit more black students and professors but took issue with the militant black nationalism of his fellow Afro-Am activists. "I never saw Ken falter in the belief that he would get the chance to show his skill and scholarship to the world, which was aggravating, I admit," says Canada, now the president and CEO of Rheedlen Centers for Children, which fights truancy among Manhattan's minority schoolchildren.
After graduating magna cum laude with honors in history, Chenault enrolled at Harvard Law School. He got his law degree in 1976 and landed a job at the tony Wall Street firm of Rogers & Wells. Three years later, he moved back to Boston to join some of his Harvard classmates at management consultancy Bain & Co. "I wasn't bored or disappointed by law," recalls Chenault. "I wanted to try something new: business."
At 28, Chenault had found his metier. At Bain, he quickly was promoted to manager and was put on a fast track to partnership, though co-founder Ralph R. Willard doubted that he would be able to hang on to Chenault for long. "Ken had CEO written all over him," Willard says.
In 1981, Chenault accepted a job offer from American Express. At the time, TRS was headed by Louis V. Gerstner Jr., now chairman and CEO of IBM. Gerstner had joined AmEx a few years earlier from McKinsey & Co. and was looking for four or five young hotshots capable of rising to the top while acting as "change agents."
Chenault started in the strategic planning department. His first assignment involved TRS's merchandise-services division, which sold jewelry, stereo equipment, and a wide range of other gear to cardholders by direct mail. Run by a former R.H. Macy & Co. buyer named Robert Myers, "merch services" was a poorly organized, foundering stepchild of the card business. However, its potential intrigued Chenault, who, to Gerstner's dismay, joined the unit as vice-president for marketing when his obligatory two-year stint in planning ended. "It was a rather high-risk opportunity for him in that I had guaranteed him a line job in the heart of the business," recalls Gerstner.
A few months later, Gerstner stunned Chenault and his new colleagues by declaring during a budget review that he did not think merch services had a future at AmEx. Myers was present, but it was Chenault who broke the uneasy silence, asking Gerstner to reserve final judgment for 45 days. Led by Chenault, merch services put together a strategic plan and won a stay of execution. Myers was fired soon afterward, and Chenault replaced him. Says DiGeso, the unit's personnel director: "Not only did Ken not scheme against Bob, he did everything he could to help him." Once he was in charge, though, Chenault sacked a half-dozen managers and made wholesale revisions in product line and sales methods.
In the two years that Chenault ran merch services, its revenues soared from about $150 million to $500 million a year. If anything, he was too successful, for many mail-order merchants began threatening to stop accepting AmEx cards. To his dismay, Chenault then had to dismantle much of what he had built to appease the custodians of AmEx' card business. After unsuccessfully proposing that AmEx spin off the merch-services division as a stand-alone business, Chenault recalls that he was issued new marching orders by Gerstner: "Lou said, `You're going into cards."'
From 1986 to 1989, Chenault was promoted three times, managing in succession the gold card/platinum division, the green card division, and the entire consumer card group. Even so, these were frustrating years for Chenault, whose proposals for new marketing initiatives generally fell on deaf ears. AmEx was an old-line company (founded in 1850) that had ruled its lucrative niches in traveler's checks and travel-and-entertainment charge cards for so long that its top management saw no need to innovate. "It was hard even to engage people in a discussion of who our competitors were," Chenault recalls. "The attitude was: `We really don't have a competitor. We are unique."'
Chenault belonged to a rising generation of AmEx managers who saw MasterCard International and especially Visa USA as a dire competitive threat. By the late 1980s, the bank-card associations were flooding the market with a myriad of low-fee cards offering frequent-flier miles, shoppers' discounts, and other benefits. Not only was American Express finding it harder to sign up new accounts, but its existing members were using their cards less and less.HIGH GROUND. Within AmEx, a great debate raged over the issue of how to restore growth to the card business. Chenault and his pro-change peers made some headway as AmEx introduced a revolving credit card, Optima, and began broadening its merchant base by adding mass-market retailers. But they were opposed by higher-ranking traditionalists who argued that AmEx should retreat to its T&E niche and hunker down. While Chenault was steadfast in his advocacy, he made his case judiciously. AmEx was not a place where even someone at his level could vehemently dissent without risking retaliation from above. "Ken clearly was among the group pushing for change, but he wasn't the most radical of us," says Roger H. Ballou, a former colleague who is now CEO of Global Vacation Group.
