JULIA KENNEDY: Good morning. Welcome to Workshop for Ethics in Business. Thank you so much for joining us. I'm Julia Taylor Kennedy. I'm a program officer here at the Carnegie Council. For those of you who are new to our workshops, it's very participatory.
Let me now introduce our featured speaker today, Bill O'Rourke. He was our first speaker for this new format for the Workshops for Ethics in Business over a year ago and was a great guinea pig. So I'm really glad that he was willing to come back.
The reason I asked him back is because I was reading a book that came out a few months ago by Charles Duhigg, who's a New York Times reporter. [Editor's note: Read or listen to the Carnegie Council interview with Charles Duhigg.] highly recommend this book. It's called The Power of Habit. In it he explored how a certain habit can really affect our personal lives or the life of a corporation positively and negatively, and spent a whole chapter talking about the aluminum company Alcoa and how the habit of safety really affected that corporation's culture in a positive way. So I'm avidly reading this chapter, because I knew Bill and had heard a little bit about the safety policies there. Sure enough, he's quoted in the chapter. I thought, "Gotta get him back."
Since working at Alcoa, Bill O'Rourke has retired and is now executive director of the Beard Institute at Duquesne University's Palumbo Donahue School of Business. He focuses on business ethics and speaks all over the country about his experience at Alcoa, as well as presenting other business ethics cases. Before that, he was with Alcoa for more than 35 years. His last position was vice president of sustainability and environment, health and safety. Before that, he was president of Alcoa Russia from 2005 to 2008, and, in fact, he opened Alcoa in Russia.
Together with CEO Paul O'Neill, he helped implement a safety overhaul at Alcoa, an aluminum manufacturing company, and he brings those lessons to business schools across the country. Paul O'Neill has called Bill O'Rourke an excellent example of a values-based leader, and we feel very lucky to have him here today.
Thanks so much for joining us.
WILLIAM O'ROURKE: Thank you.
JULIA KENNEDY: Tell me a little bit about Alcoa, just for those who don't know the company. It's enormous, but not all of us know exactly what kind of company it is and how you got there.
WILLIAM O'ROURKE: Alcoa's an excellent company. I was very fortunate to work for Alcoa for so long in so many diverse positions. It seemed that every three years of my life I was moved to another position, which in my perspective is very, very fortunate.
Alcoa was founded in 1888 in Pittsburgh, Pennsylvania. It was founded by a man named Charles Martin Hall. He found a new, cheaper, revolutionary way to make aluminum, to smelt the bauxite ore into aluminum.
Before that, it was a very precious metal. Napoleon used to carry around a spoon that was made out of aluminum. In 1879, when they capped the Washington Monument, they wanted something precious on the very top; it's aluminum at the very top of the Washington Monument—interesting.
So then, in 1888, it's not as expensive or precious anymore. It became well known since then.
Alcoa has had some very strong leaders, from Charles Martin Hall all the way through Klaus Kleinfeld today, that have made the company rather a good reputation.
If I'm asked to distinguish Alcoa from other corporations, I typically say it's the value base that they have—not the values that they write on a piece of paper, but the real behavior inside that company has always been first class. It's fortunate when you get the opportunity to work for a company like that, where there's no question and there's very little gray area all the way to the top of the company and it's made very clear.
They also have a reputation for technology. They took this relatively new metal and replaced wood, steel, and others with it. Today the beverage can is made of aluminum, where that was steel before 1963. Virtually 100 percent of them now are made out of aluminum, and it's a really big business for Alcoa, including Alcoa of Russia.
They also have innovation in the aerospace industry. Almost every alloy that's on aircraft anywhere in the world was invented at Alcoa's technical center. It's still the largest aluminum research facility in the world. It's located about 40 miles outside of Pittsburgh.
They have this reputation that they built over time. They have a reputation for environmental stewardship. Alcoa has been on the Dow Jones Sustainability Index since it was founded 10 years ago.
They have a reputation for philanthropy. The Alcoa Foundation was founded in the early 1950s. They've been endowed rather well, and they give to the communities.
The corporate social responsibility that Alcoa has built over the years is something to be admirable as well. So I feel very fortunate to have worked there.
Alcoa's current revenue at the end of last year was $25 billion. They have 60,000 employees in 31 countries. Those numbers were a lot higher before the current recession. They had $34 billion in revenue and 134,000 employees, and they operated in 43 countries. But they had to divest themselves of some assets because this recession hit the aluminum industry hard and hit Alcoa hard. Alcoa is finding its way out of that right now.
So that's a quick background on Alcoa.
JULIA KENNEDY: How did you get to the company?
WILLIAM O'ROURKE: I was hired out of law school. I was a patent attorney at the time and worked as patent counsel, ran the patent department for Alcoa at the time. Alcoa gets about 100 patents a year in the United States, and then they file foreign counterparts in about 26 countries for each one of those. We worked on the trademarks and copyrights as well for the corporation. It was a great opportunity to get to know the technology and then work with licensing the technology around the world, which was a very good experience.
From there I was given these opportunities in a lot of different areas. So I've been the vice president of procurement.
I remember the CEO called and asked me if I'd be the auditor of the company, and I wanted to know what did I do wrong. But that was the time when Sarbanes-Oxley got passed, and pretty soon the auditors were the rock stars in the corporations, and the board of directors are calling you on a regular basis. It was a pretty interesting assignment.
From there I was asked by the CEO to go to Russia. He said, "I know you won't go." I called him the next day and said, "Yeah, I'll be glad to go." He said, "Oh, now I think you have no judgment." He said, "No one in their right mind would take that job."
There I had the fortune to go to Russia for 21 years, from 2005 to 2008—they're dog years. [Laughter] It was wonderful and terrible. I'll talk about some of the challenges that you can imagine that you'd have in a country like Russia—not just in the safety area, but safety was a disaster, absolute disaster, in that country.
JULIA KENNEDY: Let's talk a little bit more about safety. How did safety become a central value of the company? Since you spent so much of your career there, how did you watch that really become integrated?
WILLIAM O'ROURKE: Even from the outset, around 1888, Charles Martin Hall was concerned with safety. Alcoa did a good job through the years. They were always a leader in the manufacturing area on their safety incident rates. But in the last 25 years, from 1987, the company has gotten an awful lot better.
In the 1970s, Alcoa hired their first environment, health, and safety leader for the corporation. But still safety didn't improve a lot.
Then they put in a policy, the first safety policy for the company, signed by the top 12 officers of the company. Still safety didn't improve very much.
Then they put in a safety program, training everybody from top to bottom in the organization. Still safety didn't improve a lot.
In 1987, Paul O'Neill was hired at Alcoa. Paul's the CEO. Those of you who know him know that he made safety his number-one priority—clearly his number-one priority. Every time he talked, his first words out of his mouth were about safety. Every meeting, the first agenda item was safety. Even at annual shareholders' meetings, the first words out of his mouth were, "In the unlikely event of an incident, we're going to proceed in an orderly fashion." This is from the CEO.
So early on people thought, "This might be phony, this guy really doesn't mean it and he's not sincere."
