| The Lighthouse Effect: In Helping Others & Achieving
McDonnell CEO and Chairman John F. McDonnell was invited to
address a group of Japanese business executives (the Keizakhai 100 Club) on the subject
that has no ready counterpoint in Japanese business culture. That is: corporate
philanthropy and community involvement. This was his speech.
Konnichi Wa (good day). Today I will be speaking to you about two different topics.
They are -- to put it mildly -- a sharply contrasting pair. One is about giving away
time and money. That is to say: community relations and corporate philanthropy. The other
is about the struggle for
survival in an industry (aerospace) which seems to be collapsing into a black hole of
mega-mergers. You have all read about Lockheed/Martin and Northrop/Grumman. Where does
that leave McDonnell Douglas? What is our plan for the future?
I would like to thank Mr. Kura for extending an invitation to address the Keizaikai 100
Club. It is a real pleasure to be here.
Let me begin by posing the question: Is there a real connection between the two topics
on today's agenda -- between winning a reputation for excellence in the civic and
philanthropic arena, and being one of the companies that is able to thrive in an
increasingly competitive marketplace? Is there a single, unifying element conducive to
success in both areas?
I am convinced there is. It's called vision. Vision provides the ability to transcend
traditional thinking and see new opportunities for growth and improvement.
Akio Morita, the chairman of Sony, tells a story that provides a vivid illustration of
what I am talking about.
Two shoe salesmen arrive in a remote corner of a tropical rainforest. The first sends a
letter to his head office: "No prospect of sales. Natives do not wear shoes."
The second wires an urgent message: "No one wears shoes here. We can dominate the
market. Send all possible stocks."
How does vision apply to corporate philanthropy? Consider how the two shoe salesmen
would react if asked to support an eminently worthy cause within their community.
It could be a program to improve schools or housing; or it could be a program to equip
little children with electronic devices for detecting the presence of crocodiles in local
The uninspired salesman would have a hard time containing his impatience. He would have
a hard time concentrating on anything that did not create an immediate improvement in
sales, market share, or the bottom line.
The other salesman -- the one with vision -- would react differently. Being much more
curious about his new environment, he would listen intently. It is easy to suppose he
would feel a twinge of sympathy -- followed by a growing sense of excitement. He might see
a great opportunity to achieve several important objectives at once: an opportunity to
improve the image of his company, to communicate an important message to customers, to
secure the long-term support of local civic leaders; and an opportunity to make a
contribution of real value to friends and associates in his new home.
If we assume the salesman was beginning to assemble a local workforce, he would also
look for an opportunity to educate and motivate workers, and to secure substantial future
returns in the form of knowledge, skills, and character.
There are two points which I would like to emphasize. First, there is no shortage of
opportunities for constructive involvement in the local community. Second is the
importance of vision in enabling you to choose between many different opportunities or
requests. A strong vision of the future will help in devising a strategic approach to
corporate philanthropy that succeeds on two levels -- both in serving the larger interests
of the community and in advancing the long-term goals and aspirations of the corporation.
We have a vision for the future at McDonnell Douglas. Our corporation has been a leader
in the aircraft industry for three quarters of a century, and we expect to be a leader in
making advanced aircraft and space craft for a long time to come. Some of the projects we
are working on today will set the stage for revolutionary advances in air travel in the
second half of the next century. For example, we are now working on the development of
technology for single-stage-to-orbit vehicles that won't have to drop off a large part of
themselves on the way to orbit -- because they will be very lightweight and efficient.
They will be able to fly to space and back on a repetitive schedule with very little
maintenance or repair required. Sometime before the end of the next century, I expect that
such aerospace craft will provide one-hour express service between Los Angeles and Tokyo.
We have also developed a strategic approach to corporate philanthropy that should help
secure our leadership in the aerospace industry far into the future.
Clearly, our future success is heavily dependent on engineering and technical
excellence. Our philanthropic contributions, accordingly, are heavily focused in the area
of education -- and higher education, in particular.
