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Kendrick B. Melrose: Caring About People: Employees and Customers

Kendrick B. Melrose joined The Toro Company in 1970 as director of marketing for the Consumer Products Division. Three years later, he was appointed president of Game Time Inc., a former Toro subsidiary located in Litchfield, Michigan. In 1976, he was named vice president of the company’s outdoor Power Equipment Group, promoted to executive vice president in July 1980, named president in February 1981, chief executive officer in December 1983, and chairman of the board in December 1987. On March 15, 2005, he stepped down as CEO but remained as executive chairman for Toro’s board of directors. In March 2006, he retired from the chairman position. In early 2006, Melrose formed a new company, Leading by Serving LLC, in Wayzata, Minnesota. Its mission is to advance the principles of servant leadership.

Melrose is a native of Orlando, Florida. He graduated with honors from Princeton University in 1962, where he majored in mathematics and electrical engineering. He was also a varsity track letterman for three years. He received a master’s degree from the Sloan School of Management at the Massachusetts Institute of Technology. He later received an MBA from the University of Chicago, where he also was a marketing research assistant, a Ford Foundation fellow, president of the Graduate Business School’s student body, and on the Dean’s Honor Roll.

Prior to joining Toro, Melrose was director of corporate planning at Bayfield Technologies Inc. of Minneapolis, and a marketing manager in the Pillsbury Company’s New Products Division. Melrose is the author of Making the Grass Greener on Your Side: A CEO’s Journey to Leading by Serving, published by Berrett-Koehler Publishers in October 1995. In addition, he serves on the board of directors of SurModics Inc. (chairman); Center for Ethical Business Cultures (chairman); the Guthrie Theatre in Minneapolis; Park Nicollet Health Services; The Environmental Institute for Golf; Turf Equipment and Supply Company; Wesco Turf Supply Inc.; Professional Turf Products, Ken Blanchard’s Lead Like Jesus enterprise, and he is a member of the faculty at the Opus School of Business at the University of St. Thomas, where he also serves on the board of governors. He is a frequent speaker at national conferences on the subjects of servant leadership, building a values-based corporate culture, and how good cultures breed good ethics.

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Ethix: Under your leadership at Toro, you developed an approach called “Alternate Dispute Resolution” to deal with accidents that occur with your products. Could you tell us what that is and how it came about?

Kendrick B. Melrose: It is a culture story about Toro. For years our philosophy was to defend ourselves, almost to extremes, if anyone suggested that our product was defective or unsafe. We took tremendous pride in the safety of our products, and were tough as nails against flagrant or frivolous lawsuits. A lawnmower is not an object that people typically love. It is a work object, and some people leave it out in the rain or they scrape it against the side of the garage, and generally abuse it. Few walk around their yard picking up the sticks and stones as prescribed, so many accidents happen from carelessness. A few people even remove the safety devices like protective shields and cut-off switches to try to improve performance. So we were subject to a number of law suits, ending up in court in about half of them.

At the same time, however, we had an internal culture that encouraged our people to speak up about anything they thought was wrong, and to offer suggestions for better ways to do things. In the early ’90s, our product liability team thought the way we dealt with injured customers was inconsistent with our culture values. Though we were winning most of the cases, we still lost in effect, because of the financial costs and use of time and resources. Perhaps just as bad, we were treating the affected customers as the enemy. The legal team thought this was wrong, since our culture is about valuing people, both customers and employees.

They suggested that we talk to these customers before the legal process began and try to understand what happened. They had watched the people in our service department deal with customers who could not get their mowers started or had something that was broken, and saw that they helped the customer, often going the extra mile. Yet we didn’t do that with people who were hurt with our product. Their instinct was, “Let’s sit down with them and express our concern that they were hurt, without moving into the realm of the legal process.”

