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Ignoring a steady drizzle and his blue-gray suit, a trim, 40-year-old lawyer squats in a Chicago parking lot behind a big yellow school bus. He carefully folds a handkerchief in quarters and places it over the tailpipe. “Okay,” he shouts. “Gun it, Pete!” The engine roars. David Piech waits a minute, two. Then he pulls the fabric away, stands up, and plunges his nose into it. “No soot and virtually no smell,” he exults. “Here, you try.” Actually, the thing does smell. But the odor is faint, metallic, and the cloth is still snowy white. Gone are the stench and soot that diesel engines usually belch, blackening city air, choking asthmatics, stressing heart patients, maybe even precipitating deaths, and certainly sending environmentalists on the warpath with the cry, “Dump Dirty Diesels!” Piech is showing off this special school bus at one of the Environmental Protection Agency hearings being held around the United States on rules — set to be finalized in December and go into effect in 2006 — that would drastically reduce the sulfur content in diesel fuel. Having taken on the automobile industry, the EPA is now cracking down on trucks and buses. Piech and his colleagues at International Truck and Engine Corporation actually support the EPA’s effort. Without low-sulfur fuel, their new Green Diesel technology, which leaves the handkerchief so clean, won’t work. Drives for other “clean” alternatives, such as compressed natural gas, might succeed. And the impact on the $8.6 billion company that makes nothing but diesel trucks, buses, and engines could be devastating. So expect more of these “hankie tests” — the most obvious demonstration of the kind of hands-on lawyering embraced by general counsel Robert Boardman and his staff as they help fight for a company that has a history of turning disaster into opportunity. Once known as International Harvester (and more recently as Navistar International Transportation Corp.), the company was built on the famous McCormick reaper, the invention that, by mechanizing harvesting and throwing men off the farm, helped fuel the American industrial revolution. Twenty years ago International plummeted from the number five spot on the Fortune 500 to the brink of oblivion. It spent 16 years in fiscal purgatory. It emerged, finally, in 1996 — without the historic name and without the farm business — but stable and eventually profitable. “This was a company we wrote off 10 years ago,” says Joanna Shatney, an analyst at The Goldman Sachs Group, Inc., who covers the machinery industry, “but they have transformed it into an engine powerhouse and a viable truck company.” Redemption came in large part because International rethought and remade its corporate culture, shedding an old-fashioned “command and control” style for a participatory culture. One big step toward recovery was the liberation of the law department. After a decade of being babysat by outside general counsel, International hired Bob Boardman in 1990. Boardman, who cut his teeth at the troubled Johns Manville Corporation, helped extricate International from crushing pension and retiree benefits. He also became an evangelist for the corporate culture change. In that new environment, Boardman, now 53, keeps his staffers close to the action. And nowhere does their involvement in business strategy show more clearly than in their helping to give birth recently to the Green Diesel initiative. The Green Diesel team was pulled together early in 1999 and charged with finding a response to rising public concern over diesel emissions and the threat of governmental regulation. Federal regulators, who had first focused on carbon monoxide and passenger cars, had turned their attention to diesel fuel and the commercial vehicles that use them. These vehicles produce particulate pollution and high levels of nitrogen oxide (a key component of smog and acid rain). In the mid-1990s, however, public health and environmental groups began issuing reports that diesel exhaust particulates aggravate asthma, exacerbates heart and lung disease, and may trigger as many as 64,000 premature deaths every year. The U.S. Department of Health found that particulates are “reasonably anticipated to be [a] human carcinogen.” The EPA responded by pumping a torrent of new diesel rules through the regulatory pipeline. Advocates like the Natural Resources Defense Council urged a more drastic solution: that the diesel buses and trucks in urban areas be replaced with “cleaner” alternatives, such as compressed natural gas. Boardman volunteered to lead International’s SWAT team, which meets every week in a thirteenth-floor conference room overlooking Lake Michigan in International’s downtown Chicago headquarters. The team’s “foreman,” associate general counsel Michele Smith, runs the strategy sessions, supplying Tootsie Pops and the like to attendees, who typically include Piech; outside counsel Robert Sussman from the Washington, D.C., office of Los Angeles’s Latham & Watkins; vice president of health, safety, and productivity William Bunn (also a Johns Manville veteran); communications consultant