Well, you have the safety record in front of you. You can see when Paul O'Neill came to the company the lost workday rate was 1.86. That was about the best in manufacturing.
JULIA KENNEDY: What is lost workday rate, just so everyone's on an even playing field here?
WILLIAM O'ROURKE: There are three general categories of incident: there's a lost workday rate, a total recordable rate, and a medical treatment case, and they're of less severity.
The lost workday, as it sounds, means that you're so hurt you can't come back to work. So your numerator would be how many of those incidents did you have. Your denominator is 200,000 man-hours. That's the equivalent of 100 people working a year. OSHA [Occupational Safety and Health Administration] has decided that that would be the common denominator for measuring safety incidents. So everybody uses that same formula, how many incidents of that category divided by 100 people of work. That's how you get that number.
So if you have 1.86, it means almost two people out of every 100 are getting hurt so bad that they can't come back to work the next day. But that 1.86 that you had in 1987, that was unacceptable to Paul O'Neill.
As I mentioned, he had the first agenda item at the shareholders' meeting, but also at the board of directors' meeting. At every board meeting they get reports ahead of time. Included in that report to the board is the health and safety report.
At every quarterly review that a business unit president would have—and at that time we had 28 businesses, and they would come in quarterly for a review with the CEO—the first item they were expected to cover was safety. It wasn't finances, it was safety. Now, of course, they covered their finances and they covered market share and they covered everything else, but the first item was always safety, which was pretty good.
Then Paul started to challenge the health and safety professionals. They were pretty good at Alcoa, but he challenged them to become better. He said, "How can we give more focus and attention?"
It was his idea to say, "I want to know if somebody's hurt so bad they can't come back to work, and I want to know within 24 hours." So he required that. If anyone was hurt anywhere in the world so bad that they couldn't come back to work, he wanted a report on the phone—at the time it was phone; now it's converted to your iPhone or your handheld phone—but he wanted to know with 24 hours who was hurt, why they were hurt, and what have you done about it.
Then he would come to his monthly meeting of his leaders and ask them, "What did you think about that incident that happened yesterday?" They'd kind of look with a glaze and say, "What incident?" He said, "Okay, you're all going on this 24-hour report as well," and they started to get that report with 24 hours. So we had a call list that the plant manager would call—not the safety manager, the plant manager would call—and tell the CEO what happened. That was raising safety to a pretty high level within the company.
Then Paul O'Neill wanted to know at any time what is the lost workday rate, total recordable rate, how many medical treatment cases do we have at any location in the world. So Alcoa has what they call a real-time safety data system.
This was built just when the Internet had come out. He wanted it on the Internet and he wanted it live and he wanted it all updated within a 24-hour period. Every business unit was expected to do that, and they did that.
So he could go on and there was Alcoa. So you could see the lost workday rate is 1.86. You can click on Alcoa, all the business units come up. You click on a business unit, all their locations come up, and you could find out where the incidents were.
Paul used to get to work early in the morning at that time. When I was in charge of safety, I tried to get there earlier because I better get on that safety system because I'm going to get a call if there was an incident last night and we don't know about it.
And sure enough, if he didn't call me, he was calling the business president and finding out what happened and why did it happen and what are we going to do about it.
Then he instituted the health and safety audit system. He put together the protocols. "We're going to follow these protocols at all the locations, and then I'm going to send auditors out and they're going to report it. And oh, by the way, I'm going to raise this audit to the level of the financial audit."
Most corporations have an audit department that includes IT and finance, and the auditors come out and they audit for IT and finance and that's it. Not at Alcoa. The audit department includes IT, finance, environmental audits, and health and safety audits.
If you fail an audit at Alcoa, you're going to go to the board of directors and explain why. And it's not just financial or IT; it's also environmental or health and safety. You're going to go to the board of directors and explain what happened. If you fail two audits at Alcoa, your successor goes to the audit committee and explains what they're going to do about it. That's true.
When people go to their plant manager training, for example, in Alcoa and you learn what's important in Alcoa—and we've interviewed these people afterwards—they learn two things at those meetings, plant manager training: (1) don't fail an audit; (2) don't mess around with safety. Those are the two real strong lessons that you get, which is pretty good.
This graph for safety results, look at that. That's incredible. If you say health and safety is a value in the company, that's one thing, but when you do it it's another.
You can see—the year 2000 is when Paul O'Neill left Alcoa and he went to become secretary of treasury—you can see a little blip in the lost workday rate.
The next CEO, who's Alain Belda, got very livid about that and really put a pressure on to get that back on track, and it came back on track.
But it was interesting. When Paul O'Neill left Alcoa, people asked Paul, "Were you a success?" Well, he was a resounding success in every area—in the financial area, shareholder value, and safety.
But his answer was pretty interesting. He said, "If the lost workday rate and total recordable rate continue to fall long after I'm gone, I will have been a success." So I'd say if you look at that graph, he was a pretty good success. That's a sustainability answer. It's the kind of answer that you really want in an organization. He's very, very proud of that.
JULIA KENNEDY: I want to move to the cases pretty soon here. But before we do, I just want to clarify what your role was in safety over your career at Alcoa so that as we're talking about your perspective, as we're working through these really juicy scenarios that you're about to present, we understand what your role has been.
WILLIAM O'ROURKE: I was the vice president of environment, health and safety. I went in and out of that function three different times in my career at Alcoa and actually retired from that position. It's pretty easy to be in charge of safety if the CEO has that as his top priority. Imagine that. Isn't that wonderful? So I was blessed to be in a position like that, whenever the CEO decides that's really his job. So even though I was the vice president of environment, health, and safety, Paul O'Neill was carrying that banner throughout the whole corporation.
He expected the functions to operate in a way that you made it better. If you look at the best-performing companies in environment, health and safety, they have to have a system in place. It starts with a vision, values, policies, procedures, protocols for auditing, audits, consequences, rewards, training programs. You have to have that whole system in place. It has to be backed up with IT systems that really make it work. There have to be reports that come out on a regular basis. You need that in place.
But I think the number one element to make that a success is an enlightened leader, like a Paul O'Neill, somebody that embraces this as an area that's of importance to the company, which he did. That makes that system really work.
So you'll find companies that are good in this area and they have the system in place, but if their leader really hasn't embraced it, I think that doesn't add the fuel to that kind of a system to really make it work. Paul expected us to take safety and make it better. So one step we put in was to look at the areas where we're hurting people. We called it the critical areas. The critical areas were molten metal, of course; electrical safety; fall protection; and mobile equipment. Those were the four areas where people were getting hurt most. So he called those the critical four, raised them to a higher level. They got a separate audit, so you got a critical-four audit score.
What we really wanted to do was focus on the areas where we're hurting people and try to eliminate those. If we could eradicate those, boy, the company would get so much safer.
And then track the incidents in the critical-four areas as well as other areas. Well, interestingly enough, Alcoa's not hurting people in the critical areas.
So we had to go to critical five, eight—we now have critical nine, where you look at contractor safety and other areas. So as we move down this chart, we're hurting people less.