So in the U.S., we put in place a process of quickly finding out if someone was hurt using one of our mowers. We immediately dispatched a team, including paralegals and an engineer, to visit the injured party. The paralegals would sit down with the injured party to find out what had happened. They would tell the customer, “The Toro Company is really sorry this happened.” We would tell them they were welcome to engage an attorney if that is what they wanted to do, but that we wanted to try to satisfy their concerns first. The team was normally authorized to pay for medical expenses, lost work time, and even some reasonable trauma costs.

Meanwhile the engineer was there to investigate the accident to see if we could make our product safer and reduce the likelihood of a future accident. This process was the origin of the safety shield that hangs at the back of the mower, preventing the person’s foot from sliding underneath it. We started this based on an accident investigation, and now almost all lawnmowers have them.

There are times where some situations cannot be resolved this way. For example, someone who had his fingertip cut off thought that should be worth a million dollars in settlement. In such a case, we would suggest a mediation process to work out what both parties thought fair. And, of course, the door to getting an attorney was always open, but our desire was to avoid that. We wanted to keep the discussion on a positive basis, because we valued our customers and felt badly when they were hurt using our products.

Realities of the Alternate Dispute Resolution

Did you worry that this open conversation might make the company more vulnerable to liability by freely expressing concern over the injury with your product?

Melrose: We were worried about it. Some suggested we were leaving money on the table, or encouraging a lawsuit. And some argued that where it was clear that the operator was careless, we didn’t owe him anything. But in all cases, these people were our customers and needed to be treated as such as a first step. This was the impetus behind our foray into alternative dispute resolution.

The bottom line is you cannot manufacture a perfectly safe product or create a process that’s completely foolproof.

How does the discussion go if it is clear they have been abusing the product?

Melrose: Usually, when people are stirring for a fight and we come to apologize and try to make things right, our approach disarms them. We rarely find someone who is looking to get rich on a settlement. In this case, the mediator usually reminds people of how a jury would likely react to an absurd claim, and a settlement is reached. Now, fully two thirds of our cases are settled in the home, and about a third go to a mediator. We have had only one case go to court — in 1994 — since we put this initiative in place in 1991.

What are the other results for this program?

Melrose: In the ’70s and ’80s, we would have about a 100 cases a year in the U.S., and half of them ended up at the courthouse. It was an expensive part of our business. Then we started ADR in 1991. Since that time our costs are about 25 percent per year of what they were with the old approach. The average settlement is 53 percent less than what it was before, and is settled in months rather than years. The best part of this is we’ve been able to retain these customers for life.

Application of ADR to Other Industries?

This raises an obvious question. Why is it that other industries do not adopt this practice, in particular the medical industry, which has such tremendous legal costs? Whenever I suggest something like this, I am told, “If we admitted guilt in any way, or implied that by being sympathetic, that would be grounds for a lawsuit, and we would be in deep trouble. Our lawyers would not even let us talk about it.” It seems like your experience is counter to that.

Melrose: Our experience is counter to this. Companies are nervous about this because they think it will cost them more, that they are admitting tacitly that their product is bad, or in the case of a hospital, a doctor did something wrong. But other companies are beginning to move to the Alternative Dispute Resolution process, modified according the particulars of their industry.

I think we will see more of this even with hospitals. I am on the board of one of the major medical centers here in Minneapolis, and we have talked a lot about it. Some hospitals have started to develop a policy to apologize to a patient when a mistake is made, for example, the wrong surgery or medication. There was a statewide study a few years back that tried to capture this, to see how those who admit mistakes would fare in liability and insurance premiums compared with those who did not. Those that admitted mistakes had the lowest insurance premiums because they had fewer lawsuits.

When you look somebody in the eye who’s ready for a fight and say, “I am really sorry this happened,” it takes the sting and animosity out. When you try to find a reasonable solution, it works out better for everyone. I think hospitals are a good area where this will come about, but it is just going to take time and some courage.