Bruce Harrison; vice president of public affairs Brian Whalen; and Engine Engineering Group manager Warren Slodowske. In the spring of 1999, International’s lawyers brought to the meetings the grim news that California was thinking of banning diesel vehicles altogether. But the engineers’ reports were wonderful; recent tests were showing that International’s new technologies were eliminating more than 95 percent of the particulates. Hydrocarbons, the chemicals responsible for the noxious smell, were undetectable. In fact, this diesel technology produces 50 percent less particulates than compressed natural gas engines. The engineers had achieved this feat by redesigning the whole system; in the engine, fuel injection is electronically controlled so that fuel burns more completely; in place of a muffler, a filter traps particulates and fumes; and the fuel itself is low in sulfur. In a great “lightbulb moment,” says Patrick Charbonneau, vice president of engine engineering, the group came up with a plan: put the new technology into some demonstration buses and take them on the road. “Industries have had a tendency, anytime there’s an issue, to get defensive,” says John Horne, the company’s chief executive officer. Instead, the strategy sessions are more about seizing opportunities than controlling damage. The idea, he says, is to position International’s new technologies “as part of the solution” to air pollution. He says that the company decided a decade ago, when they came up with their “smokeless diesel,” that they were not out to defend old technologies but rather to devise feasible solutions for newly identified problems. The Green Diesel program is just one example of the enterprise and energy with which Boardman has infused his 22-lawyer department. International’s in-housers also are taking an aggressive new approach to intellectual property, for example. “To push our business units into managing their assets,” senior patent and trademark counsel D. Kelly Sullivan proposed the creation of patent management committees. He sold the idea to executives and is in the process of implementing it. “Now that’s empowerment,” says Sullivan, who is currently trying to convince executives to form a subsidiary for handling licensing income. Meanwhile, senior attorney Jeffrey Calfa developed an IP intranet site that simplifies the invention submission process for engineers. The effort has paid off; submissions were up 100 percent in 1998 and another 35 percent in 1999; and patent applications increased 100 percent in the past two years. There are no revenue figures available yet on these new patents. But the aggressive new approach does mean that International is going after infringers more and winning settlements. Such entrepreneurship is a far cry from the old law department’s isolated, hierarchical style. But then again, the revitalized International Truck and Engine Corporation is very different from the dying giant the company was not too long ago. By American standards, International is ancient. It began in 1831 with young Cyrus McCormick tinkering into the night in the blacksmith shop on his father’s Virginia farm. Just in time for harvest, McCormick completed the world’s first mechanical reaper. This spindly looking invention would remake the business of farming and reroute the course of American history. Mechanizing harvests freed a vast pool of labor for factory jobs, powering the nation’s industrial revolution. It also helped open the Great Plains to settlement because suddenly a single family could run a farm on its own. It’s a heady legacy for any company. Setting up shop in Chicago, McCormick applied his ingenuity to sales techniques and devised such innovations as the installment plan, written guarantees, and factory-trained repairmen. His business came to be called International Harvester, and by the early 1900s had grown into the world’s biggest and best-known maker of farm equipment. In the first half of the twentieth century, the company diversified horizontally — into engines, trucks, construction equipment, gas turbines, home appliances — and vertically — into supporting businesses such as coal and iron mining, steel manufacturing, shipping and railroading, refrigeration, and even twine making. IH opened dealerships in hundreds of farming communities across the nation, eventually running more retail outlets than Sears, Roebuck and Co. But the company’s storied past also was a burden. Its once-innovative business practices ossified into traditions. The many retail outlets, for example, were difficult to shed despite their costliness and ineffectiveness. More flexible competitors, such as Deere & Company, took sizable bites out of IH’s market share. In 1977 an outsider who happened to have a strong cost accounting background became IH’s chairman. He quickly realized that the company was out of control: bloated, inefficient, and booby-trapped with massively underfunded retirement and health benefits programs. The company also had an infamously bad relationship with its union workers — dating back 100 years. On May 3, 1886, Chicago police gunned down union workers who had