In mid-1989, Gerstner abruptly resigned to head RJR Nabisco Inc. and was replaced at TRS's helm by three co-CEOs--a stopgap measure that only exacerbated the unit's woes. Amid the disorder, Chenault captured the conceptual high ground by sponsoring a series of studies that represented the first real attempt to gauge TRS's performance by such external measures as market share of total plastic spending. To Chenault, anyway, the evidence was clear: The AmEx brand was fading fast.
In 1991, a gradual decline in TRS's profits accelerated into a rout as AmEx had to write off $265 million in bad loans made to Optima cardholders. Worse, merchants' long-smoldering resentment at AmEx' high-handed treatment and steep transaction fees flamed into open revolt in Boston, where a group of 100 restaurants captured front-page attention by threatening to boycott AmEx. Soon, angry merchants all across the country were hurling ultimatums at AmEx, which faced the corporate equivalent of a run on the bank.
Robinson summoned Golub from Minneapolis and made him president of AmEx and CEO of TRS. Golub emerged from a hurried round of meetings at headquarters with new respect for Chenault. "It was his courage I noticed first," Golub says. "He was the only one at TRS who was standing up and saying, `Here is the problem."' Chenault was no less impressed, finding Golub's incisiveness liberating after his years of trying to "penetrate the wall of arrogance" within TRS. "Harvey is a fact-based person," he says. "With him, I could sit down and give it to him straight."
Golub added to Chenault's duties by putting him over the Establishment Services Div., which managed TRS's fraying merchant relationships and was far and away AmEx' largest source of revenue and operating income. At the time, the typical merchant was paying back to AmEx 3.5 cents of every dollar charged on one of its cards, compared with 2 cents for Visa and MasterCard. AmEx' premium 3.5% "discount rate" was a product of the upscale image it had cultivated and the fact that its typical member outspent his or her bank-card counterpart by a margin of nearly 3 to 1.GAME MASTER. Chenault made Tom Ryder the new general manager of Establishment Services. Ryder immediately imposed a moratorium on the signing of new accounts (eliminating what had been a key bonus criterion) and insisted that salespeople bend over backward to cater to the existing clientele. A group of 16 sales managers went to Chenault with an ultimatum: Lose Ryder or you will lose us. Chenault explained the need for fundamental change and then delivered his own ultimatum: Get with the program or find a new job. All but a few of the 16 remain at AmEx today.
To placate the angriest and most important merchants, Ryder often turned to Chenault. He went to great lengths to smooth ruffled feathers, once flying from New York to San Francisco on a few hours' notice to take a client to dinner. Still, he made only nominal cuts in discount rates. His resolve was tested by many of AmEx' biggest customers, including United Airlines Inc. CEO Stephen M. Wolf, who threatened to stop accepting AmEx cards unless United's discount rate was slashed, according to Adam Aaron, then United's marketing chief. "Ken told him, `It will be interesting to watch you try to survive without American Express,"' Aaron says. "It was a game of chicken, and United backed down."
At a TRS management meeting in March, 1992, Golub warned that if the division did not cut its annual operating costs by $1 billion over the next three years, AmEx "would be out of business." Golub says he arrived at $1 billion "arbitrarily" but fostered the impression that it was the product of painstaking analysis. "The figure was roughly what I thought it would take for us to match Visa's discount rate if we had to," Golub says. "But I had no idea how we were going to do that. None."