The bottom line is you cannot manufacture a perfectly safe product or create a process that’s completely foolproof. Human beings will make mistakes, even though one must continually try to make things safer. I believe virtually every company in America works hard to make sure its products are safe as they can be. There are not a lot of bad people leading these companies. At Toro, we tried to catch everything. We try to make a safe product with comprehensive safety audits, but sometimes a defect will get through the system, or the product will be used improperly. By having an intelligent and compassionate conversation when a problem occurs, it generally works out. This is more of a human value that we have, but the numbers suggest it is very practical too.

The Internal Culture at Toro

How did your philosophy of dealing with external disputes change the way you dealt with internal disputes. Did this have any impact on your human resources policies?

Melrose: Probably not, because the ADR actually grew out of our internal culture and employee values, making the way we treated customers come closer to the way we treated our own people.

We used to behave in a more “top down” way of managing, as if the “bosses” were the only decision-makers. We had unionized plants with the traditional conflicts between management and labor. In the ’80s, we sent all the officers and the director level people to work on the lines in each of our plants for a day each year. We wanted to have them realize that the people who work on the lines building lawnmowers know a lot more about their jobs than we do, can make their own decisions, and can be trusted to do the right thing.

This kind of thinking changes a company from the inside out. Moreover, office management began to see the plant employees as valuable members of the Toro family. When the question of moving a plant offshore, such as to China, came up, we began attacking cost issues as a team that included our important stakeholders. We wanted to make it difficult to eliminate parts of our team. This did two very important things: It made the plant folks more accountable, and made management more empathetic.

But you do have plants in other parts of the world now. And you must stay competitive. How did you resolve this?

Melrose: Virtually all of our non-U.S. plants have come from acquisitions. The only exceptions are two in Juarez, Mexico, which are sister plants to one in El Paso [Texas]. These came about largely from a new (and very large) customer, The Home Depot, which added such volume that it enabled us to keep our U.S. plants with plenty of work.

Another Challenging Safety Decision

You faced a difficult decision with your zero-radius turning mower, which was designed to go around very tight corners. How did you handle this safety issue?

Melrose: The “Z,” zero-degree mower became the standard mower for landscape contractors due to its superior productivity. This is very important for contractors and their crews. In some isolated cases, while cutting on wet grass or steep inclines — something we warn operators not to do — the Z mowers can begin sliding and then turn over at the bottom of the hill. This put the operator at risk of injury, so we decided to build all new units with roll bars. Today, most of our competitors have roll bars as well, but we were one of the first to standardize roll bars on all units.

The bigger issue for us was what to do with the installed base. We could create a kit allowing people to add the roll bar to mowers in use, at our cost of about $150 each, but we were concerned that contractors wouldn’t buy and retrofit them.

We did the numbers. Toro is the leading manufacturer of commercial zero radius turn mowers, and we knew this would be a large one-time charge. Wall Street was not going to be happy, so we had the internal debate about how to proceed. There was no precedent that we knew of for this decision. When auto manufacturers put seat belts on the new cars, they did not retrofit the old cars. So the argument was made that we did not have do this for free. One of our people said, “Isn’t this about whether an old customer is as important as a new customer? If we really care for our old customers, then we have no choice.” He was right. So we made the decision to retrofit the old units for free. When we went to the board of directors to discuss this, they were quick to agree. It was the right thing to do.

Tension Between Wall Street and Stakeholders

You have talked about caring for customers and your employees, but Wall Street has expectations for profit. How do you resolve that tension?

Melrose: One of the several things that is wrong with our system is the paranoia about quarter-over-quarter earnings. When you disappoint the analysts by as little as a penny per share, you are going to get harshly penalized for it. If you miss your earnings estimates for two or three quarters, you can get a reputation that you’re not managing the company very well. It creates pressure to avoid these things almost at all costs. In some very public cases, it pushed some managers beyond the ethical boundaries, and drove the need for more regulations. But, of even more importance in my opinion, it favors short-term strategies and discourages building long-term value for all the stakeholders.

When I was growing up in the ’60s, my parents were stock brokers. They always talked about looking at stocks that had great long-term value. I never heard them talk about companies struggling to make their quarterly EPS targets.

