Mister PowerPoint Goes to Washington
From the Magazine: Friday, December 1, 2006
Mitt Romney, Massachusetts governor and Olympics savior, aspires to the White House. What does his background as a Bain consultant and hyper-successful venture capitalist tell us about how he’ll perform? MATTHEW REES has the answers.
“Look at the invoices!”
That’s what Tom Stemberg, then a fledgling entrepreneur, told Mitt Romney in 1985. Romney was the head of a new venture firm, Bain Capital, and was skeptical of Stemberg’s idea of launching a chain of office-supply stores. Romney had called 100 businesses in the Boston area and found that they were spending far less on pens, paperclips, and the like than Stemberg was claiming in his business plan.
Stemberg had heard this complaint from other venture capitalists, and he always told them the same thing: the businesses didn’t know how much they were spending. If the VCs would simply go to the companies and check their office-supply invoices—a dreary, labor-intensive task—they would find that the companies were actually spending a remarkable $1,200 per employee on the mundane supplies. No other VC had taken Stemberg up on his challenge—but Romney did.
He and two Bain Capital colleagues, Josh Bekenstein and Adam Kirsch, went back to the businesses, got their invoices, and ran the numbers. The exercise provided the Eureka! moment that would come along many more times in Romney’s venture career. Stemberg was right. There was a lot of money in paperclips. After spending three months grilling Stemberg on every conceivable dimension of the proposed business, Romney recommended to his partners that the idea—a company that would be called Staples—deserved an infusion of capital.
That initial investment—about $600,000—paid off brilliantly. Staples started in May 1986 with one store, in the Boston suburb of Brighton. It went public three years later, and today has 1,800 outlets with 69,000 employees. Last year, Staples registered $16 billion in sales. The business has handsome profit margins, little debt, and a stock-market value of more than $18 billion. Today, Mitt Romney says he’s prouder of this investment than any other.
The episode highlights what would become the defining characteristic of Romney’s career as a venture capitalist—and later as a government executive. He was willing to pursue—and analyze—data that others wouldn’t bother to chase down. His dogged persistence paid off. During the 14 years Romney headed Bain Capital, the firm’s average annual internal rate of return on realized investments was a staggering 113 percent. At that growth rate, a hypothetical $1,000 investment would grow to $39.6 million before fees. Few, if any, VC firms have ever matched Bain Capital’s performance under Mitt Romney.
Since 2003, he has served as governor of Massachusetts—a Republican running the most Democratic state in America. Romney, who turns 60 in March, is now laying the groundwork for a presidential campaign. His record in business and government, coupled with his personal discipline and a strong campaign organization, give him credibility even in a GOP field where Arizona senator John McCain and former NYC mayor Rudolph Giuliani are now far ahead in early polls.
It’s too early to say whether Romney can win, and aspiring Presidents Kerry, Dukakis, Tsongas, and Ted Kennedy are potent reminders of the rocky road from Massachusetts to 1600 Pennsylvania Avenue. But in the event Romney is elected two years from now, there’s little doubt that he would approach public policy just as he approached business and investing.
In his youth, it was the ambition of Willard Mitt Romney to lead a major corporation. His father, George, was chief executive of American Motors, where he introduced Americans to the compact car and saved the company, at least for a time, from extinction. George Romney was later elected three times as governor of Michigan, unsuccessfully sought the Republican nomination for president in 1968, then served as secretary of Housing and Urban Development. He died in 1995 at age 88. Mitt Romney told me that his own “dream come true” would have been to head General Motors: “That was the most exciting thing I could imagine.” He certainly checked all the right boxes. He excelled at suburban Detroit’s elite Cranbrook School (where he overlapped with future journalists Michael Kinsley and Michael Barone), went off to Stanford for a year, spent two years as a Mormon missionary in France, transferred to Brigham Young University, graduated first in class, and was accepted into a joint-degree program at Harvard’s business and law schools. At both schools, he finished near the top of his class. Romney’s business school classmates included a swaggering Texan from Yale named George W. Bush.
After a meeting with recruiters from the Boston Consulting Group (BCG), Romney became convinced that working as a consultant at the highest levels of a variety of companies would prepare him for a future job as a top manager, so he delayed his plan to join a big corporation. Instead, he spent two years at BCG and six at Bain & Co., where his colleagues included two future CEOs of Fortune 500 companies, Kevin Rollins of Dell and Meg Whitman of eBay. Romney worked for such clients as Outboard Marine Corp., Burlington Industries, Monsanto, and Corning.