If you look at the chart in front of you, you see the lost workday/total recordable rate has gone down. But what you don't see on that chart is days away.
Back in 1987, for every lost workday, people were away close to five days on average. It's now less than two that they're away. So the severity has been reduced. I think it comes from this kind of focus and attention, driven by Paul O'Neill, that said, "Let's look at this area like a science, find out the areas, how do we focus on this the right way?" He put those kind of programs in place.
He also didn't want a distinction between employees and contractors. If somebody is hurt at Alcoa, they're hurt at Alcoa. So those numbers include contractors as well as employees.
He also set one set of rules for the world: "I want the OSHA standard to apply everywhere. Even though the standards are less or they're more relaxed in some of the jurisdictions in the world, OSHA is our guideline." A lot of people would complain about that because their incident rates automatically went up as soon as we put the OSHA standard in place. But one set of rules for the world, which was pretty good.
He also challenged us to do better in different areas. I remember, when the corporate medical director resigned, we had to replace the corporate medical director. I interviewed a number of people and had the surgeon general of one of the armed forces and other people.
But when you have a corporate medical director, they usually have one specialty, and they need a number of consultants. The consultants are epidemiologists and internists, et cetera, because they don't have all that expertise. So we're going to need a corporate medical director and all these consultants.
What we decided to do—and it was Rick Kelson and me whom I mentioned earlier—we went to Yale University and we asked the head of the medical school, "Will you be our corporate medical director?" He said, "We don't do that. We're not interested."
He called back in a week and said, "We'd like to do that." So Yale University became Alcoa's corporate medical director. It's revolutionary.
Think of the benefit you can get from something like that. So we had a doctor at Yale, named Dr. Mark Cullen. Mark was brilliant, he had industrial experience, and he had a bent for research. So you link that with Alcoa's rich database on not only employees and injuries but also on working conditions, and we put together a team of people looking at health like we'd never looked at it before.
You can come up with some observations that are actionable. For example, they run all the information through the database and say, "People who work more than 16 hours a day or 60 hours a week get hurt 30 percent more than others." That's actionable. You can actually then require a business unit president, "You have to sign off before you work excessive overtime. I want you to be aware of that and maybe you'll take some action, such as move those workers to a less stringent position for the overtime, or give them extra training at the end of eight hours, or something like that, but let's make people aware of that."
They were also able to determine that people with treatable diseases, like hypertension, diabetes, they're getting hurt more than the regular people otherwise, which is pretty interesting. That's actionable as well. You can make sure you have the working conditions where people with treatable diseases have the right to treat them. They can get breaks to take their medication, or whatever.
These kinds of programs got put into place.
Then, Dr. Cullen transfers to Stanford University, but he didn't want to let go of this relationship. So it's now called the Yale-Stanford relationship. Think of that for a corporation, just to have both Yale's and Stanford's medical schools providing the advice for what you're doing. It's wonderful. It's a wonderful environment to have.
JULIA KENNEDY: I love your humility, because I asked you about your role and it's all about Paul O'Neill. This is great.
Now let's move to work through some of these cases.
Just to give you a preview of what we're going to be doing, first we are going to present a challenge of implementing this safety policy among the managers of Alcoa, because we've seen the bird's-eye view of what happened, but of course things come up along the way for enforcing this new policy and making it a reality. Second, we're going to talk about Alcoa in relationship to the community and how that element of safety and environment works.
Let's start with implementing safety values at Alcoa. Bill, if you would, tell me about a high potential general manager of an Alcoa plant in Australia and why he was considered a rising star at Alcoa.
WILLIAM O'ROURKE: This individual was heavily recruited by Alcoa. His boss was ready for the next position and he needed to get somebody under him ready to take his job. So they heavily recruited somebody, found somebody that was absolutely thought to be excellent, and they wanted to put him in an operating position for a while so he can get seasoned before he got promoted.
They put him in a position in Australia. He was general manager of the location. He was having some very early successes. Things were working out very, very well. Customer service, quality of the product, employee engagement scores, financial results—everything is going all in the right direction. So he was doing rather well.
JULIA KENNEDY: Okay. Now I'm going to ask you to take the position of a safety manager at the plant. Of course, that's not the role you were in at the time, but just to start discussion that's the first position we're going to ask you and the participants to take.
So you're safety manager at the plant. What's your relationship like to the general manager, and then what do you learn about his position and policies on safety?
WILLIAM O'ROURKE: First, I mentioned earlier that plant managers, when you get into that new position, you go through this extensive training in Alcoa, so you learn how important safety is, how important audits are. That was the background of the general manager coming in. He did have that training. He was aware of how critical safety is in a company like Alcoa.
But then, with some recent talks between the safety manager and the general manager, they find out that he knows how important safety is, so he'd rather not report all the incidents—"Let's not do that because that will look bad for us."
JULIA KENNEDY: And he has other really successful numbers, he wants successful numbers across the board.
WILLIAM O'ROURKE: Yes.
JULIA KENNEDY: So that's the conversation he has.
WILLIAM O'ROURKE: Well, he's instructed not to report incidents.
JULIA KENNEDY: Right. So the safety manager is in a pickle, because he has also had training about how important safety is to the company, and here his general manager is telling him to keep some of these incidents quiet.
So now we turn it over to you. I'm going to give you some time to discuss amongst yourselves before you comment to us.
Take the role of the safety manager. You have an issue with the general manager's instruction not to report safety incidents. You're a loyal Alcoa employee. So what do you do? How do you respond both to the manager and maybe to the company at large?
JULIA KENNEDY: Why don't you share with the group some of what you've been discussing? Say you're the safety manager. How do you respond to this instruction from your general manager?
PARTICIPANT: Number one, if we are not safe, our workers' compensation costs will rise. Also, the cost of our health insurance will rise if it's on the job or off the job. Therefore, we must make it safe. If we're not going to report it, we must within ourselves see if any of the facilities and the work area are helping to cause accidents or illness, how we can resolve them.
JULIA KENNEDY: Spoken like a true insurance professional. So your advice is you can also work within the team even if it's sort of separate from the overall corporate structure. Okay, interesting solution.
PARTICIPANT: These problems don't go away. Whilst I think that's a very good place to start, our conclusion was that you would look around the organization for somebody to whom you could discuss the problem. So it might be going back to the organization where you yourself as the safety manager got trained.
I think it would require some courage and probably a little protection. So I think it would be very important to find the ally within the organization whom you could ask for help, who might guide you through the process.
That would come after a conversation with your plant manager in which you actually challenge the issue, point out some of the things that you've alluded to, but basically not to collude with that kind of behavior because it is so counterculture in the organization, and at the end of the day it could cost lives.
JULIA KENNEDY: Okay, so find a safe mentor, a safe place to report this higher up in the organization.
PARTICIPANT: I think the safety manager is in a very delicate situation. I think he should go to the auditor and have a discussion of how to proceed and deal with this.
I had one question. A lot of corporations—I don't know if Alcoa has—have a whistleblower policy or ombudsman where someone can go anonymously and report something.