The McDonnell Douglas Foundation -- the corporation's philanthropic arm -- distributed
$8.8 million in grants in 1993 -- an amount that was equal to just over 2 percent of our
net income in that year. Out of the $8.8 million, about 50 percent went to educational
institutions and programs. That included grants to 63 colleges and universities.
As chairman of the board of the Foundation, I am directly involved in setting policy
and in making major decisions. We don't play Santa Claus. In making cash contributions, we
look for some kind of a connection that will provide long-range benefits.
In 1993, for instance, the Foundation gave $400,000 for building a flight simulator
laboratory at St. Louis University's Parks College of Aeronautics. The grant will help in
the development of an undergraduate flight control curriculum, while providing a research
facility for graduate students and faculty members. We regard Parks College as part of the
educational infrastructure that feeds and supports McDonnell Douglas. We have hired a
number of the school's graduates.
Similarly, the Foundation supported the establishment of an international business
department within the business school at St. Louis University. With the full financial
support of the corporation, some of our most promising young executives are pursuing or
have already received their MBA's from St. Louis University.
The Foundation encourages employees to support their favorite educational institutions
by matching every dollar they give with a yearly limit of $5,000. In 1993, our employees
and the Foundation gave close to one million dollars in matching gifts to more than 400
colleges and universities.
Sometimes the connection between the Foundation's charitable contributions and the
interests of the corporation and its people is less direct. But there is always a
connection. Over the years, for instance, we have given financial support to the Boy
Scouts of America. The primary objective of the Boy Scouts is to build character in this
nation's young people. Furthermore, many of our employees -- including many of our top
executives -- are active in the organization.
The Foundation acts as a kind of reservoir. Even in the midst of a drought in corporate
profits and cash flow -- such as we experienced a few years ago -- the Foundation
continued to distribute over $8 million a year in grants. As a corporation, we pay large
amounts of money into the Foundation some years; and nothing in others -- depending upon
our circumstances. Regardless, the Foundation is able to maintain a smooth flow of
contributions. That's important because many institutions are depending upon the
Foundation for ongoing support. We don't want to disappoint them.
In addition to the Foundation, McDonnell Douglas has a second mechanism for
corporate giving which operates at more of a grass-roots level. In each of four major
McDonnell Douglas locations there is an Employees' Community Fund -- or an ECF, as we call
them -- which has its own board of directors elected by employees.
Unlike the Foundation, which is funded through the corporate treasury, each of the
ECF's is entirely supported by employees through voluntary payroll deductions. In 1993, 65
percent of the corporation's total workforce supported ECF's through payroll
deductions -- with an average annual contribution of $85 per person. In turn, the ECF's
distributed more than $6 million nationwide.
While the two entities are entirely separate in terms of their governance, the
Foundation and the ECF's work closely together, and they share a common set of
"focus" areas, which includes education, youth at risk, hunger and homelessness,
and the environment.
Let me cite a couple of examples.
With the help of funding from the Foundation, a program called Hope House was launched
in 1989 to help St. Louis homeless families. Hope House does more than provide temporary
room and board. It is aimed at keeping families together and giving them a better chance
at success once they leave the program. A $10,000 Employees' Community Fund grant -- which
received matching funds from the U.S. Department of Housing and Urban Development --
enabled Hope House to hire a counselor who works with family members in overcoming or
Another Employees Community Fund grant helped add a key working exhibit to the
EarthWays Home, a unique laboratory in St. Louis where visitors of all ages learn about
the environment. Sponsored by EarthWay -- a non-profit environmental organization -- the
home is filled with energy efficient appliances and furnishings made from recycled goods.
The ECF grant helped build the home's recycling center, a hands-on exhibit which shows
people how to make greater use of reused materials.
In addition, the ECF's and the Foundation both contribute to "Team" gifts to
major organizations like United Ways. As a general rule, the Foundation gives by formula
one dollar for every two dollars contributed by our Employee Community Funds. In 1993 our
ECF's contributed about $2.1 million and the Foundation $1.4 million to United Ways in the
communities where McDonnell Douglas is located.
Not only do the ECF's and the Foundation work closely together; they also go out of
their way to encourage and support employees who volunteer their own time to the support
of civic and community groups.
