“This hiring of 40 to 50 young people every year is what made the difference,” said Rodrigues. “When you take a boy of 25 and make him a manager, this inspires all the younger ones.”
The first team of trainees included, for example, Luiz Fernando Edmond from Rio, who became the CEO in 2005. (He is currently CEO of AB InBev for North America.) As the years went by, the trainee program was transformed into one of the most hotly disputed in the country. There were 74,000 candidates in 2012, only 24 of whom were approved.
The invasion of young people into the Brahma management occurred quickly and reached all areas of the company. One of Telles’ most daring steps in this area was to change 10 of the 17 plant managers in 1990, replacing former employees with younger people who had never worked in production. Telles knew that such a big change in so short a time would be a risk, but decided to pay the price to see. If it worked, it would be the chance to blow away all the cobwebs that had accumulated over decades. It worked.
“Marcel said you needed to get rid of 10% of the company every year, as these people were like dead wood that needed to be cut back,” Rodrigues recalled.
Of course, this was not exactly an original idea. Telles’ thinking resembled what Jack Welch, the legendary CEO of GE, had adopted in the long-standing company founded by Thomas Edison. The similarity was not unwarranted. Telles and his partners never had any experience with GE, as they did with Goldman Sachs and Walmart, but the company’s annual reports were a Bible for the Brazilians who, once again, copied the best from them.
Welch, regarded as the CEO of the 20th century, led GE from 1981 to 2001. During this period, GE adopted what became known as the 20-70-10 rule. It laid down that employees in a meritocratic environment should be split into three ranges: the 20% top performers should be rewarded, the 70% average performers retained and the 10% underperformers shown the door. By adapting the GE rule to its own situation, Brahma renovated its workforce.
“When I joined the company, the average age of the staff was around 48,” Rodrigues said. “When I left [in 2003] it had fallen to 32.”
The results of the change in the employee profile occurred fast. In 1991, less than two years after Brahma was bought by Garantia, it was elected “Company of the Year” by the magazine Exame. Its revenues expanded by 7.5% in one year. The profit virtually tripled – and 35% of its employees (the best, obviously) received a bonus of three to nine extra salaries, a windfall equivalent to 10% of the company’s earnings in 1990. It was the embryo of the formidable people machine that would allow Brahma (and then Ambev, InBev and AB InBev) to keep growing under the command of executives polished in house. Even though Telles is no longer involved in the daily running of the company, he still takes part in the final selection of the trainee program and tells those chosen that they can send him messages directly should they feel it necessary.
“With Brahma, I used to give a telephone token to every trainee, but said it was a one-off opportunity... I am more up to date now and everyone can send me an e-mail whenever they want,” he said.
To spread this new culture through a company that had existed for over a century, Telles had to do lots of visiting. He almost had to convert new followers.
“Sometimes we’ll have to behave as though we’re crazy for these people to realize that what we are saying is for real,” he once told Rodrigues.
For an executive like Rodrigues with an explosive temperament, large gestures and deep voice, it was easy to cause a fuss. Rodrigues once exemplified this approach during a visit he and Telles made to a Brahma plant in Bauru, upstate São Paulo.
After a long meeting with almost 20 people from the plant, Telles and Rodrigues were getting ready to go relax at their hotel. As night fell, the plant director offered his bosses a ride. Rodrigues saw the car – a fancy General Motors sedan with no company logo – and asked if the car belonged to the manager or the company. When the answer came that it was part of the firm’s fleet, he went mad and started to kick the door and screamed that all Brahma cars should bear logos in line with a rule established some months earlier.
“Are you ashamed of your company?” he shouted as he gave the car a few more kicks. “I’m not going in this damned thing!” The plant manager, who had been with the company for 30 years, was astonished. Telles watched everything in silence. He only spoke when they finally reached the hotel: “Well, Magim, you didn’t need to exaggerate...”
Rodrigues still likes to tell this story.
In his crusade to cut costs, recruit good people, outline targets for all and offer an extraordinary remuneration to the best, Telles relied on the timely help of a professor of engineering. It was the start of the 1990s, and Brazilian companies were operating under the vigilant eye of the Inter-ministerial Prices Commission (known locally as CIP), a federal government body that controlled the readjustments of 21 categories of products, including beer. The supervision was also an insane amount of work – the CIP had over 300 staff to analyze 1,200 applications to raise prices every month – and discouraged companies from becoming more efficient. This was because the readjustments were authorized based on spreadsheets of the costs of the products (the higher, the better the chances of obtaining authorization for the readjustments). Telles had already been the victim of this kind of control.
He was once caught by surprise when a group of Federal Police officers appeared at Brahma’s head office ready to arrest whomever was responsible for a price increase. The situation was so tense that the company lawyer suggested Telles hide in the bathroom, advice he did not take. It was no easy task for the Brahma executives to convince the police that the company had not violated the price freeze, but only passed on an increase in the industrialized products tax, the IPI.