Early in the ’80s, Toro almost went bankrupt. We had three years of losses, and we had to redo the whole company. We spent a lot of time with Wall Street talking about how we could make it, but they needed to hang in there with us, and they did. It might be tougher today to convince them to be that patient. But we have always said that we are going to do things for the long run. If it doesn’t rain, then the grass doesn’t grow. Then there’s less demand for lawnmowers. It’s that simple. And because of that, we worked very, very hard on how to manage the company’s business and assets in a way that allowed us to deliver steadily improving results. We would not excite the high-tech community, but would be a company that shareholders could count on, year after year, and especially over the long term. It took a long time before we convinced Wall Street, but today we are still delivering on our promises and expectations. The best way to deliver strong results over time is being consistent and trustworthy, and through an empowered and accountable work force.

Your tension seems to have been eased by training Wall Street about your company. Does there continue to be a tension between the long term and Wall Street expectations?

Melrose: There always is. If we guided the analysts within a certain earnings range for the quarter, and three weeks before the end of the quarter, our estimates were short, there would be a concerted effort to make up the deficiency. But if we couldn’t do it appropriately, honestly, and ethically, we’d just take our lumps. I think my parents would tell me, “Ken, it’s just one quarter. Don’t worry about the short term, you’ll make it up eventually!”

Product Line Evolution

You mentioned that you had to learn to manage around the weather. You can’t manage the weather, so what did you do?

Melrose: In my early time with the company, we offered residential products of lawnmowers and snowblowers. We learned a painful lesson about snowblowers in the ’70s when they became our major business; it stopped snowing, and we could not sell snowblowers. The mistake we made was we thought we could. We broadened our non-winter product lines to include trimmers, chain saws, tractors, riders, and tillers in addition to lawnmowers, but all these residential products still required a nice warm spring with a gentle rain, not droughts and floods. We went through the ’80s trying to fight this volatility, and we decided we may always be in the lawnmower business, but it cannot be our basic business.

People who work on the lines building lawnmowers know more about their jobs than we do, can make their own decisions, and can be trusted to do the right thing.

We started building the professional equipment and irrigation side of the business, i.e., maintenance products for golf courses, parks, playgrounds, sports fields, and other large commercial turf areas. When the weather is not very good for growing grass, groundskeepers will still buy equipment, though they may not buy quite as much. We also expanded our irrigation business, which nicely complemented our grass-cutting business. At the same time, we introduced to all of our constituencies, including Wall Street, a new slogan, “Toro, more than a lawnmower company.”

In the ’80s, two thirds of our business was for the residential market; in the ’90s, residential became only one-third due to our emphasis and investment in the professional side. To further reduce the influence of weather, we increased our focus around the world, figuring that bad weather someplace in the world may not mean bad weather everyplace. In the late ’80s, 15 percent of our business was international; today it is about 30 percent.

Culture and Ethics

Earlier, you talked about the culture you have created in valuing people. What has that meant to the ethical climate of your company?

Melrose: I believe good company culture breeds good ethics, and bad cultures more easily breed bad ethics. Our culture was developed by turning the organization chart upside down. My role as CEO, and now my successor’s role today, is characterized by serving, mentoring, empowering, and trusting people who work for us. In our culture, the CEO in effect works for the management, management works for the employees, employees work for customers, and thus customer is the ultimate boss. If I can help make all the people who report to me successful, and they in turn try to make all the people who work for them successful and so forth, then all of us become successful. This model pushes initiative, accountability, discipline, and teammanship down the hierarchy, which all fosters a better ethical climate.

We brought in business gurus Tom Peters, Steve Covey, and Ken Blanchard to help us develop this culture. Everyone in our company has gone through Covey’s principle-centered leadership courses. It centers on empathy, seeking first to understand, and then creating win-win solutions. I do not win unless we both win, I do not win unless our customers win, I do not win unless our employees win.

Meg Wheatley, in Running to One Another, taught us how enriching it is to gain understanding of another person’s point of view. Conflict competency is more about understanding, enriching, and empathy rather than winning or losing. Once you understand another person’s position, you are enriched. Two people with better understanding and broader perspectives become better teammates than a winner and a loser.