But I think the most difficult set of circumstances is the safety director. He has been put in a very awkward situation and should perhaps try to get some help and not just be on his own.
JULIA KENNEDY: Over here, let's hear from the safety professional among us.
PARTICIPANT: We were talking about that as well. Do you do a whistleblower, because you are put in a tough spot? We decided that maybe the first step is to try to sit down with your boss and talk about the details and maybe build some scenarios around what could happen if we go down that path of concealing the truth. There could be legal implications. In some countries there are criminal sanctions for that type of behavior, where you're not reporting and following the regulations. So really try to give the boss who has been successful—which is great, it's not all bad—a chance to be successful in this area as well.
Then, if you can get nowhere and he is sort of forcing your hand to be unethical and forge the report, then definitely look for somebody outside his purview to bring him into line.
JULIA KENNEDY: So a staged response.
PARTICIPANT: Right, try to bring him around.
JULIA KENNEDY: All right, great.
PARTICIPANT: It just occurred to me a question within that scenario. Given Alcoa's background, they must have had some sort of average of safety and successes. If this particular manager was on top, let's say top 1 percent, wouldn't you guys be curious about what makes him on top of that 1 percent for the short period of time that he was?
JULIA KENNEDY: Great. So why don't you talk about how the plant manager responded and then bake in a little bit an answer to this question.
WILLIAM O'ROURKE: These comments are excellent, by the way.
This safety manager finds himself in a very difficult position. This boss controls his pay, actually controls his job. So what do you do? These situations occur every day, so you have to find ways to let them out of it.
You mentioned the whistleblower possibility. Of course Alcoa has that, like most other corporations. You have a compliance line telephone number that anybody can call at any time and report something. You can do it anonymously if you wish. Alcoa did have that in place.
Alcoa receives about 1,200 calls a year on that compliance line, by the way. Ninety percent of them are unfounded, but 10 percent aren't and they need investigating. One hundred percent get investigated from beginning to end. That's exactly what the safety manager did in this case.
You mentioned the first situation you should go to your boss. Of course, and I think that's a recommendation in any ethical situation, confront it directly yourself. But if you don't get any recourse, now what do you do? Then you have to have a way out. So most corporations have that way out.
I like the idea of having a friend in the organization, someone you can go to, who can provide a little bit of protection.
But it also requires courage in any of those steps that you take. So people need that.
But people need to speak up. The worst thing that could happen is if it was suppressed.
The interesting question, if he appeared on the top, the auditors look at that when they go around on health and safety auditing. One of the audit protocols is recordkeeping, and they actually go into the books and records and make sure that incidents that are being reported are getting recorded. The integrity of that system really makes it work.
The easiest thing to do is just suppress incidents and you could show improvement, right? But you've got to make sure that they're being reported exactly.
PARTICIPANT: One notices in Manhattan on many construction sites people are asked to anonymously report any problems or accidents in English and/or in Spanish. That only can save lives.
WILLIAM O'ROURKE: That's exactly right. It's the integrity of the system that makes it work. If you don't have truthfulness in what's going on, then your data isn't accurate and you can't act on it.
The other one is if someone is getting hurt in some area that you could tell the rest of the organization, "You can avoid this incident at your location if you follow these practices"—that's what Alcoa does, and within 24 hours. That's why incidents have to reported, so that everybody else who has that same condition is expected to know about it and then take care of it, which is tough.
PARTICIPANT: I wonder if passive resistance ever works in these cases. We've all been subject to people who, you tell them to do a certain thing and they say "Sure I'll do that" and then they don't. I wonder if this could be a case where it would work for the company, where the safety manager would say, "Okay," but then go ahead and do exactly what he knows is the right thing to do and leave it to the plant manager to deal with that, because if he tried to fire him it would go to HR, and at that point it would open up.
WILLIAM O'ROURKE: Right. And again, that would take some courage too, because you're putting your reputation on the line. But yes, that works often, and some people will confront things that are wrong by just doing what's right. I think it's the right approach on many occasions.
In this one I mentioned every item that gets reported on the compliance line gets investigated. This safety manager felt his only recourse was to call in. He calls the compliance line, reported that the incident was going on anonymously. As I mentioned, all get investigated by the functional head.
Since this one was a safety incident, it comes into my lap. A problem I have is this guy doesn't report to me, nor does he report to—the guy, the accused—he reports into operations, so he reports elsewhere. But I still have the responsibility and ability to investigate this one and find out what's going on. So that fell in my lap.
JULIA KENNEDY: Right. So that's the next step at the case that we want you to discuss. Say you're in Bill's shoes, and here he is, he knows this guy's a rising star, he's been heavily recruited by Alcoa, he has this marvelous record in all kinds of other performance areas. Bill's higher up the food chain from the general manager but has this kind of responsibility to think about the bigger picture and to take that into account in his own interactions with other executives at the company, but at the same time wants to ensure that he's setting a uniform standard, that safety is top priority at Alcoa, as Paul O'Neill has said.
So say you're Bill. What do you do?
PARTICIPANT: Who is Bill reporting to?
WILLIAM O'ROURKE: I report to the CEO.
PARTICIPANT: So the VP of the plant, the perpetrator, reports to another VP?
WILLIAM O'ROURKE: He reported to a business unit president, who reported to a group president, who reports to the CEO. I'm not higher on the chain, I'm in a different chain, is what it is. So he's in operations and I'm in a functional responsibility.
By the way, this was Klaus Kleinfeld, not Paul O'Neill.
JULIA KENNEDY: My mistake. Okay.
So you have your new scenario. Take a couple of minutes to discuss in your small groups and then we'll share.
WILLIAM O'ROURKE: The question is what would I do.
JULIA KENNEDY: I'm eavesdropping and I'm hearing some really great things. So you're all Bill. What do you do?
PARTICIPANT: I'll set up where we started the conversation. I have the benefit of having interviewed Bill.
Step zero is getting all the facts, so getting all of the details. So you have an anonymous whistleblower and you start an inquiry to figure out is this guy stirring the pot or is there reality here. Then, from there I wasn't sure where to go.
PARTICIPANT: I think that the next step, if you've established that the facts point to a bona fide case, as opposed to the 90 percent of wobbly cases, you start an inquiry where everybody is interviewed—I don't want to use "investigated"—and the people who are involved in that inquiry need to be very separate from the people that were part of the recruitment process, people that were part of the previous history prior to the new plant manager coming on board.
I'm assuming that there must be a lot of clues in the safety record before the new plant manager came on board, because things don't change overnight. So I would have thought that was step number two.
My experience is that direct conversations with people usually are very revealing, so face-to-face interviews rather than just looking at facts on paper.
JULIA KENNEDY: Okay. So we have some rigorous investigation or inquiry going on. What else?
PARTICIPANT: Obviously there are two things. One is definitely an investigation, so finding out from the person face-to-face, we agree, give them a chance to explain what happened.
Ultimately, since he's a successful businessperson, you hope the best case scenario is this person stays around and is successful but changes that part of their behavior. If you're seeing that as your goal, during your investigation you use that to guide you, to say, "We don't want to just put this guy out; we want to see if we can bring him around." That would at least give him a chance to recoup himself. Maybe he'll become the best safety plant director ever if you do that.