He was quickly promoted to partner but became frustrated in a role of recommending strategy rather than implementing it. He was on the verge of joining the Gould Corp. in Chicago when Bill Bain, the founder of Bain & Co., and Jack Hanley, who was then CEO of Monsanto, intervened. Try something that would give you operational control, they suggested. Romney agreed.
Bain researchers had found that, once the firm had completed an engagement advising a company, its stock price outperformed those of its peers. So why not share in the upside? Romney decided to enter venture capital, which involves identifying promising companies, investing in them, and helping to manage their businesses. So, in 1984, he left Bain & Co. and spent a year raising $37 million to start a firm called Bain Capital, LLC. It was completely independent of Bain & Co. though Bill Bain, who was an investor in Romney’s firm, was happy to have his name associated with the venture.
Bain Capital set out to find underperforming companies—known in the venture community as “deals with hair”—and revive them. The firm also pursued investment opportunities for companies little more than a glimmer in the eye of ambitious entrepreneurs like Tom Stemberg. The goal was “to see something others didn’t see,” as Romney puts it. That was no small matter in the hyper-competitive venture world, filled with people who pride themselves on 20-20 investment foresight.
Romney thought he had an edge. At a time when most venture firms stressed financial engineering—reconstructing balance sheets by shifting assets and liabilities—Bain distinguished itself through the operational experience of its partners. They knew how to run businesses. Most of Bain Capital’s professionals had either been in management consulting or in line-management jobs in corporations, so Bain could help boost the operating performance of the companies in which it invested.
Plus, Romney was obsessed with numbers. “My favorite thing to do is to bathe in data,” he says now, “do analysis, reach conclusions, and then find a breakthrough. There is nothing as exciting as that ‘aha!’ moment—seeing something that looks insoluble and finding a way to make it work.”
For every serious candidate for investment, Romney and his colleagues would undertake what they called a “strategic audit” of the company. They would survey board members, Wall Street analysts, bankers, suppliers, competitors, former employees, customers. (In the case of Staples, for example, they projected a sizable constituency for office supplies among home-based workers, a group just beginning to grow.) And then they would dissect a vast array of metrics: market share, cash flow, product quality, customer satisfaction, and on and on. “At the end of the strategic audit,” says Romney, “we had a pretty good map of what was right and wrong in the business, of what had to be fixed, and which things were urgent and which were long term.”
It doesn’t hurt that Romney has star power. He was named one of People magazine’s 50 most beautiful people in 2002.
Each week, the firm’s professionals would gather in a windowless conference room for what was known as a BCBR, or Bain Capital Business Review, reviewing the strategic audits and making decisions on whether or not companies were worthy of an investment. Unanimity among the partners was required for a commitment. Consistently playing the role of contrarian was Romney, who thrived on trying to find holes in his colleagues’arguments (even when fully supportive of the investment proposal). Bain Capital’s portfolio companies eventually included Sealy, Brookstone, The Sports Authority, and Domino’s, and the firm now has $40 billion in assets under management.
In 1990, Romney was asked to save his former consulting firm, Bain & Co. It was weighed down by a poor financial structure at the same time when business was slowing. Romney began by traveling to all of Bain’s offices, then met with the firm’s partners and said he would take the job on three conditions. All the partners had to: name him CEO unanimously, commit to staying on the job for at least one year, and give him unilateral authority. They quickly acceded.
Romney brought with him two of his trusted lieutenants from Bain Capital, Josh Bekenstein (from Staples days) and Bob White, and they led an effort to work through the complicated restructuring of the employee stock-ownership plan, real-estate deals, bank loans, and money still owed to former partners. Two moves stood out: First, Romney increased the transparency of the firm’s finances, letting partners see each other’s salaries, for example. Second, he said he would give employees regular updates on the rescue plan, but, in order to keep everyone focused on clients, the updates would be provided only on weekends. The turnaround proved a swift success. Within a year, Bain & Co. returned to profitability without layoffs or partner defections.
Romney returned to Bain Capital, and in 1998 he was asked to perform another rescue, leading the Salt Lake City Olympic Committee. His task was to save the 2002 Winter Games, which were in jeopardy after a corruption scandal. Again, Romney turned around a dire situation. A $379 million deficit became a $56 million surplus, and the Games were widely recognized as a success.