When you create an environment with the freedom to fail, you try to figure out what went wrong, make the changes and learn from the failure, rather than focus on the failure and the one who failed. The coach is there to guide and help through the process, trying to make sure people see that an honest failure does not lead to the loss of a job or merit raise. The person generally responds the next time not only by doing better, but realizes he is accountable for success and brings forward a better idea. It is a safer environment, and therefore encourages accountability. We developed a system of discipline because we are all in it together; my failure is part of others’ failures and my success is part of their successes. This might sound pretty Pollyannaish, but it really made for a more productive, continuously improving organization. I don’t want to suggest I never got mad, or yelled at someone, or became autocratic. It happened, but only rarely.

Creating the Management Culture

How do you avoid having people in the organization slip through the cracks? They may look good to their boss, but they are very hard on their people and don’t live the culture at all.

Melrose: Now it’s pretty easy because the culture is well established, expectations clear, and everyone notices. In the ’80s, it was very hard. One of the things we did was to find somebody doing something really well and have a celebration with his or her peers. It was a Ken Blanchard principle of “catching someone doing something right.” Unfortunately, the nature of business is to focus almost entirely on the things that are wrong or need improving.

This was an important shift, but not enough. The management had to move their power down the organization, and they often did not want to do that. They would say, “I’ve worked hard to become director of marketing. I’ve worked to get promoted, done well, and have earned the bigger office and better parking place because I deserve it and I’m now the boss.” It’s an “all about me” kind of thing.

People would be managing up. For example, people who reported to me would tell me how good they were doing against our six-people values, when in fact their direct reports would say they were doing these very poorly.

I believe good company culture breeds good ethics, and bad cultures more easily breed bad ethics.

So in the ’80s we decided we had to make this part of our compensation plan. In our company, when you get to the director level and above, you earn both a salary and an incentive bonus. In the past, the bonus was based on meeting measurable performance targets. But then we changed this to six-performance measures and six-people values, which sprung out of the culture work we did in the early ’80s. Both value sets were weighted equally. Unless you scored at least 80 percent of your goal, you would get no bonus. We did a midyear review, and an end of year review, when the bonus was awarded. But nothing much changed. Managers said they were achieving their people values’ objectives very well, but we had no measure for them.

So we made a change. The performance measures, e.g., increase sales 20 percent, would be measured by the manager’s supervisor. But the people measures, e.g., building good relationships, communications, empowerment, recognition, would be rated by the subordinates. One person got a score of 93 percent on the performance measures and 27 percent on the people measures for an average of 60 percent, which meant no bonus. The manager group concluded that we were serious about the people measures, some of those people left the company. We do not do this anymore because we do not have to. The culture is so ingrained that if you cannot accommodate the values of the culture, you quickly say this is not the place for me, and then leave.

What else do you do to establish ownership for people in the company?

Melrose: One of the first things we did when we emerged from our near-bankruptcy scare was create a 10-year employee stock ownership plan (ESOP), because we wanted everyone to participate in the ownership of the company. When the plan came to term, about 20 percent of the outstanding stock was owned by the employees. This helped build accountability and a sense of “this is my company.”

CEO Salaries

You had a large salary and bonus yourself as chairman and CEO. How did you deal with the reality of that?

Melrose: I admit, to the person in the plant I was way over-compensated. Much of this came from my stock ownership. Because of what I learned from my parents, I invested in company stock from the time I first joined the company in 1970. I think it is good for company management to own stock because this causes the executives to be financially involved in the outcome of the decisions he or she makes. In 1990, I worked with the board to give up cash compensation to own more stock 10 years later. I actually took a substandard salary for five years. For a while that looked like a very poor decision for me. It obviously was a good decision because the stock increased about 10 to 11 times from 1990 to the time I retired. So I did well.