But you go back to what was the root cause of this person not drinking the safety Kool-Aid when he was on board. Why did he think that that was okay? He somehow slipped into that productivity culture as his primary value as opposed to the safety. So something happened in the process of bringing him around. Maybe he got all of the Kool-Aid but he didn't drink it because that's who he is. Maybe that's one of the outcomes.
But ultimately go to the safety person, make them feel comfortable about finding out what happened, and go to this plant manager, make them feel safe, and whoever else might be involved, like you said, and try to get all the facts and prepare a report. Hopefully, that report then would ultimately end up in this person turning around, and reporting the facts to the CEO.
JULIA KENNEDY: And say the goal was to turn him around. Then what do you do? Do you have a direct conversation with him and give him a disciplinary time line? How do you bring him around?
PARTICIPANT: I would suggest we tell him that we are one big family and we don't want these things to happen. One must follow the rules so that no one gets injured, if possible, or no one becomes ill, because of any problems at our plant.
JULIA KENNEDY: Is there a penalty attached to that, or is it just you have a conversation and see what happens?
PARTICIPANT: Well, you have the conversation, and if the person who doesn't report it keeps on not reporting it, it might be time to make a change to help the other thousand employees at the company.
JULIA KENNEDY: Any other thoughts?
PARTICIPANT: Intuitively it feels very uncomfortable, the kind of magnitude of that kind of pressure. If you're trying to keep someone in a leadership position, what happens—and I pose it as a question rather than as the end game—but I think that it's very hard to continue with a lack of credibility that follows an incident like that because whoever has been part of this story is then very aware of what has transpired and what led to the investigation.
PARTICIPANT: We largely agreed with everything that went around the table.
Mainly our concern was this person—Alcoa expended a lot of resources, a lot of energy, getting this person on board—they were heavily recruited, as you said—but then starts exhibiting this type of behavior, it seems very early on in his position. So our concern was that this is something that maybe were practices that he also suppressed in earlier positions to make him a desirable candidate for Alcoa and something that he would continue if this wasn't stopped and investigated very early on.
Whether you let him go or you make the decision to try and change his behavior and bring him more on line with company policy, that would be something that—no beating around the bush about that, it would have to happen very swiftly, very quickly, and be made very serious to him that this is how it works or you have to leave.
JULIA KENNEDY: Okay. Great round of responses. Bill?
WILLIAM O'ROURKE: Those were great responses, and is exactly right.
As one participant said, the first step is to gather the facts. You have to find out if it's true or not.
I give this example to students often, and they say, "Fire that person right away." I say, "No, gather the facts. Then, if you find out the fact is true, now what do you do? Now do you fire the person, or whatever? But you have to gather the facts first."
In this case, we took the best record keeper in all of Alcoa in the health and safety side. It was a woman out of Tennessee. We sent her to Australia. It has to be face-to-face, by the way; you can't do these from a distance. She went over the records, she did her interviews with the victims and the safety manager, and found out that there were 52 incidents not reported. Forty-eight were minor medical treatment cases. Four, though, were recordable cases, which is kind of significant.
So we have the report, we found out what had happened, and then my job was—this person didn't report to me—I gave that final report to his boss, not the CEO, which would have been another level. So they now have the report.
Then they were holding a meeting to discuss this in New York City. They called me into the meeting. The question to me was: "Do we have to fire him?"
What do you think my answer was?
WILLIAM O'ROURKE: My answer was, "No, you don't have to fire him. He has already fired himself, and now 60,000 Alcoa employees are watching the two of you to see what you do about it." That was my answer, which is interesting.
You talked about whether or not you had to have capital punishment in this case. Sometimes you don't but sometimes you do.
I believe that whenever you have situations where you're repressing or suppressing certain information in one area, it could be in other areas. So these good reports in employee engagement scores and others, were they true? It makes you wonder, doesn't it? And I believe when you have behavior like this it's hard to change.
You need to send a signal in the organization. If this person would have got a slap on the wrist, what does that say to 60,000 employees? Even though he's in a remote area of Australia, what does it say? It says we're going to tolerate this. Safety isn't as important as it was.
History, by the way—you go back another 10 years. Paul O'Neill actually terminated a business unit president very publicly, in an op-ed article in The Wall Street Journal, because this guy suppressed a big incident that happened at one of our plants in Mexico, where 170 people were overcome with carbon monoxide poisoning, and he didn't report that.
He claimed that he did during the investigation. If you read his report, you would have thought we had an open house at this location and a lot of local ambulances showed up. He suppressed it.
For doing that, a Benedictine nun showed up at one of our annual meetings and said to Paul O'Neill, "You're hurting people in Mexico." He said, "That's not true. If I was, I would have known about it within 24 hours. I don't know about it."
But he's pretty sharp. He calls a group together, says, "Get down to Mexico, investigate this, find out what's really going on."
He found out it was suppressed. Since it was brought up pretty publicly in an annual meeting, he was terminated publicly in a letter that says, "I knew him, I knew him well, I knew his wife, we were good friends, he grew that business dramatically to the point that it was the most profitable in Alcoa at the time. Still he violated the safety principles here. You have to let people know what's going on."
So that's 10-year-old history. Now, 10 years later, under a new CEO, what happens—and it didn't even have to go to the CEO level. Isn't that interesting? Other people knew.
I believe our job in functions is to make our leaders better leaders. By just putting it back in their lap, they do the right thing. In that case they did the right thing, I believe.
It's in a remote area of Australia. That reverberates throughout the whole corporation. Everybody knows that a general manager who suppressed incidents lost his job. That really reinforces the safety culture, and it's an opportunity to do that. The opposite could have happened, but it didn't. So I like the way that that turned out.
JULIA KENNEDY: I see a couple of comments.
PARTICIPANT: Which is something that we discussed before, because if you have this kind of behavior, you cannot move that person to another department or another location, because their behavior follows that person. So at that point you have to cut your losses short and let that person go.
WILLIAM O'ROURKE: I agree with that so much. I ran the financial services function for a while. In the expense account area, periodically people violate the expense account rules—for a few bucks, which is crazy; I'll never understand that.
But my belief is that that's behavior, and if you're going to violate the rules for a few dollars, you're probably going to violate the rules for bigger items. I believe cutting the losses early in those situations is okay.
Not all the time do you need capital punishment, and sometimes people will be resurrected and turn around. But often you find out that it's behavior and it follows the person. I agree with that.
JULIA KENNEDY: I want to make sure that we fit in this next extremely different scenario. Let's talk a little bit about how Alcoa has interacted with community safety, not just company safety.
To set this up, Bill, why don't you tell me about how Alcoa came to own a facility in El Campo, Texas?
WILLIAM O'ROURKE: Alcoa was growing in the 1990s. They had bought the aluminum industries of Spain, Italy, Hungary. There was a lot of growth going on. We bought Alumax Corporation, Cordant Technologies, and Reynolds Metals.