Four years ago, some of our employees launched a program in St. Louis area schools
aimed at stimulating interest in math and science in grades four through six -- a time
when studies show they are likely to lose interest.
The program is called "A World in Motion," and it has won nationwide
attention. With the full support of the corporation, nearly 50 of our engineers take time
off from their regular jobs to serve as active partners and mentors in science classes.
With hands-on experiments and examples drawn directly from the real world, they help
school children learn concepts such as friction, wind power, drag, and air resistance.
I hope that what I have said gives you a fairly detailed picture of our philosophy and
policies in the area of corporate giving and community relations. Now I would like to
return to the "vision thing" -- as ex-President Bush called it -- and take a
closer look at its impact on the all-around performance and behavior of a corporation
during a period of acute stress.
The real test of the power of a vision is adversity. If the vision is strong and true,
it will have a "lighthouse effect" -- serving as a beacon in the night for a
ship cast on storm-tossed seas. A company that is guided by a strong and compelling vision
is far more likely to avoid the rocks in the midst of a typhoon than a company that
battens down the hatches and abandons the rudder.
I don't mind telling you that McDonnell Douglas was fighting for its life a few years
ago. In 1990 we began to experience severe cash flow difficulties as a result of
concurrent problems in four aircraft development programs. Those difficulties resulted in
several large write-offs.
Suddenly, there was rampant speculation in the news media that McDonnell Douglas was
headed for bankruptcy. The price of our stock plunged from a high of $94 per share in 1989
to $27 in January 1991 shortly after the news that the A-12, one of our major military
aircraft programs, had been canceled.
Well, not only have we survived to tell the tale, but we have rebounded from our recent
woes with strong earnings, a dramatic reduction in corporate debt, and a string of
successes in military aircraft competitions.
Moreover, we have done all that in the face of major downturns in both the military and
commercial aircraft markets. Across the corporation, we have reduced inventory, overhead,
and rework and made giant strides in improving productivity. Over the past several years,
for instance, the number of assembly hours per MD-80 twin jet has fallen by 50 percent.
Our stock has regained all of the ground it lost in the worst days of 1990 through 1992
-- and then some.
During a period of rapid contraction -- such as we have experienced in the aerospace
industry over the past five years -- there is a tendency for companies to become
increasingly top-heavy. Even in the midst of plant closures and heavy layoffs, too many
people, too many facilities and too many layers of management remain in place, watching
over a shrinking business base.
It is that kind of a situation which prompts a pell-mell rush to the altar -- and major
asset swaps between companies. With a lot of mergers, appearances are deceiving. Often the
big hurry isn't about wanting to get bigger; it's about wanting to get smaller. The merger
sets the stage for cost-cutting and other economies within the newly combined enterprise.
It's the old idea of two being able to live together more cheaply than one.
At McDonnell Douglas, we took strong, preemptive action in reducing cost structures in advance
of anticipated declines in production. We did that ahead of most other companies in
the industry. That is one of the keys to our financial resurgence -- and one of the
reasons we have not felt the urge-to-merge with the same urgency as other companies.
But if we have become a much stronger and more vigorous company -- and I am convinced
we have -- it is not just because we cut costs to the bone; it is also because of the
"lighthouse effect" of having a vision.
In the midst of some of our worst travails, top management conducted a searching
reexamination of our mission, goals and strategies as a corporation. We made a number of
the decisions, but none was more important than the decision to face the future in
aerospace -- and nowhere else.
As a result of that decision, we not only rejected the option of diversifying into
other lines of business; we also took the additional step of divesting several businesses
outside our core aerospace competencies. In other words, we cleared the decks so we could
concentrate on what we do best -- the design, development and assembly of advanced
We do not fear the trend toward consolidation in the U.S. defense industry. In fact, we
welcome it. If I may paraphrase the shoe salesman with a sense of vision: "There are
fewer and fewer competitors. We can dominate the market."
Given the austere environment in which we are operating, our primary emphasis is on
providing our customers with outstanding value. By being very lean and fit... and highly
focused on our customers... we believe we will be well positioned to take advantage of
market opportunities during the next several years while other companies are internally
focused on the difficult task of integrating acquisitions.