been shut out of the McCormick Harvesting Machine Company for four months and were heckling scabs. The next day, a protest erupted into the bloody Haymarket Square riot. Although the plants eventually unionized, suspicion and antagonism festered. In 1979 the animosity boiled over again — into a crippling strike. At the time, it was the United Auto Workers’ longest walkout, and when it was over, six months later, the company’s rickety superstructure began to collapse. With little income generated during the strike, IH’s capital market ratings dropped below investment grade. Desperately trying to raise enough capital to keep operating, IH sold its non-core businesses, resolving to focus on trucks, engines, and farm equipment. But even that was too much to handle. In 1985 the company was forced to sell its very heart, the agricultural equipment division, along with the International Harvester name and the IH logo. It became Navistar International Transportation Corp., and focused on manufacturing trucks and engines. But the worst was far from over. With the 1990 recession aggravating its condition, IH bled close to $900 million during the next three years. All told, from 1980 to 1996, the company slogged through three grueling restructurings of its debt. It lost almost 90 percent of its 105,000 employees. As Navistar turned away from innovation toward mere survival, the company cut its patent and trademark group, letting ten lawyers go. The seemingly endless fiscal nightmare meant hiring freezes, pay cuts, more layoffs, terrible uncertainty, and deepening cynicism. “We were in survival mode for a lot of years,” says Sullivan. “It has taken us a long time as a company to recover from that.” Bob Boardman didn’t know the extent of Navistar’s continuing pain when he arrived in 1990. Then 42, Boardman was all too familiar with corporate crisis. As vice president and corporate secretary at building materials manufacturer Johns Manville, he’d sat in its Denver boardroom while beleaguered directors wrestled with massive asbestos-related liabilities and bankruptcy. Boardman says that he moved to Navistar with the idea of having “his own laboratory” to try out some ideas about running a law department. He thought lawyers should move closer to the business side and feel directly tied to the company’s success. He thought they should be proactive. “My whole philosophy is when you work for the same company, you have the same objectives,” he says. “If you’re working well together, the client shouldn’t be the sole determiner of how you add value.” As it happened, Boardman had an excellent opportunity to put his theories to the test. The company was in crisis. In fact, Boardman walked straight into a life-or-death showdown with the Pension Benefit Guaranty Corporation. Created in 1974 because retirees were being left high and dry by failing Rust Belt companies, the PBGC protects retirees’ benefits. For years, International Harvester had offered such generous health and retirement benefits (including free lifetime medical, dental, vision, and prescription plans) that employees nicknamed the company “Mother Harvester.” But as active staff shrank, health costs soared, and global competition ate into market share, such beneficence became insupportable. When Boardman arrived in 1990, the PBGC and the company had been at each other’s throats for almost a decade. The agency had sued International Harvester, claiming it was liable for employee pensions at Wisconsin Steel, a subsidiary that had gone bankrupt in 1981, four years after International had sold it. The PBGC called the sale a sham — made to evade pension liabilities — and therefore a violation of the Employee Retirement Income Security Act. It was the first time the agency had charged a company with liability for a former unit, and the case was meant as a warning to other companies: don’t dump your pensioners. For International, the stakes were equally high. At a time when it was losing millions every quarter, the agency was demanding it pay $139 million in penalties and interest. The parties grew increasingly hostile. Or, as associate general counsel and corporate secretary William Jones puts it: “There was no agreement even as to the day of the week.” Boardman set out to defuse the tension. He got a “time out” from the judge, opened the company books to the PBGC, and offered stock as part of a settlement. It worked. The feds agreed to a $65 million settlement, including the stock. Jones says it was, for him, a dramatic introduction to the power of relationship-building, “taking off the victim glasses,” and becoming accountable. He thinks it was also the beginning of what eventually become the company’s new participatory culture, to be dubbed “Climate for Performance.” But almost immediately after this crisis was averted, another liability threatened to crush the company. This time the monster was retiree health benefits. Although Navistar’s workforce had dropped from 115,000 employees to just 15,000, the company retained liability for its retirees’ benefits. By 1991, there were three retirees for every active worker — a burden virtually unmatched