Reynolds owned about 80 locations around the world. We were good at buying companies, so when we were going to buy Reynolds we did environmental due diligence at 78 of the 80 locations. One of the locations where we didn't conduct environment due diligence was a small extrusion plant that probably sat on property that was 400 feet by 400 feet, an old extrusion plant.
JULIA KENNEDY: What is extrusion?
WILLIAM O'ROURKE: Extrusion is taking aluminum billets that are small in size and pushing them through a machine to make formed product at the other end, so there would be long, elongated rods, angles, and other shapes, used in window frames—
JULIA KENNEDY: Like pasta, like an aluminum pasta maker.
WILLIAM O'ROURKE: Exactly.
So Alcoa did not conduct environmental due diligence at this location. It hadn't operated for five years, so it was shut down. It was actually sold. It was under a signed sales agreement with a company in California, but the closing hadn't occurred yet. So we had this plant in Texas. The closing would occur, I think, a month later.
We purchased all the outstanding stock of Reynolds. We owned everything lock, stock, and barrel, including liabilities. That's how we get to own it.
JULIA KENNEDY: How did you learn that there was trichloroethylene in the groundwater near this plant in El Campo, Texas?
WILLIAM O'ROURKE: I had environmental responsibility for the company, environment health and safety. I get a call at 5 o'clock pm on a Wednesday from engineers in Texas that said they did some core sampling and found trichloroethylene in the groundwater next to this plant.
So gather the facts. A lot of questions.
First of all: Why in the world are you drilling core samples? Well, Alcoa had a consent decree with the state of Texas that said we will conduct core samples around all the properties we own in Texas every so many years and report the results to the authorities within 60 days.
When the people were drilling, they called the corporate secretary's office and said, "Give us a list of properties." This was on the list because we owned it at the time. So they did a core sample there and this is what they found.
JULIA KENNEDY: So 5:00 pm you find this out. You call the lawyer, right, to figure out what your responsibilities are? There has been this groundwater potential contamination. You don't know exactly, but you know, it's near your facility. What does the lawyer advise?
WILLIAM O'ROURKE: Even before that, I had to gather a lot more facts.
The first fact is: Is trichloroethylene bad? Yes, it's bad. It's a known carcinogen. If you ingest it, you will get cancer. Okay.
Are they ingesting it? Well, there's 125 families that live in the city of El Campo, Texas, that are all drinking well water, all from the same aquifer. That's interesting.
Now you have a group of people together. You are getting advice from a number of people around the table.
One of the persons around the table was the Alcoa lawyer. When we're starting to talk about what do we do now, the lawyer's advice was: "Don't do anything. If you do anything at all, it will be an admission of liability, and we don't know that the trichloroethylene came from that plant."
JULIA KENNEDY: So say you're Bill, and once again in a very tough spot. I can't believe you did this three times, Bill. It's a hard job. But you've gathered all the facts and you've solicited your attorney's advice. He is saying, "Do nothing." At the same time, you have this guiding principle at Alcoa of safety both in the company and for the community, and you want to ensure that the community of these 125 families is safe. You know this is a carcinogen.
So what do you do? It's 5:00 pm. What's your timeframe? Who do you need to communicate with and how do you do that? Let's discuss that set of questions.
PARTICIPANT: Just to clarify, you don't know all the facts yet when the lawyer said, "Don't do anything," right?
WILLIAM O'ROURKE: You have the facts that I have: trichloroethylene is bad, it is in the groundwater, don't know that it came from our plant.
JULIA KENNEDY: All right. Discuss.
JULIA KENNEDY: I'm going to stop you again. I'm guessing we're going to have a really wide range of solutions, because this scenario really begs creativity.
Once again, you own this plant that has been shuttered, you've discovered a carcinogen in the groundwater nearby, you've gathered the facts, you know that 125 families are drinking water that may be affected. You're Bill. The attorney has told you, "Don't do anything," but you want to protect the safety of the community. So what do you do?
WILLIAM O'ROURKE: It's 5:15 now. I have a dinner at 6:00.
PARTICIPANT: Regardless of what your attorneys has told you, either you knew or should have known, and it will come out that you knew. But even if it wouldn't come out, you have a duty to the community to say, "We have found out that there is a potential or an actual cancer problem in our area. We urge everyone to be careful, initially take bottled water, and we will investigate." There's no other alternative.
JULIA KENNEDY: All right. So that's one possibility; to come clean immediately, and take measures to provide alternative water for the community.
What else were you discussing?
PARTICIPANT: I think one thing to add too is we need to find the source of the carcinogen, and also find out how far back that goes, and then maybe through press conferences, through press releases—I don't know how—but we need to keep the public informed at every step of the finding. And also, maybe if we find that other families have been affected by this, maybe try to find some way to address their problems as well.
But that's not what you need to—we can't bury it. Move on. You can't listen the lawyer at that point.
PARTICIPANT: What we've been discussing is this is something that needs to go to the CEO because it's a potential Tylenol disaster in the making.
But I'd also go to your medical director, whether he's at Yale or Stanford, to start investigating in the local hospitals if there are cancer cases and how far back these cases go.
And then we were discussing putting—because I think you said, didn't you, that it hadn't actually been closed on this one location, right?
WILLIAM O'ROURKE: Right.
PARTICIPANT: I would threaten Reynolds Metal—I guess is who you were talking about—and say, "We're not closing this whole deal."
WILLIAM O'ROURKE: That's over. That's done.
PARTICIPANT: "We need the information on this."
And then, I wouldn't go immediately to the press. They've been drinking this water long before these core samples were taken. But I certainly would go pretty soon, and certainly after we knew what the medical situation had turned into.
JULIA KENNEDY: Anything about that?
PARTICIPANT: I think it's very interesting, if you look at the BP disaster, the most damaging thing in my assessment was this attempt to apportion blame and not to take responsibility at the outset, because whoever was responsible, whether it was Reynolds or whether Alcoa, inadvertently or otherwise, whoever turns out to be part of the problem, the question is: What do you actually do when you actually own this property at the end of the day if it's discovered that this is part of it?
I think there are some very early things that you can do. You can set up funds which you put in escrow for the community, you work with the community, and you actually do show yourself to be the good citizen that you are, even if it's beyond the call of duty. It's not that you're there to sweep up everybody else's problem, but you do own the property, and that property is in the middle of the problem area, whatever has caused it. So what do you do?
I think there's something about the values that you described before that gives me the hunch that you would have actually been much more proactive in terms of supporting the community, whether it was your responsibility or not.
JULIA KENNEDY: So you almost see this as a citizenship demonstration opportunity, and if part of that story is, "Look, we've just acquired this plant and we're really stepping up and taking responsibility," that might be part of the story.
PARTICIPANT: You have the heft to fight with Reynolds. The community does not.
At some level, it remains a very unattractive and reputation-damaging thing to see all of the people involved in BP still scrapping with each other about whose responsibility is it. They'd have been much better off to do it behind closed doors, or a lot more behind closed doors, and come up with a collective solution that was good for everybody.