But I’m not a big fan of large stock-option grants year after year after year to already well-paid executives. I don’t buy the argument that each slug of options is needed to continue to motivate the CEO to get the stock value up. And it’s a hollow argument to say it’s good for the small shareholder. The dilemma for me was that since the stock value was rising so much faster than inflation, my compensation and financial position were far outpacing the vast majority of the Toro employees who had little stock ownership. I wanted to find ways to recognize and value the role they played in this trend.

Unfortunately, the nature of business is to focus almost entirely on the things that are wrong or need improving.

Early in the 2000s, I got a partial answer to this dilemma. At Toro, we have a college scholarship fund for children of employees, based on merit and extra curricular activities. Scholarships are awarded to students who do well academically but also are involved in things like the student newspaper, sports, music, etc. One of the people I had worked with in one of the plants wrote to me and asked if there was more that could be done. In his situation, he had three daughters who would all be in college at the same time. In order to prepare for this financially, his daughters worked after school and therefore were not involved in extra curricular activities. His oldest daughter had a B average, but had not been awarded a scholarship for lack of outside school activities. So I set up another kind of Toro scholarship for students like them.

A few years later, when I retired I wanted to do something more. We have a plant in southern California, and in the early 2000s, after wildfires wiped out some of our employees’ homes, cars, and their belongings, they had nothing. We started to raise money for them, but since they were in California, people in Minneapolis were less connected. The giving wasn’t enough to really help these families. So we established an emergency relief fund, and I funded it with a significant amount of Toro stock.

There are lots of ways executives can recognize the important role of employees in share-price growth.

There are probably lots of other ways executives can recognize the important role of employees as a whole in share price growth. I hope more of them give this serious consideration.

The Right Mission

In looking at your material, I was struck with the language you use in describing your purpose. It talks about having a passion for beautification of outdoor environments. It would be very easy to describe your products in a functional and utilitarian manner, so I was curious about the origin of that language.

Melrose: In the 1970s, we were principally a lawnmower company, and the mission of the company (I am paraphrasing) was to build the best lawnmower in the world. The engineers and salesmen loved it, but people less directly connected to our product had more difficulty relating to our mission. During our transformation in the ’80s due to our financial difficulties, we thought about an appropriate mission statement. We wanted a statement that reflected a much broader view of Toro, and to be compelling and engaging for all of the employees.

When you are as passionate about these topics as I am, you can’t simply walk away.

We concluded that what we do ultimately is to help customers beautify and preserve their outdoor landscapes. And thus a new mission statement was born. This had an interesting side impact on our engineers, who found they could also connect directly to the new mission. It pushed their thinking beyond the predominant “cut and bag” mowers. The bagged grass typically ends up in a landfill. And in the summer months, grass is about 20 percent of the landfill problem. So they embarked on designing a lawnmower that recycles the cut grass and puts it back into the soil as nutrients, thus avoiding the landfill issue.

Mentors

I know you have done a significant amount of mentoring yourself, but who are your mentors?

Melrose: I’ve had several over the years. Myron Roeder was director of marketing while I was at Pillsbury early in my career. Gene Casey, an industrial design guru, was helpful in my early years at Toro, Steve Covey in my early years as CEO, and Ken Blanchard more recently.

Present Activity

Tell us about the organization you are now managing, “Leading by Serving.”

Melrose: When I retired, I didn’t want to retire from doing work, and I very much wanted to spend time “giving back.” I have a passion about corporate culture, servant-leadership, and business ethics, and wanted to continue to work in these areas. I could have formed an LLC called Ken Melrose and Associates, similar to what other retired CEOs have done. But I didn’t want a company named Ken Melrose and I had no associates!

What I care most about is servant-leadership, so “Leading by Serving” seemed like the right title for my organization. My focus now is on advancing the principles of servant-leadership in businesses, churches, and universities. I teach on the subjects of ethics and corporate cultures at the University of St. Thomas here in Minneapolis, I do speaking at business and education forums, and I write and work on these topics. When you are as passionate about these topics as I am, you can’t simply walk away.

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