Romney brought the same methodical, disciplined approach to his next job as well. In his inaugural address as Massachusetts governor on January 2, 2003, he talked of a “realignment toward the nimble and inventive,” and cited “corporate behemoths” like United Airlines being “outmaneuvered by nimble, fast-moving upstarts” like Southwest and JetBlue. He also blamed budget deficits and high taxes on the structure of the state government, and pledged reforms.
He started early. The day after his election, he convened a meeting of senior advisers to talk about restructuring, with an emphasis on overhauling the way Cabinet departments would report to him. Later, he commissioned private consultants: Bain & Co. prepared an analysis of the state’s higher education system; BCG focused on health and human services reforms; and Deloitte & Touche tackled the uncompensated care pool, which paid hospitals for taking care of uninsured poor people. When, after just two months in office, he proposed spending reductions in his first budget, he told The Boston Globe, “I went through every single cut with every single one of the executive offices and the Cabinet-level agencies. It’s a process I am used to. It’s the same thing which we did at the Olympics. It’s the same thing we did at the consulting firm.” In 2004, Romney even dedicated a day to honor venture capitalists, calling on Massachusetts residents to “applaud the efforts of the many individuals who make entrepreneurship possible.”
You can see the influence of his Bain background in how he approached government. He explained in an interview with Fast Company magazine: “The business world is very unforgiving if your numbers don’t add up. In the public sector, there is a potential for a great deal more sloppiness…. My experience in the investment and consulting worlds helped me develop an approach to turnaround situations….
Romney focused on the fact that so many people who could afford health care had decided to go without it.
“Number one: Stanch the bleeding…. Then you do a strategic assessment of how bad things are. When I became governor, we immediately found that we were in financial distress. We carried out an audit of where we were and developed a pared-down budget that didn’t force us to raise taxes or eliminate essential services. You have to build the right team. I look for bright people with strong personalities who will argue with me…. Finally, you have to focus. In business, you realize that unless you improve the way you’re doing things, you’ll be left behind. Government tends to add programs but doesn’t think in terms of eliminating inefficiency, much less constant improvement. I look at every program and think, How can we make this better? In the private sector, change is a part of everyday life.”
It was inevitable that, as governor, Romney would go after the thorniest public-policy problem of all: health care. Tom Stemberg convinced him to take it on. In April, with a good deal of national attention, Romney signed a measure to provide universal coverage for the uninsured in Massachusetts without raising taxes or resorting to employer mandates. The conservative Heritage Foundation played an advisory role; the measure won grudging support from Ted Kennedy (who had beaten Romney, 58 percent to 41 percent, in a Senate race in 1994) and even The New York Times editorial board, which called it “a carefully crafted plan with elements that could serve as a model for elsewhere.”
Romney had started, naturally, with a Bain-style strategic audit, pulling together experts from business, academia, and government, and posing a few basic—though frequently overlooked—questions: Who exactly was uninsured? Why were they uninsured? What could be done to enable people to keep their health coverage even if they switched jobs or worked as independent contractors?
A survey of 5,000 state households turned up some surprises. Twenty percent of the uninsured were eligible for Medicaid but had not enrolled. Another 40 percent had annual earnings high enough to afford health care but had decided to forgo it. The remaining 40 percent were earning too much to qualify for Medicaid but not enough to afford health insurance.
Romney focused on the fact that so many people who could afford health care had decided to go without it. He asked for data on the bundled price of health care to be unpacked and looked for ways to change the market conditions that had driven up the cost of care. He ultimately settled on a measure, known as the Connector, which created an entirely new market for health care—enabling individuals and families to purchase private health insurance, with pre-tax dollars, at a savings of 20 percent to 40 percent. (Romney also pressed for eliminating a number of state-imposed mandates on health insurers, as these mandates had the perverse effect of driving up premiums and leading some companies to drop health insurance as a benefit. The legislature refused to go along, but did agree to a moratorium.)
Because, under the Connector system, health coverage was not tied to an employer, residents had a property right to the insurance and would not lose it if they switched jobs. “This is something conservatives have been trying to achieve for 50 years,” says Robert Moffit, a former Reagan administration official who, as director of Health Policy Studies at the Heritage Foundation, regularly consulted with Romney.