In an era of shrinking defense budgets, the Government is highly constrained in its
ability to support brand-new programs. The most cost-effective approach is to upgrade
existing products. And that plays to the great strength of our existing product line.
In 1993, McDonnell Douglas turned a real corner in going from cash-poor to a cash-rich
company. Let me point out here that our most recent debt-to-equity ratio was .39, which
compares with .64 for Lockheed/Martin and 1.13 for Northrop/Grumman. We continue to
generate a strong positive cash flow -- and that gives us all kinds of options that we
didn't have several years ago. If the price is right, for instance, we might be
interested in selective acquisitions aimed at bolstering areas of our current product
But even when McDonnell Douglas was experiencing its worst financial difficulties, we
continued to invest in both the development of new technology and the development of our
people. We never lost sight of the idea that our future depends on engineering and
Guided by a vision of the future, we maintained our practice of providing full tuition
reimbursements to employees who wished to pursue academic studies in their spare time.
We set a goal of targeting government research and development contracts -- and winning
a high percentage of those competitions. Last year we won 31 out of 33 targeted
Last but not least, we continued to invest in the important philanthropic endeavors
which I described earlier. Not only did the Foundation and the Employee Community Funds
continue to distribute grants, but volunteerism continued at a high level.
I understand from Mr. Kura that some of you are now becoming actively involved in civic
and philanthropic endeavors; while others are thinking about doing so.
It strikes me that you have a great deal to gain from becoming involved in community
relations and philanthropic endeavors in the U.S. Surely one of your objectives must be to
raise the level of public awareness in the U.S. of the benefits your companies bring to
the U.S. -- benefits that are enjoyed by workers as well as consumers. Total employment in
the U.S. operations of Japanese firms has more than tripled since 1986, and now totals
more than 700,000 people -- which is equal to about 10 percent of the total employment of
the largest 500 U.S. industrial companies. Thus Japanese firms are making a big and
growing contribution to the domestic U.S. economy. But hardly anyone knows. A far
more active approachto community relations andcivic affairs in the U.S. can help you tell
a story that needs to be told.
Mr. Kura asked me if I had any specific advice to offer on getting involved in
community affairs and philanthropic endeavors. There are several points that come to mind:
Point Number One: If you wonder where to begin, find out what you are already doing.
Without a doubt, many of your employees are volunteering time and money to a variety of
worthy causes in the community. You can start by lending additional support to
some of the same causes.
Point Number Two: Always remember that nobody can do a better job of representing your
firm and its interests than your own employees. Do everything you can to promote
volunteerism at all levels. A voluntary contribution of a person's time and energy is the
sincerest form of giving. It is also, hands down, the most effective. It does the most
good for the recipient. It earns the most credit for the donor. And it suffers the least
damage or dilution in the exchange from the one to the other.
Point Number Three: Exercise extreme caution when deciding whether to support any
institution for the first time. The easiest way to turn goodwill into ill-will is to give
support one year and pull the plug the next.
Point Number Four: Make sure you set your annual cash contributions at a sustainable
level. Again, it is important for corporate donors to establish a record of consistency
and reliability. You don't want the reputation of being a fair-weather friend.
Point Number Five: Take credit for your good deeds. Don't be reluctant to accept
credit for your company's contribution and do everything you can to recognize and promote
the civic deeds and accomplishments of your employees.
Point Number Six: Take advantage of the opportunity to meet new people, make new
friends, and have some fun. That is part of the attraction of community relations. It is
also one of the things that results in long-term benefits.
Point Number Seven: Consider your company's vision for the future -- and let that be
your guide in setting broad objectives in your civic and philanthropic endeavors that
provide a win-win situation for the community and the company.
If you have a vision, you will see opportunities where others see only problems. You
will be able to help others -- and create new competitive space for yourself.
And this brings me to the most important point of all. Wherever you have plants or
concentrations of people, you will find communities that value your presence and want to
get you more deeply and actively involved in civic and community affairs. The welcome mat
will be waiting for you. So my eighth and last point is simply this: JUST DO IT. You will
help yourself -- by helping others.