Telles was shaken and learned a lesson from this episode. He decided to follow protocol when he wanted to hike the price of beer another time and arranged a meeting in Brasília with the National Economy Secretary, Dorothea Werneck. During the meeting, she asked him why, instead of only raising prices, Brahma did not invest to improve its productivity. She suggested he should meet a professor from the Christiano Ottoni Foundation in Minas Gerais state who had become one of the rare Brazilian specialists in management methods after making a series of visits to Japanese companies the previous decade. Telles had never heard of Vicente Falconi, who was a metallurgy engineer and graduate of the Universidade Federal de Minas Gerais. He also had a Ph.D. from the Colorado School of Mines in the US. Despite this, he thought it wise to follow Werneck’s recommendation, since upsetting her and failing to obtain her authorization to raise the prices was out of the question.
“Brazil was like the Wild West at that time in terms of management,” said Falconi.
Falconi’s methodology was based on the PDCA acronym, meaning plan-do-check-act. Applying this apparently simple concept to the disorganized Brazilian companies at that time had a quixotic touch. The difficulties were enormous, even at Brahma, which had undergone a culture shock with the arrival of the Garantia team. Falconi recalled how the brewer was when he entered it for the first time 20 years earlier:
“Brahma was a madhouse like all companies in Brazil then... There were no standards whatsoever. Every plant was different, every day was different... The beer varied and there was no difference between one brand and another... I knew nothing about the business at the beginning and it was even difficult to make a diagnosis. It was like the country of the blind. We brought in some Japanese to help us. All the Brahma directors and managers went on missions to Japan to learn what quality was... Marcel was very uncomfortable about the process of producing beer and invited me to visit a plant. We arrived there at seven in the morning and the master brewer went for a walk with us around the plant. He arrived at a tank, dropped a little into a glass, sniffed it and ordered the temperature to be increased. He went to another tank, added a little more to the glass and called for the pH to be lowered. Everything was done by the eye without any measurement...”
For someone like Falconi, who was obsessed by measuring things, this lack of control was unacceptable. He needed to prove that the master brewers did not have a clue about what they were doing. He asked for a bottle of beer from every Brahma plant, each of which had to have been produced on the same day and time. For the sake of comparison, bottles from competitors bought in the same towns where Brahma had plants were also separated. The result was alarming: each plant produced a different final product. The final straw was the test carried out at what was regarded as the company’s most efficient plant. A bottle was taken from the production line every hour throughout the entire day. When it was analyzed, it was shown that the characteristics of the bottled beer differed considerably over a single day even in the same plant. When he learned the results of the surveys, Telles was puzzled. “What am I going to do with this mess?” he asked Falconi. The consultant said the answer was to establish standards for each plant activity and measure everything. Only products that met the standards would go to the market.
Telles quickly realized that many people would be against these changes. To convince the management to embrace Falconi’s commandments, he decided to link the quality indices to their wallets.
“Marcel set a target for everyone who worked in the plant, from shop floor workers to the directors: if the plant did not meet 50% of the quality targets in the first year, no-one would earn a bonus,” Falconi said. “He raised the target to 75% in the second year and to 95% in the third. This was enough to end any resistance to our work.” The professor’s methodology gradually spread to the other sectors of the company. None of them, whether sales, administration or logistics remained outside its scope. (AB InBev’s 116,000 employees throughout the world currently have individual targets, broken down in line with the company’s main guidelines.) The engineering professor became Telles’ counselor and was the first outsider to occupy a seat on the company’s board of directors in 1997.
As time went by, Falconi’s presence spread throughout the other companies controlled by the trio. He began working at Lojas Americanas, for example, in 1992.
“On the day of [Fernando] Collor’s impeachment, I put on a suit and went to Belo Horizonte,” recalled Fersen Lambranho, who had travelled to Minas Gerais at Telles’ request to hire the consultant for the retail chain. “Falconi was to take part in an event there and the auditorium was full. The national anthem was played and then this man with all the correct behavior of a Japanese appeared. When I saw all this formality, I thought ‘where am I?’”
In the following years, virtually all the companies in which GP Investimentos invested money went through the hands of Falconi and his team.
At the age of 72, Falconi remains involved with the projects his consultancy develops for companies belonging to Lemann and his two partners, particularly Ambev, where he has a seat on the board. With his sober style and white hair, Falconi could be mistaken for a quiet old gentleman at first sight. However, he still controls data, numbers and results with an iron fist and is not satisfied unless he meets the targets he himself has helped set. He formed a working group with the main Ambev executives in mid-2011 to reduce the staff turnover in the plants. The ratio was around 20% in 2010, and Falconi’s target is to slash this to 6% within five years.
“We are creating new processes so that the workers feel they are better appreciated, as variable remuneration, on its own, has not been enough,” he said. “Now we are doing everything to celebrate. If the guy has completed 10 years with the firm, you have to mark the occasion in some way. We have learned that we need to celebrate.”