PARTICIPANT: It's 5:30, so I think the first thing in my opinion, if you were discussing about this, is you have two fronts, which is the legal aspect and the public aspect of it. The legal advice was to do nothing, but then what do you do with the public opinion?
We agree that the first thing to do is talk to the families, because they are going to be your spokespeople after all is said and done. You have to tell them that this is not your doing, you are just getting this, but you are going to work with them, and then do everything else that you need to do.
PARTICIPANT: I agree that you have to think like you're one of the people that got harmed, or perceived that they were harmed, and what would make you feel less enraged, and put yourself in their shoes, and then try to see if you can come up with some way to do that.
But my other concern would be somebody beating me to the punch on the PR piece, like a lab technician or somebody. People know about this. I would probably as quickly as possible try to take the lead on it so that are least you're not defending yourself: "We found this, we are going to investigate it, we are going to do everything that we can to make things whole and make sure that people are not going to be at risk any longer." You don't have really time to plan all that out, but at least you have time to be out in front of it.
PARTICIPANT: Would you bring in the government at this point, would you bring in OSHA, and say, "This is what we've been told and we want you to know it first"?
JULIA KENNEDY: So that's another option, would be to go first to report.
WILLIAM O'ROURKE: The legal requirement here was to go to the government with these core samples 60 days after they were taken. So we have two months by law before we have to report anything, which is interesting.
A couple of clarifications: When Alcoa bought all the stock of Reynolds, they owned everything, including the liabilities. There was no fight with Reynolds here. If we wanted the due diligence, we could have done that ourselves. So we own it now. It's ours.
Now, the other sale of this property to the company in California, that's off, that's definitely gone, of course.
You had mentioned find the source of trichloroethylene. That was one of the questions during fact-gathering. It will take six to eight years to identify the source. Wow! So we don't have six to eight years.
What I really like about all the comments is that you're all too ethically mature to deal with this. [Laughter] You all have all the right inclinations. So you started with values. That's really where Alcoa starts.
But even above the values, Alcoa had a vision statement at the time. The vision in Alcoa is "We aspire to be the best company in the world." Alcoa's not, but they aspire to be, and that was their vision statement. Pretty neat.
In this meeting, somebody asked the question, "What would the best company in the world do in a situation like that?" That's a pretty nice standard to have, isn't it? What would the best company in the world do? Sit on it? Of course not, of course not, for many, many reasons—not because you might be caught, but because people are ingesting a known carcinogen, which is pretty interesting.
What Alcoa did: We mobilized our engineers in Texas. The next morning, starting at 8 o'clock, they were knocking on 125 doors. They told the people what was found. They brought the big bottled water and said, "Here, drink from this and we'll continue to bring water for the next two to three weeks while we come back and install filters on your wells that will filter out the trichloroethylene." Interesting.
Of course, we told the government officials at the same time. Very, very interesting.
That's a million-dollar decision, by the way, to bring water to 125 families and put filters on their wells. That's a lot.
I did not go to the CEO to discuss this ahead of time. I went to the CEO and explained what happened and what we did.
Our CEO had created a culture where the company did what was right. I reported later what was done—not, "What do you think about it?" or, "Let's discuss."
I would not want to have gone into the CEO's office and said, "We're not going to do anything about this because we don't know if we're liable yet and there are people who are handling this situation," which is interesting.
Again, I'm fortunate to work in an environment like that, where you're expected to do the right thing. There are a lot of environments that aren't that way; you're expected to spend less and less money.
When I discuss this situation with college students, I ask: "Would the shareholders want you to do this?" Almost unanimously they say no. That's the environment that they've grown up in. They're wrong.
I point out that I would bet if you took a poll of 80 percent of the shareholders, they would say, "You better do that." The shareholders really are interested in the long-term viability of the organizations where they invest. They aren't interested in that dollar today. I really don't believe that. There might be a few, but not many anymore.
PARTICIPANT: I wanted to make a comment about the shareholders. I actually have been thinking a lot about segmentation of shareholders and types of shareholders. When I was writing about this, thinking about Alcoa as a traditional blue chip, as a company that families pass their stock of Alcoa on to their children and their children, as opposed to people who are hedge fund managers or people flipping the stock or whatever, I think that's really a significant conversation that we have to have more of in terms of the motivations of different types of shareholders.
So my view is, and my question to you is, would you say that today there still are a lot of people who hold Alcoa stock for the long term, because those would be the shareholders in my view that would be the ones who would be good with this decision that you made?
WILLIAM O'ROURKE: Yes, there's a lot of people that still hold Alcoa stock as family stock and pass it down, but not nearly what it was before. The typical shareholders are institutional investors, pension funds, people like that. They are interested in stock appreciation, but even those institutional investors I believe are interested in the company doing the right thing. I really believe that, even the institutional investors, not just the family ones.
JULIA KENNEDY: This turned into a longer story. I'm curious if you can talk about what the longer-term consequences were of this experience and how Erin Brockovich, who we all know from movie and Julia Roberts fame, got involved.
WILLIAM O'ROURKE: The rest of the story is Erin Brockovich brought a trailer into the city and signed up the families to bring a class-action suit against Alcoa, of course. Alcoa spent hundreds of thousands more to defend the lawsuit.
The end of the story: They could not determine liability. They could not ascribe liability to any individual. It could have been a gas station, a dry cleaning shop, anywhere. Everybody was on the same aquifer. It could have been the extrusion plant. Couldn't figure it out. So there was no liability, but an awful lot of expenditure in addressing the problem, dealing with the families, installing the filters, and defending the lawsuit. So there was a lot there.
Even though Alcoa wasn't going to be a member of that community, because the plant was shut down, they're still a member of the community and they have to act the right way.
But I believe Alcoa did the right thing. I wasn't called to the witness stand, but if I were I would have been proud of the actions that Alcoa took. Those are the ones that you want to take. You don't want to say that you waited for 60 days to report the results and suppressed anything. You really want to do the right thing.
JULIA KENNEDY: It's hard to play a guessing game as to what would have happened, but I'm guessing that this probably would have gotten out to the community regardless.
WILLIAM O'ROURKE: Of course. We're kidding ourselves if we think anything can stay confidential anymore.
PARTICIPANT: Were there any mortalities? Was there a rise in the cancer rate, or is that not a fact you're aware of?
WILLIAM O'ROURKE: Of course all that came out in discovery. There were a lot of people. There were cancer incident rates in the community, like there are in all communities, and there were questions and opinions on whether those incident rates were higher or lower than others, whether it was attributable in causation to the trichloroethylene in the groundwater or not. So a lot of facts that were presented—some in dispute, some not.
There were definitely people in the city who had cancer. In fact, in a presentation for this story for general managers in our company, I actually have some photographs of some of the people that contracted the cancer and died in that city, to make it real, that these are real situations that happen to real people, and we have to be aware of that. That's why you take action fast in these areas. I think most of you had that instinct: Don't sit on things like this when you have information.
PARTICIPANT: My understanding is with some of these exposures with those types of agents the latency period between when you're exposed to when you get it could be 10, 15, 20 years, and I'm sure that all came out.