Romney created an Internet portal for hospitals and clinics to enroll eligible residents in Medicaid automatically when they sought treatment. For uninsured residents whose income was too high to qualify for Medicaid, Romney offered a subsidy funded from the state’s uninsured care fund, which totaled about $1 billion. Romney asked an MIT economist, Jonathan Gruber, to develop an econometric profile of this segment of uninsured residents. Gruber discovered that they were disproportionately young single males who were both educated and healthy, so the subsidies were unlikely to be greater than the $1 billion in the pool.
True to form, Romney became deeply immersed in crafting the health-care proposal. Moffit recalls that when he was asked to brief Romney, he found the tables turned. Romney was the one who gave Moffit the comprehensive PowerPoint presentation. “In 25 years of briefing elected officials and senior government executives, this was the first time I was the one who got briefed,” Moffit says. “It was like being in a private class with a very high-energy professor, and Romney was the professor and I was the student.”
The health care achievement quickly raised Romney’s national profile. “His candidacy is taken very seriously among insiders,” says Thomas Mann of the Brookings Institution. “He increasingly appears likely to be the strongest challenger to John McCain for the Republican nomination.”
If one were to perform a Romney-style strategic audit of his prospects, the obvious assets would be his successes as governor, as head of the Olympic committee, and as CEO of Bain Capital. He’s also helped by the early primary line-up. He’s popular in next-door New Hampshire, where he owns a vacation home in bucolic Wolfeboro. In Iowa, McCain is still damaged by his refusal to compete in the state’s primary in 2000. And Michigan is the state where Romney was raised and where his father was adored as a governor and businessman. In 2005, Romney was selected to head the Republican Governors’ Association, a post that has allowed him to work with key political figures around the country. He has already established a highly synchronized fundraising apparatus, and he will be able to tap three rich veins: venture capitalists and other fellow financiers, CEOs like Stemberg whom he has helped, and Mormons. Of course, Romney won’t get the backing of every Mormon. The governor of Utah, Jon Huntsman Jr., a co-religionist, has already endorsed McCain—though Huntsman’s billionaire father, who founded a giant chemical company, is an active Romney supporter.
Romney was obsessed with numbers. 'My favorite thing to do is to bathe in data,' he says now.
Yet the audit of Romney’s presidential prospects would also turn up two potential liabilities. The first is some lingering distrust among conservatives. Statements from his 1994 Senate campaign—he said abortion should be “safe and legal in this country”—are sure to be dredged up. He has sounded and acted more conservative as governor. In 2005, he wrote in an op-ed in The Boston Globe that he wanted to see Roe v. Wade overturned and said states should decide on their own whether to permit abortion. “I believe that abortion is the wrong choice, except in cases of incest, rape, and to save the life of the mother,” he wrote. “I wish the people of America agreed, and that the laws of our nation could reflect that view.” Earlier qualms on the right may also be offset by his aggressive opposition to the Massachusetts Supreme Court ruling that permitted gay marriage.
Second, there is his religion. Romney is a member of the Church of Jesus Christ of Latter-Day Saints. Mormons sometimes joke that they’re the last group in America that can be openly maligned (a television series on HBO called “Big Love” portrays a polygamous family and an evil Mormon patriarch), and a Bloomberg/Los Angeles Times poll conducted in June found that 35 percent of registered voters said they would not vote for a Mormon presidential candidate. By comparison, 22 percent said they would not vote for an evangelical Christian; 14 percent would not support a Jewish candidate; and 9 percent, a Catholic candidate.
Romney’s chances in 2008 may come down to whether he is truly ready for prime time. While his success in business and the Olympics stemmed in part from his dexterity in sales and marketing—useful attributes to have as a candidate—he’s run for office only twice and won just once (his classmate George W. Bush had two victories under his belt and in a far larger state), and presidential campaigns have a way of uncovering vulnerabilities candidates didn’t even know they had (just ask George Allen).
Matthew Rees has served as a speechwriter at the White House, the Treasury, the Securities and Exchange Commission, and for the U.S. Trade Representative. During ten years as a fulltime journalist, his articles appeared in a wide range of publications, including The Economist, The New Republic, The New York Times, The Washington Post, and The Weekly Standard. He is also author of “From the Deck to the Sea: Blacks and the Republican Party” (Longwood).