The seeds of
self-destruction
The economist Eduardo Giannetti da Fonseca, author of a number of books and professor at Insper business school in São Paulo, worked for a week in Garantia. This is how he described his experience:
“In 1994, I was invited by Claudio Haddad to give a lecture in Garantia. I had just published my book Vícios privados, benefícios públicos and returned from a seven-year spell in Cambridge, England. Some days after this speech, Claudio invited me to have lunch in the bank. When I arrived, Jorge Paulo Lemann and Affonso Celso Pastore were there, and they suddenly invited me to come and work in the bank as an economist. I was tempted. I was just over 30 and had always led an academic life. I was curious to have a practical experience of how an investment bank worked. At the same time, the proposal was very attractive in financial terms.
I agreed to give it a try, but soon saw that it was a very different world from mine. I was accustomed to the ivory tour of academia whereas the rhythm in Garantia was frenetic. Nobody had any time to explain how each area functioned. This bothered me as I had no detailed knowledge of how the financial market operated. The level of personal dedication to work was almost obsessive. The day began at seven with a meeting to decide the bank’s strategies. When it was five o’clock, and I was dying to go home and be with my family, I saw that nobody had left and I was not going to be first. It was only around seven or eight that the bank began to empty. I remember going into Avenida Paulista feeling exhausted and physically shattered, as though I had been hit by a big truck. However, everybody who worked accepted this rhythm because of the adrenaline and the opportunities of earning a lot of money. I remember one trader taking advantage of his lunch hour to have helicopter pilot lessons. Imagine, that was the way that he found to relax!
The only comparison I had had of daily work in a financial institution was with my father who had been a director in a very traditional bank in São Paulo. He had an office, a secretary and a waiter who wore gloves to serve coffee. There could be no greater comparison with Garantia than that. Once, in the middle of the working day, when the markets were going flat out, I dared open a book to study a little. People stared at me in astonishment as though I were an extraterrestrial. I felt like disappearing. At that very moment, I realized that the bank was not for me. I did not last a week. When I told them I was not staying, Lemann gave a good-humored response. ‘I thought you would bring a touch of culture to these people,’ he said.
The group gathered around Lemann is probably the most important in the history of Brazilian business in the second half of the 20th century. But, that kind of life was definitely not for me.”
If he had adapted to the Garantia culture, Giannetti could have earned a lot of money. The bank had experienced a series of highly successful years, but 1994 was exceptional, the best in its history. All the big deals passed through Garantia. It was the main choice for foreign investors, who wanted to put their money in Brazil, partly due to the painstaking work carried out by partner Fred Packard over the years that opened doors abroad. Its brokerage was the most powerful in the country, responsible for 7% of all trading on the São Paulo stock market, the Bovespa, that year – although this did not take into account the amount the group moved through outsourced brokerages. Net income came to almost US$ 1 billion, with 90% of the volume being distributed among 322 employees.
Under Lemann’s meritocracy, some earned more than others, and no one was happier than Eric Hime, a brilliant trader from Rio who was not even 30. According to press reports at that time, and former Garantia employees interviewed during the research for this book, he earned US$ 20 million. If the amount is a fortune in today’s terms, imagine what it was like almost two decades ago.
For those who observed Garantia from outside, the bank seemed to be an unbeatable machine. However, a closer look would reveal some signs that the fantastic engine, created by Lemann, Telles and Sicupira was showing signs of wear and tear. Frugality and simplicity, the three partners’ core culture values, were under threat. With all that money fattening partners’ wallets, the almost Franciscan spirit that had previously prevailed in the institution went by the wayside. Traders were now taking helicopters lessons – to learn to fly their personal helicopters. Enormous luxury houses were bought at the most exclusive beaches on the Rio de Janeiro and São Paulo coastlines. Imported luxury cars began to fill the ba
nk’s parking spaces. What was wrong with taking a little advantage of all that money? After all, wasn’t the purpose of all that hard work to become rich and reap the material rewards? This was how many of the new Garantia millionaires thought, anyway.
Telles had warned the staff about this behavior in a letter sent to all those who received commissions on August 19, 1988:
“It is OK for people to buy new cars, apartments or rent houses abroad. However, at work, our brains belong to the firm, and all our time and effort should be dedicated to it.
Managing your own money and wasting time with it may seem more profitable, but it just means being small-minded. It is much more important to commit our intelligence, time and effort to the firm than operating a reserve or a deposit in a saving account. We, as staff who receive commissions, are partners in the bank’s success and profits. Until today, all who got their heads down and worked hard and thought only about the firm, have been rewarded extraordinarily well over time.”
Six years after Telles wrote his letter, the lavish spending to which he had alluded had swallowed up the bank. By 1994, none of the three main defenders of the Garantia culture were active in its daily operation. Telles had been working on a daily basis in Brahma for five years. Sicupira had not been involved in the daily operations for more than a decade, having been focused on his assignments with Lojas Americanas and then GP Investimentos. Lemann, who was then 54, spent 1994 in a marina on his boat after suffering a heart attack while carrying out a physical effort test in the Clínica São Vicente, in Rio. Although he kept the same strict discipline in terms of his health – he did not smoke or drink and practiced exercises almost daily – more than two decades of heavy work in the financial market had affected his heart.
DREAM BIG: How the Brazilian Trio behind 3G Capital - Jorge Paulo Lemann, Marcel Telles and Beto Sicupira - acquired Anheuser-Busch, Burger King and Heinz Page 12