But I was just wondering: Was there any evidence that indicated that the extrusion plant that you purchased had ever used trichloroethylene?
WILLIAM O'ROURKE: There was no proof. But there was proof that some extrusion plants in North America used lubricants, et cetera, that could have had trichloroethylene. It was legal and allowed. But then you would still have to had shown evidence of spill and then non-cleanup and things like that. So there's a lot of incidents like that.
You bring up a good point. The latency rate on asbestosis, for example, or berylliosis if you breathe the beryllium fumes, is high. So a company like Alcoa gets advice from its corporate medical directors: We can't be putting beryllium in our alloys; it's not good for the long term.
So even though you're allowed beryllium in aluminum alloys, it was Alcoa that goes to all of its customers and says, "We're going to get it out of there. We'll find alternative inclusions, different alloys that we can make, that will give you the strength and corrosion resistance, but we have to get beryllium out of the alloys."
That's what the good company does to avoid that latency rate: don't even allow, even though you're allowed small amounts in the beryllium—let's get them out of there and let's deal with the government and the aircraft companies and others to get beryllium out of the alloys. That's what good companies do. Alcoa led that way on getting beryllium out of alloys, which is pretty good.
PARTICIPANT: Is Alcoa in that community today?
WILLIAM O'ROURKE: Alcoa does not operate in that community.
PARTICIPANT: Do you still have a relationship with the community?
WILLIAM O'ROURKE: Not really. It's really a remote city. There's no Alcoa facility there. The people who were involved in this, the engineers and others, are very proud of the actions that they took and the knocking on the doors. But there's other people that still don't know where the source of the trichloroethylene came from and they'd really like to know that.
JULIA KENNEDY: I do want to zoom out a little bit because we've talked about two very thorny specific cases.
What I take away from them is that they are elements of consistent enlightened leadership, that it's important to set a consistent standard, and also clear incentives and rewards for good behavior and clear disciplinary actions for bad behavior in developing a successful safety policy.
Can you expand a little bit on that?
WILLIAM O'ROURKE: I mentioned earlier there has to be the whole process in place—from the vision, the values, the protocols, the audits, the reward/consequences, training, promotion of the people, the organization. You have to have all the pieces in place. But the fuel for all of that is really the enlightened leader. When they are passionate about what they're doing, they really make it a true priority within the corporation, they can actually change the culture. That's what Paul O'Neill did.
You saw the results on the graph that we showed earlier. That happened not only through Paul O'Neill but his successor Alain Belda, and his successor Klaus Kleinfeld is continuing that tradition today, to the point that 2011 was the safest year on record for Alcoa, and it continues in that fashion, which I think is wonderful.
So I think it's the fuel of the enlightened leader that happens, not just in safety but in any area. Where they decide to make it a priority, it becomes a priority.
JULIA KENNEDY: Something else I wanted to talk about as the knock-on effects that safety brought to Alcoa and how other areas of the company and its concept of citizenship and responsibility rose along with safety.
WILLIAM O'ROURKE: It does. In fact, our CFO used to ask people, "Is it easier to get zero lost workdays or to get a return that meets the cost of capital?" He believes getting zero lost workdays is an awful lot harder. So if we can get close to zero here, why can't we get the cost of capital over here? He thinks that's a lot easier—which was a nice speech that he would make periodically.
Paul O'Neill would talk about theoretical limits: How far can you go? So he called the controller in and he asked him, "Ernie, how fast can you close the books?" He said, "If I removed all of your impediments and everything was perfect, how fast would you close the books every quarter?"
He said, "I could do that—if everything was removed, we had perfect systems, three days."
He said, "Okay, Ernie, that's your target now, close the books in three days."
Ernie said, "I can't do that."
He said, "Yes you can, and you will."
And he did, by the way, he did, and Paul O'Neill removed all the impediments.
He said, "I need a common chart of accounts that everybody uses everywhere in the world." Alcoa has a common chart of accounts.
"I need a single system that we're going to use." So we use the backboard of Oracle. Could be SAP. But there is one system in Alcoa, it's Oracle, and it's everywhere, and everybody closes those books fast. In fact, Ernie set three days; it's now less than a day to close the books, which is hard because it's already tomorrow in Australia. So you have to have rules on what is "today," what is a "one day close."
Alcoa is now releasing its earnings first quarterly, first one out, because of that fast time.
Think of that. There's now 10 to 14 days that Alcoa is not closing the books that you could focus now on looking at the company and focusing on the future and the strategy and the policy and the direction of the company, which is great.
So then this theoretical limit starts to become a culture within the company.
In the IT organization, in the late 1990s Alcoa had 108 data centers around the world. So you ask: What's perfect; what would be the best in data centers? The answer is two, you'd have a pair of data centers in different continents somewhere, that would be the best. What does Alcoa have today? Four (North America, South America, Australia, and Europe)—four data centers. That's pretty good from 108. Think of the cost that falls out there, whenever you take 104 data centers and get rid of them. That's pretty good. An awful lot of cost advantage and then other advantages as well.
This happens in the environmental area. Pat Atkins [Alcoa's director of environmental affairs] has set some objectives for the company that are just stellar—reductions in the CO2 equivalent emissions, reductions in waste, reduction in mercury emission, increase in recycling rates—that are almost theoretical limits. But guess what? The progress that is being made is absolutely dramatic. If you read some of the environment, health and safety reports, sustainability reports of Alcoa, you'll see dramatic improvements in the environmental area as well.
Stewardship in the communities: Alcoa has a policy now that every business in every location must have what they call a community framework—How will you deal with your community?—and that gets reviewed periodically by the CEO: "Here's your plan. Are you living according to your plan?"
If you think of that culture where you want to be the best in everything that you do, it's a great place to work. I used to call it "Name That Tune." If somebody says I can close the books in three days, somebody else can do it in two days—I can do it in an hour, or whatever. But think of that environment where you want to do better.
The CEOs can't be everywhere. Think of the plate that a poor CEO has—from marketing, community relations, government relations; from the stockholder appreciation, et cetera—and these people probably also have families where the kids are looking at what college do I go to, maybe I have to relocate, I have elderly parents, et cetera. Their plates are really full.
So they have to create a culture where other people pick up on what has to be done in the company, so that you don't have to go to the CEO and discuss what do we do in a situation like this; you go and report what you did and the CEO feels good about that.
And then it happens not only after you retire but after the next CEO retires, and you continue with that kind of performance throughout the corporation and it continues to get better.
That's the kind of environment that I had the opportunity to work in. I was very, very fortunate to have the career that I did in the company that I did and with the leaders that I had.
PARTICIPANT: This is a quick comment on your phrasing of removing impediments. To me—I'm trying to define what an enlightened leader is—the more that they can remove impediments and create the right culture for other people to pick up and do the work, that's an enlightened leader.
WILLIAM O'ROURKE: Oh, it is, it is. Take the excuses away, they're gone.
JULIA KENNEDY: Thank you so much for a wonderful presentation.
WILLIAM O'ROURKE: A privilege. Thank you very much.