Leader of Steel: F. Kenneth Iverson
Here is an excerpt from our book, Intelligent Fanatics Project: How Great Leaders Build Sustainable Businesses:
What Nucor management has been able to do is get workers to identify their own interests fundamentally with those of management, something managers have been attempting to do, not very successfully, since the dawn of industry.
—Ted Kuster, New Steel
In strategy, in philosophy, in plant location, in how to construct a plant, in motivating a workforce, in meeting a market, [Ken Iverson’s] the one to follow. He’s a great operator.
—James Mertz, president of Calumet Steel
In the nineteenth century, in the early days of steel production, workers had both poor and dangerous working conditions. Andrew Carnegie’s steel workers exemplified what was common during those days. Workers toiled twelve-hour shifts, seven days a week, and only received one vacation day a year—on the Fourth of July. Steel workers were treated like peasants and were paid like peasants, so it was no surprise that steel workers throughout the early 1900s began to strike.
After years of strikes, unions formed in the steel industry. Working conditions began to improve, though not much changed from the 1880s to the 1960s. Even with positive changes, steel companies continued to struggle to get the most efficiency out of their workforce, especially once those companies had to compete with lower-cost foreign steel producers.
So how was F. Kenneth Iverson able to get his workers at Nucor to become fully aligned with their company and to create one of the most efficient steel producers in the world, all without any union involvement? How was Iverson able to create one of the best track records of shareholder value creation in the steel industry, from a standstill, against billion-dollar incumbents?
Ken Iverson blazed a new trail in steel production with the mini mill, thin-slab casting, and other innovations. He also treated his employees like partners. Both of these approaches were too unconventional and unusual for the old, slow-moving, integrated steel mills to compete with. Ken Iverson harnessed the superpower of incentives and effective corporate culture. He understood how to manage people and had a clear goal. He often said:
"I don’t order our managers to keep in close contact with their employees. But I do nag them. I say, “Andrew Carnegie was a financier. He could afford to treat people like peasants. We’re managers. We can’t."
As is true of other intelligent fanatics profiled in this book, Ken Iverson could have been identified, early in Nucor’s history, as a special manager. As early as August 9, 1973, outside observers of all types were given a glimpse into Nucor and were shown how Iverson was unlocking the superpower of incentives with employees. The Wall Street Journal’s Jim Montgomery profiled Nucor in an article entitled “Raking It In: Steelmaker Raises Output and Productivity with Incentives that Make Everyone Hustle.” In the article, Montgomery highlighted one of Nucor’s employees, James Samuel Jr., an ex-sharecropper who never reached high school. In the prior year, Samuel had earned $12,110 plus an additional $807 in profit sharing, more than double the $6,049 earned by South Carolina’s three hundred thousand other hourly paid factory workers. Montgomery did not even pick the highest earner at Nucor, as some workers that year were earning $20,000 to $25,000, and the company was quoted as saying that many employees earned at least $12,000. The article went on to describe James Samuel Jr. and his opportunity at Nucor:
It’s a hot job, peering down from a grillwork platform at the white-hot metal filling the molds below, and Mr. Samuel and two other strand tenders must let each other often rest their eyes. But Mr. Samuel says he has no complaints. In four years he has been able to buy a sporty Plymouth Duster and a $15,500 home far more comfortable than his seven-member family ever could have dreamed of owning previously. He used to share his crops with his landlord to pay his rent. And he says it still seems unreal to get a bonus of more than $4,000 in cash a year for producing bumper crops of steel billets.
The article went on to describe, in detail, the incentive structure Nucor had in place for workers throughout the organization. Ken Iverson was quoted as saying that 40% bonuses used to “scare” him, but as he fully understood the power of the incentive structure, he began to worry when bonuses were too small. “If a man produces a great deal, you’d be amazed at how much you can pay him.”
Additionally, the article mentioned how successful the incentive philosophy, lean management structure, and decentralized operation were for Nucor’s financial performance:
Eight years ago, Nucor was running in the red. Sales stagnated at $20 million a year. Since the present management took over in 1966, sales have risen by an average 25% a year. Operating earnings have increased by an average of 35% a year. In 1972, net income hit a record $4.7 million, or $2.35 a share, on record sales of $83.6 million.
Without knowing too much about the steel industry, an investor could have deduced that Ken Iverson and Nucor were special and that further due diligence was necessary. In fact, it probably would have been best if you did not know much about the steel industry, because no one in the steel industry could have fathomed the small microcap Nucor becoming the top steel producer in the United States a few decades later. Almost none of Nucor’s employees, including James Samuel Jr. and CEO Kenneth Iverson, had any prior experience in the steel industry, and therefore they did not know what was impossible for a steel company.
Upon further investigation, and given time, an individual could have observed that, in 1975, Nucor’s annual report had all of Nucor’s employees listed on the front cover, signifying who truly ran the company. And every year since, Nucor has listed all employees front and center in the annual report, even as the list of names has grown to more than twelve thousand today.
Even the skeptical, conservative investor who was cautious about Nucor and steel’s growth prospects in 1973, and who wanted to wait for Nucor’s Ken Iverson to establish more than a ten-year track record, would have been greatly rewarded in the long term. Investing in Nucor in 1978 and holding until the day Ken Iverson stepped down as CEO, on January 1, 1996, would have produced a 25% compounded annual return over an eighteen-year period (see figure 7.1). That would be compared to the S&P 500’s 11.3% compounded annual return over the same period.
$10,000 Investment in Nucor Compared to the S&P 500 (1978–January 1996)
Source: Google Finance historical price data
You can read Ken Iverson’s story in our book, Intelligent Fanatics Project: How Great Leaders Build Sustainable Businesses. Become a Member and we’ll send you the eBook-Kindle version for Free.