elsewhere in corporate America. To make matters worse, the Financial Accounting Standards Board had issued a new rule requiring employers to include on their balance sheets the accrued cost of nonpension postretirement benefits. (Before 1990, most companies like Navistar accounted for these costs on a pay-as-you-go basis.) Suddenly Navistar was faced with a staggering $2.6 billion charge in a fiscal year (1993) when its net losses would amount to $500 million. Navistar tried, but failed, to renegotiate the retiree health care benefits with the unions. Company brass considered, and ruled out, filing for bankruptcy. If Navistar simply went ahead and reduced benefits, it would have had to fight a multitude of suits, in many states, with many possible outcomes. Then Boardman stepped forward with an unusual strategy. The company filed a class action against its 40,000 retirees and their 50,000 dependents, claiming that Navistar had the right to reduce retirees’ benefits. The goal: to have all the benefits reduced in one stroke. For the plan to work, however, Boardman needed to build trust with the United Auto Workers, which had been named class representative. Once again he opened the books to his opponents; the union leaders and their investment bankers saw that Navistar couldn’t maintain benefits as originally structured. The suit settled. Retiree health benefits were reduced by $1.6 billion. A retiree health trust fund was established with one-third of Navistar’s outstanding stock. And the company finally dispersed the cloud that had overshadowed its efforts to regroup. While he was gaining outsiders’ trust, Boardman was doing the same at home among Navistar’s lawyers. One of his assignments from then�chief executive officer and chairman James Cotting was to “normalize” the law department’s operations. The two previous general counsel had been running the then-20-lawyer department by remote control. Although they kept offices at Navistar, both were outsiders, partners at Chicago’s Kirkland & Ellis, set up as overseers to reassure Navistar’s many creditors. According to long-term employees, the law department always had been traditional, hierarchical, and isolated. The staff that Boardman inherited was solid. The problem, in Boardman’s eyes, was one of attitude and self-definition. The lawyers were literally walled off from their clients, working behind two sets of heavy wood doors on the twenty-fourth floor of Chicago’s Equitable Building, then the company’s headquarters. Like many in-house lawyers of their time, they focused almost exclusively on minimizing risks and were seen by the clients as naysayers. Sullivan, who’s been with the company for more than three decades, says that the lawyers thought of themselves as separate from their clients. Going to talk with a lawyer was for the clients like going to the principal’s office. Life within the department was no picnic either; stressed by the company turmoil, the department had succumbed to cynicism and petty sniping. Boardman’s style and hopes for the department couldn’t have been more different. When he started, he found himself managing older lawyers and trying to graft new ideas onto the hidebound, paternalistic old company. He promoted two women, Michele Smith and Mary Patricia Cahill, to his senior staff — generating grumbles about seniority-jumping and quotas. He sent all the lawyers to workshops on client-handling skills. But most importantly, his staff says, Boardman has always served as a role model. Although low-key (he speaks quietly and wears pressed “business casual” khakis and polo shirts), he stays battle-ready by running five to 10 miles almost every day. A sports fanatic, he responds to business problems by setting up teams. Respectful of individuals, he shuffled lawyers and jobs to try to avoid firing anyone when he arrived, then kept the staff small to avert future layoffs. He leaves by 6 p.m. every day and wants his lawyers to do the same. To win the clients’ trust, Boardman taught his lawyers to shun the spotlight. “I thought he was so goody-two-shoes that he couldn’t be sincere,” recalls Smith, a former prosecutor who arrived at Navistar a few months before Boardman. But he won his staff over, according to Smith, with his handling of a series of personal tragedies within the department. First, a lawyer developed a brain disease; Boardman did everything to enable the attorney to continue working even as he lost his eyesight. Then a member of the administrative staff was stricken by breast cancer; Boardman got the leave policy changed so she could have as much time off as she needed. Both eventually died. The remaining staff became Boardman loyalists. In 1996 Navistar named a new chief executive officer, John Horne, an engineer who had worked his way up through the company ranks. Horne was ready to look beyond mere survival. And the question became, ” ‘How good can we be?’ ” says Boardman. “ We had shifted gears to playing offense.” Horne sent then�vice president of communications Maril MacDonald to the plants to ask workers and managers what they thought a more effective and productive culture would look like. Their answers were taken to a three-day meeting in October 1996 at which 30 of the company’s most senior officers (including Boardman) hammered out a list of core values. Simultaneously, 20 high-potential middle managers tackled the same assignment. Then the two groups caucused to boil the list down into seven values on which to build a new Navistar. In November, the company’s top 500 employees, including 10 members of the law department, convened to identify “guiding behaviors” for each of these values. Boardman lobbied for, and won, the inclusion of a recommended behavior that reads: “Encourage a healthy balance between work and personal life” under the larger corporate value “respect for people.” The other six values, and the behaviors that go with them, read like a corporate Scout’s Oath. Under the value “accountability,” for example, the behaviors are: “take ownership,” “act with integrity,” and “drive for results.” Horne notes that the law department “really jumped into” the culture change initiative. “It was part of the culture that was already building inside the law department,” he says, and fit well with Boardman’s “very client-based” approach. The group decided that company employees, not outside consultants, would teach these values and behaviors to the company’s 15,000 employees in three-day workshops. Boardman and two other in-housers, associate general counsel Jones and Navistar Financial Corporation GC Stephen Covey, were among the 35 volunteers. The sessions that they helped lead were about catharsis and connection. To dispel cynicism and generate trust, they let employees know that it was safe to be open with their feelings. The workshops also emphasized self-examination. Participants each left with a laminated, wallet-sized “contract” they wrote for themselves. For Cahill, associate general counsel for litigation, the admonition to always first “assume innocence” hit her hard; it’s not exactly the lawyer’s natural stance. And Jones was shocked to discover that he had only achieved a rather low level of listening (which is one of the behaviors under the value called “communication”). It was with their personal lives, many of the lawyers now say, that this training helped them most. But their professional lives also benefited profoundly. They are now active participants in the company’s business ventures. And that can make all the difference for International’s ultimate success. Seeking to reclaim its heritage a bit, Navistar in February changed the name of its operating company to International Truck and Engine Corporation. Boom times in the big rig sector have been powering recent gains, pushing total 1999 sales and revenues to $8.6 billion. But industry analysts are warning that the big truck market is headed down, thanks in part to rising interest rates and high fuel prices. Other aspects of International’s business, however, are less cyclical. The company is the United States’ leading maker of medium trucks, with a solid 38 percent market share. It supplies diesel engines for Ford Motor Company’s sport utility vehicles and pickup trucks. International commands an impressive 60 percent share of the small school-bus market, and has invested in expanding its bus manufacturing capacity. And the company has spent heavily on developing low-emission engines and vehicles — another area where it is a market leader. In fact, International says it’s not only going to meet the new EPA regulations for trucks and buses; it’s well positioned to better them — and in so doing seize a major slice of the emerging market. If only lawmakers give diesel a second chance, and low sulfur fuel becomes commercially available. “We think this is all good,” says NRDC spokesman Elliott Negin, adding that environmentalists “applaud” efforts like International’s and the EPA’s to clean up diesel engines and their fuel — eventually. But right now, says Negrin, “public bus agencies have the opportunity to buy clean technology, and we are urging them to stop buying diesel and start buying compressed natural gas.” International’s Green Diesel campaign managed to persuade California policymakers at least to take another look at diesel engines. Success there could mean a good chunk of change as California owns 24,000 school buses, 97 percent of which are fueled by diesel, and Governor Gray Davis has budgeted $50 million to replace the oldest. More importantly, as California goes, so goes the nation. The powerful American Petroleum Institute is fighting the EPA’s low-sulfur requirements, claiming that the regulations can’t be met without enormous price hikes. If the API brings enough pressure, it might postpone the rules’ December adoption date long enough for the EPA’s politics to possibly change under a Bush administration. The Clinton administration is very committed to mandating low sulphur fuel by 2006, but there’s a “big controversy right now,” says Smith. So International’s lawyers are packing up their hankies and taking them on the road. Good thing that back in March the company ordered 6,000 of the little white cotton squares. View Related Tables

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