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In a voice burnished by bourbon and cigarettes, Herb Kelleher, 71, tells a story that illustrates why he picked Jim Parker to succeed him last year as CEO of Southwest Airlines Co. In 1991 then-general counsel Parker was at Chicago’s Midway Airport looking for gate space for Dallas-based Southwest. The GC saw Northwest Airlines gates sitting unused, and he figured there must be some way that Southwest could get a hold of those gates. So Parker found an obscure provision in Northwest’s lease that allowed the city of Chicago to let another airline occupy any gates that weren’t being used. And he got the mayor of the Windy City to let Southwest take over the gates in what Parker likes to call “a midnight raid.” “If you’re from Texas,” says Kelleher, “that’s known as homesteading.” Business judgment and calculated risk-taking in a lawyer — that’s Kelleher’s kind of CEO because, well, that is Kelleher. The legendary co-founder of the no-frills, low-fare airline was also its first lawyer. And, Kelleher says simply, “Being general counsel gives you a company overview that’s very helpful.” Apparently. Sitting atop a few major corporations today are former GCs including Michael Critelli, CEO of Pitney Bowes Inc., and Debra Lee of BET Inc. Legal consultant Peter Zeughauser of the Zeughauser Group in Newport Beach, Calif., notes, “When you’re a general counsel you’re getting managing experience. Once you become GC, it’s not an unnatural step to CEO.” Even so, according to executive coach Frederick Wackerle, it’s relatively rare for a general counsel to ascend to the CEO spot at a Fortune 500 company (Southwest is No. 316 on the list). Rarer still is such a company run primarily by attorneys. At Southwest, those lawyers include Kelleher, Parker and new GC Deborah Ackerman. Plus, the new president, Colleen Barrett, was once Kelleher’s legal secretary. TURBULENT TIMES While the spotlight would be on any new CEO and his team, in Parker’s case the pressure to perform is enormous. He doesn’t have an MBA, and he’s had limited experience working with Wall Street. Parker also is a self-deprecating, laid-back, and seemingly unambitious man who’s stepping into the shoes of a renowned showman: Kelleher. And Kelleher is still very much around — as chairman of the board. Parker also has to figure out how to work with the people reporting to him, including his own GC. Under Kelleher, Parker’s GC role was expansive. He also was responsible for several nonlegal business functions for the country’s fourth-biggest airline. But now that he’s CEO, Parker says he wants a top lawyer in a different mold: a more traditional GC who isn’t overburdened by too many managerial obligations. And he promises to let his replacement do her job. “I’m not going to micromanage the legal department or anything else,” Parker says. He has plenty to keep him busy elsewhere. Parker, 55, jumped into the pilot’s seat just as the company slammed into the most turbulent times the airline industry has ever seen: the crisis sparked by the Sept. 11 terrorist attacks. And a potentially nasty labor dispute may be looming on Southwest’s horizon. Still, nine months into the Parker era, analysts who cover the stock are giving the new CEO high marks. Their enthusiasm is fueled by Southwest’s exceptional performance — especially considering the times. FLYING HIGH Southwest is the only one among the top 10 U.S. carriers to make money in 2001, its 29th straight year of profitability. Others lost hundreds of millions of dollars last year: ranging from Northwest’s relatively small $423 million to UAL Corp.’s (United Airlines’ parent) whopping $2.1 billion. Southwest not only posted a profit of $511 million in 2001, but it also made money — $32 million — during the disastrous fourth quarter, when the other carriers took their steepest nosedives. “They’re recovering a lot faster than the other airlines,” says analyst Raymond Neidl, who follows Southwest for ABN AMRO Inc. in New York. And 2002, he says, looks good for the company. Credit goes to Parker’s staying the course, say industry observers. Before taking the helm, the new CEO said that he expected to make no major changes at Southwest. He’s stuck to that plan, even in the wake of the September attacks. Such steadfastness reassures a Wall Street enamored of Southwest’s profitability. Industry experts also suspect that it’s another reason the ex-GC landed the CEO spot. He’s Kelleher’s trusted company man. The ultimate second in command. But can Parker climb out from Kelleher’s long shadow? And does he even need to? ELVIS HAS NOT LEFT THE BUILDING While Parker gets praise for coping with tough times, ABN Amro’s Neidl observes that Kelleher hasn’t exactly jumped ship. Adds Glen Engel, an airlines analyst with The Goldman Sachs Group Inc.: “Herb will be involved as long as he can hold a cigarette in one hand and a drink in the other.” Kelleher says only, “It’s been seven days a week for everybody, me included, since Sept. 11.” So why did he bother announcing a successor back in spring 2001? Last year, after battling prostate cancer and turning 70, Kelleher was under pressure from