Penney pinched

Falling sales and claims of sexist, insular management plague Plano-based J.C. Penney. Can a woman -- from Wal-Mart of all places -- turn the troubled chain around?

But Castagna's most significant comments centered on a concept previously unknown at J.C. Penney: new blood. In establishing a team to take the company forward, Castagna said, "We're looking at a nucleus of J.C. Penney's associates, but we're also talking about a number of the best people on the outside that could add to the team process."

If Castagna's words translate into action, J.C. Penney could become a very different corporation.

"If nepotism becomes the culture, instead of a part of the culture, it's a problem... Any company culture can get out of whack."
Hadley Hooper
"If nepotism becomes the culture, instead of a part of the culture, it's a problem... Any company culture can get out of whack."

Only six years ago, J.C. Penney earned the coveted reputation as a fun place to work.

In the 1993 edition of The 100 Best Companies to Work for In America, written by Robert Levering and Milton Moskowitz, J.C. Penney was among the top employers. The authors cited in particular the creed that founder James Cash Penney developed in 1913 -- 10 years after starting his retail chain -- which is referred to in the company as "The Penney Idea."

Penney wanted his employees, whom he called "associates," always to work with "honor, service, and cooperation." Veteran workers are supposed to wear a pin every day showing the commitment to those principles. He also wanted executives to share the profits and act according to the Golden Rule. He urged his employees to treat each other with the utmost respect and caring, as if they were family.

Levering applauded the family atmosphere and presence of so many family members at J.C. Penney in 1993. But now he says, "If nepotism becomes the culture, instead of a part of the culture, it's a problem... Any company culture can get out of whack."

By 1998, Levering and Moskowitz, who now compile their list annually for Fortune magazine, dropped J.C. Penney from their Top 100. As a policy, Levering won't say why a company falls off.

It couldn't have helped that J.C. Penney, after a short turnaround in the early '90s in which it set a sales record for stores and catalogs of $20.6 billion, began reporting quarter after quarter of nearly flat sales.

Oesterreicher was given credit for the earlier turnaround when he served as president of stores and catalogs in the early '90s. About the time he was promoted to chairman in 1997, however, the company's fortunes started to flag. Baker's lawyer, Pat Maloney Sr., claimed there was a direct relationship between Oesterreicher's leadership and the decline in Penney's fortunes.

A well-respected plaintiffs' attorney from San Antonio, Maloney portrayed Oesterreicher as ineffectual, chauvinistic, and sometimes downright vicious.

"Oesterreicher ignominious pygmy," Maloney told the arbitrator in his opening statement. "That's the only way you can describe him...He's small in thought, and he's the way he treats people."

A native of Saginaw, Michigan, Oesterreicher has worked 34 of his 56 years at the company. A business acquaintance, comparing Oesterreicher to other more dynamic Fortune 500 chief executives, says, "He possesses all the charisma of your pharmacist." New York Times business writer Leslie Kaufman described Oesterreicher as a Herbert Hoover, "proposing modest corrections even in the face of a deepening crisis."

Maloney grilled Oesterreicher mercilessly. "There's nothing funny about this, Mr. Oesterreicher...You can smile all you want, but you'll notice my client isn't," Maloney told Oesterreicher when he detected a grin on the J.C. Penney chairman's face. "Humor and smiling are two different things," Oesterreicher replied.

Maloney painted a grim financial picture of J.C. Penney and pinned the poor performance to Oesterreicher. Since he took the top J.C. Penney post four years earlier, the lawyer noted, the company's stock had fallen precipitously. The company's share price dropped from a high of $56 per share this summer to the low 20s in recent weeks.

The troubles at J.C. Penney department stores have made many Wall Street analysts keep the company stock on a hold status, advising investors not to buy shares.

"They have been pretty stuck on their way of doing things," says Alan Mak, a stock research analyst for Argus Research Group. J.C. Penney doesn't seem to know who its customers are. Class-conscious consumers who once shunned low-end retailers such as Kmart and shopped at J.C. Penney now buy at The Gap and other brand-name specialty stores. For bargain hunters, J.C. Penney is a pale alternative to a Kmart or Wal-Mart, Mak says.

The company's customer base is "ill-defined," agrees market researcher Sally Schaadt at 14 Research Corp.

About a year ago, J.C. Penney managers began publicly acknowledging they needed to redefine their customer base.

"Our 1998 results were not acceptable," Oesterreicher said last February at an industry conference. He took a 17 percent cut in compensation last year, making his take-home pay excluding stock benefits $1.8 million -- a salary that is not particularly large for the CEO of a Fortune 500 company. "There's a lot of resilience to guys like that," says an asset manager whose investment firm has a significant stake in J.C. Penney when asked why the J.C. Penney board hasn't given Oesterreicher the boot, given the past years' financial reports.

Even before Castagna arrived, Oesterreicher began to take what amounted to dramatic steps -- for a somewhat stodgy company -- to reposition J.C. Penney and transform its culture.

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