The burden of identifying and implementing cuts fell mainly to Chenault as the senior card executive. Each of TRS's four main lines--green card, gold card, platinum card, and traveler's checks--had its own sales, marketing, and processing staffs. In mid-1992, Chenault started the daunting task of collapsing these four principalities into a single, leanly staffed unit. TRS promptly took a $342 million restructuring charge and eliminated 4,800 jobs. This amounted to fully 9% of AmEx' workforce, but the pain was just beginning.NEW FOCUS. In early 1993, AmEx' board ousted Jim Robinson and moved Golub up to chairman and CEO. Promoted to president of TRS, Chenault put the card business into high gear at last. Under his direction, the type of cards AmEx issues soared from 4 to 60 in a few years' time. The vast majority of AmEx' new offerings were "co-branded" cards bearing not only the familiar blue box but the logos of such joint issuers as Delta Air Lines, Peugeot Motors, and the New York Knicks. At Establishment Services, meanwhile, the focus shifted from damage control to expansion. The number of new merchant accounts doubled to 60,000 in 1993 from 30,000 the previous year and is now running above 400,000 a year. Although AmEx' discount rate has fallen to about 2.7%, it remains considerably higher than Visa's or MasterCard's.
After Chenault's 1995 promotion to vice-chairman of American Express, the restructuring drive that he led broadened beyond TRS to encompass every part of the company and deepened to include every managerial system and work process. At its peak, 300 of AmEx' most talented managers were assigned to the project, and Chenault frequently had to exert his authority to overcome grassroots opposition to particular reforms. In the end, not $1 billion but $3 billion in cost was eliminated, along with 15,800 jobs. "Ken took the re-engineering bit in his teeth and really made it happen," says Philip J. Riese, who succeeded Chenault as president of the consumer-card group. "And yet people really don't recognize reducing headcount as a Ken-like activity."
Partly this is because of the way he handled the layoffs. Chenault personally visited each of TRS's nine operating centers and explained at length why cutbacks had to be made. Employees slated to lose their jobs were notified as soon as the decision was made--resulting in advance notice of as much as 18 months. What is more, AmEx continued to grow on balance as the $3 billion in savings was wholly reinvested within the company. In fact, total employment rose to 73,620 in 1997 from 61,108 in 1991.
Although AmEx is again a formidable competitor in the credit-card wars, its brand position remains fundamentally tenuous. As measured by the value of purchases made, Visa commands 53.9% of the worldwide card market, vs. 49.2% in 1994, according to The Nilson Report, a credit-card industry newsletter. Visa's gains have come at the expense of MasterCard, which now has 28.3% of the market. AmEx ranks third, holding steady at 13.7%.
AmEx could add handsomely to its share by deluging the market with cut-rate cards. But rather than sacrifice AmEx' profit margins on the altar of transaction volume, Golub and Chenault are doggedly implementing a strategy they call "opening the network." Essentially, it is an attempt to entice the very banks that are members of the Visa and MasterCard networks to issue cards in partnership with AmEx, and it may be the company's last best hope to substantially narrow the market-share gap.TIES THAT BIND. From a standing start two years ago, AmEx has struck up card-issuing alliances with 38 foreign partners, including such banking giants as Credit Suisse and National Westminster Bank. However, in the U.S. it has been thwarted by Visa and MasterCard bylaws that prohibit member institutions from participating in any other card networks. In October, the Justice Dept. filed an antitrust suit against Visa and MasterCard, alleging, among other things, that their exclusionary rules have unfairly stifled competition. Visa and MasterCard are contesting the allegations.
If the open network strategy fails to add handsomely to AmEx' revenues over the next few years, the company likely will seek a merger partner well before Golub turns 65 in 2004. In 1996, Golub instigated merger talks with Citicorp, the world's largest Visa and MasterCard issuer. Unwilling to pay the premium price that Golub sought, Citicorp merged with Travelers Group Inc. instead. How Chenault might fare in a future megamerger is anybody's guess. He is well aware of the fate of Travelers wunderkind James Dimon, who was considered a lock to run Citigroup until the very day he was let go in October.
Over the years, Chenault has been besieged with calls from executive recruiters representing one corporate giant or another. His commitment to AmEx will be tested again and again in the coming years, but it would take a breathtaking offer to break the ties that now bind Chenault to AmEx. "I have a psychic investment in its success," he says. Patience and persistence have been hallmarks of Chenault's career. That's not likely to change now that he is one step from the top of the mountain.By Anthony Bianco in New YorkReturn to top