Wall Street to put a face on Southwest’s future. Jack Welch, the recently retired CEO of General Electric Co., said in his autobiography that choosing someone to succeed him “was the most agonizing decision I’ve ever had to make.” Kelleher wouldn’t discuss his decision-making process. But, Parker says, “a number of other people could have gotten this job.” Goldman Sachs’ Engel says that, given Southwest’s close-knit culture, he assumed that Kelleher’s successor would be “someone internal.” Among the contenders, analysts say, were CFO Gary Kelly, COO James Wimberly and executive VP of corporate services John Denison (all of whom are still at the company). But, according to Engel, “nobody stood out as the obvious choice.” So it probably came down to this: None of the other executives have worked with Kelleher for as long, and in as many capacities, as has Parker. During their 22 years together, they were fellow law firm partners; Parker was Kelleher’s outside counsel; and for the past 15 years, Parker has served not only as GC, but also as head of several nonlegal operational functions, including properties and facilities and technical services. Fred Krebs, president of the American Corporate Counsel Association, says that, while most GCs have nonlegal responsibilities, they “tend to be more administrative than operational.” And operations experience, the nuts and bolts of a business, is “invaluable” for anyone jumping to CEO, according to Wackerle, author of “The Right CEO.” Wackerle adds, “These nuances likely made … [Parker] more of a corporate executive than a general counsel, and a stronger candidate for CEO.” Now that Parker is CEO, his compensation has increased along with his still greater responsibilities, but the company won’t yet disclose how much. As GC in 2000, Parker made about $371,000 in salary and bonus, and cashed in about $3.7 million worth of stock options. That year CEO Kelleher made $620,000 in salary and bonus and earned $13 million on options. CHEERLEADERS Just as Kelleher elevated his faithful adviser Parker, so, too, Parker promoted his. Ackerman, 51, is one of the 46 female GCs that the American Corporate Counsel Association counts among the Fortune 500 companies. Parker’s associate general counsel for 13 years, she used to be responsible for trying cases and working on contracts with key vendors, including The Boeing Co. and General Electric. She also handled other financial transactions and managed parts of the legal department budget. When he was GC, Parker negotiated labor contracts, oversaw the 12-member legal department budget, and served as company spokesman on legal issues. His operational duties also grew over the years, taking more and more of his time. Although he’s kept the role of chief labor negotiator, Parker last year turned over most of the legal department duties to Ackerman. In the wake of Sept. 11, Ackerman also monitors security and other federal issues. The new GC still reports directly to Parker (they meet at least once every two weeks), but she also now reports to company president Barrett, with whom she meets monthly. Unlike her predecessor, Ackerman doesn’t have operational duties outside the legal department; all Parker’s previous responsibilities went to other managers. Parker says it’s not because of any lack of business ability on Ackerman’s part; he’s just playing to her strengths and his needs as CEO. “Debby is able to focus more purely on the legal function than I was. It’s more appropriate than having a GC trying to run other departments,” he says. Ackerman, a corporate finance specialist in private practice, is not complaining. “I’ve done plenty on the business side in my 13 years here,” she says. She’s also kept busy by her other duties as an officer of the company, including attending company events and building morale. At Southwest those responsibilities, which Ackerman calls “cheerleading,” are a critical part of the company’s famously wacky and warm culture. WE’RE IN THIS TOGETHER That ethos has been vital to the airline’s success, according to Harvard Business School professor Jody Hoffer Gittell, who has studied the company since 1994. Southwest is bursting with personality. Walk through the corridors of the company’s five-story headquarters on the runway at Love Field in Dallas, and it jumps out at you. Mannequins on the third floor model Southwest’s flight attendant uniforms over the years, from the 1970s’ groovy, burnt-orange hot pants and rainbow chiffon scarves to today’s golf shirts and khaki not-so-short shorts. Self-selected mementos and pictures of workers — and even of their pets at play (framed at company expense) — cram every inch of hallway wall space on several floors. Harvard’s Gittell reports that Southwest employees, “for the most part, like being together.” The strong relationships across functional lines, from ticket agents to ramp workers to pilots, come through at the corporate level, too. “I was at an executive meeting,” Gittell says, “and if you closed your eyes and listened, you couldn’t have guessed people’s job titles. There seemed to be no territoriality, which is hard to do in the airline industry. It has a history of divisiveness.” STEADY AS HE GOES It looks like this esprit de corps will thrive under Parker as well. At least, he’s off to a good start. The four other largest airlines laid off 65,000 workers in the wake of Sept. 11. But Parker told his troops that job cuts at Southwest would be a last resort. As of February, not one person, out of 30,000 workers, had been let go. This is not just business for Parker; it’s personal. Last October, he chartered three buses to shuttle fellow Southwest employees to his oldest son’s wedding. But if a company always winds up reflecting its chief, then Southwest will likely grow a little more sedate — and its sense of humor will be wry rather than outrageous. How’s Parker getting on in his new job? Well, he says, “Herb counseled me that I had to stop being a lawyer, stop being general counsel. So … , ” Parker deadpans, “ I’m getting into this client thing now — making unreasonable demands.” But don’t be fooled by Parker’s manner, cautions someone who has gone up against him (and who asked not to be named). Parker is “quiet, but a tough negotiator. He enjoys horse trading.” And analysts say that he’s the right man to carry out Southwest’s business plan, which, despite Kelleher’s flair, has always been a conservative one. That means keeping costs low and growth slow. Being careful, though, doesn’t mean that Southwest and its new CEO lack vision. In fact, when the Sept. 11 crisis hit, Parker showed his mettle. He decided against reducing the number of Southwest flights, even as every other major airline in the country canceled thousands of flights. “We decided,” Parkers says, “we were going to fly our way out of this crisis.” THE EVERYMAN Like Kelleher, Parker never planned on becoming a CEO. Parker was raised in Fort Worth, where, his official company bio boasts, his first paying job was “working the drive-through at Sandy’s Hamburger Stand.” Parker earned both his undergraduate and law degrees from the University of Texas. Other than wanting to be a lawyer, Parker claims that he’s never had a master plan. After law school, he stayed in Austin as a clerk for U.S. District Judge Jack Roberts. He so liked the job, the one-year clerkship stretched into four years. Finally, Parker moved on to try cases in the Texas attorney general’s office. Taking his time made for good timing. Parker met Kelleher in 1978, when they both worked on the same case. At that time Kelleher was a partner at the San Antonio law firm Oppenheimer, Rosenberg, Kelleher & Wheatley. Kelleher recruited Parker to the firm in 1979; Parker made partner a few years later. Among Parker’s clients: Southwest and its new chairman of the board, Kelleher, who took the Southwest CEO and president posts for good in 1982. At Oppenheimer, Parker was, he says, “a generalist,” though he handled a lot of labor issues and litigation for Southwest. In 1986, when Southwest had grown substantially and needed a GC in-house, Kelleher once more called on Parker. Parker lured Ackerman to Southwest two years later. CEO-IN-TRAINING While Parker has come fast out of the gate as CEO, he may run into some trouble ahead. He’s held on to responsibility for negotiating all of the company’s collective bargaining agreements. At Southwest — the nation’s most unionized airline — that’s a critical job. There’s been only one strike against the airline in its history, and that was pre-Parker. In 1994 Parker designed — and got Southwest’s pilots to approve — a unique airline industry contract. It froze pilot wages for 10 years, while offering a graduated stock option plan. But that deal is winding down. And Jon Weaks, president of the Southwest Airlines Pilots Association, is rolling up his sleeves. He calls the current contract “terrible.” Southwest’s 4,000 pilots are making $50 an hour less than the industry standard for Boeing 737 pilots, Weaks says. There is some question whether Parker, no matter how experienced, should be representing management when the deal gets renegotiated next year. According to airline industry experts, it’s common for a CEO or a GC to lead labor talks; but it’s rare for either to do it for as long as Parker has. Analyst Neidl says that Parker hangs on to the role because “he likes it … . It’s a personal as much as a professional thing. But at some point he probably should delegate.” Weaks says that time might be now. “Can a CEO also be a chief negotiator with all the labor unions?” Weaks asks. “Does he have time?” ON TOP Parker says it was his collective bargaining experience that really prepared him for the CEO job. While others say it was his unusually broad operational duties that gave him a leg up, Parker explains that “the ability to understand another party’s point of view in negotiations has helped” with investors and employees. Even without all his added responsibilities, though, Parker says simply “being general counsel is excellent preparation for any other position in a company — including CEO.” But, since not every GC becomes CEO, what would he tell those who want the top spot? “Don’t set it as a career goal,” Parker advises. And don’t try to be another Herb Kelleher.

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