(FORTUNE Magazine) – THROUGH three-quarters of his presidency, Ronald Reagan appeared to be a manager any chief executive could learn from. Since November he has been a case study of everything to avoid. What happened? Was the first impression flat wrong? The question would hardly matter if Reagan had been a mediocre President, a Warren Harding with jokes. But the accomplishments of his first six years are not illusory. A critical reexamination of Reagan as manager is in order. There are, it turns out, managerial lessons to be learned from the Iran-contra debacle, and from Reagan's effort to correct his mistakes. How do you contain a rogue subordinate? Or the damage from an undertaking gone awry and suddenly in the headlines? The question of how much the President knew still hovers over the affair. Some critics think Reagan understood exactly what he was doing in trading arms for hostages, including the diversion of profits to Nicaraguan contras. If that is true, Reagan's portrayal of himself as a hands-off manager who lost control would be nothing more than a cover-up for possible criminality. But the Tower Commission found no evidence that the President knew about the contra diversion. From what we know up to now, Reagan's failures must be viewed as managerial. | In a much discussed FORTUNE cover story (September 15, 1986), Reagan summed up his management style this way: ''Surround yourself with the best people you can find, delegate authority, and don't interfere as long as the overall policy you've set is being carried out.'' Since the Iran-contra debacle, critics have ridiculed those principles as a no-hands, no-brain recipe for disaster. The critics haven't looked deeply enough. Consider the question of delegating authority. ''The debate over delegating vs. hands-on management is nonsense,'' says Donald Rumsfeld, former Secretary of Defense and White House chief of staff under Gerald Ford, and former president of G.D. Searle. ''Anyone in an important position has to delegate.'' THE REAL QUESTION is how well. The amount of delegation ranges from Reagan's management style at the loose end to the uptight executives whom some experts term control freaks. President Jimmy Carter would qualify, his micromanagement extending at one point to the scheduling of play on the White House tennis court. So would fired White House chief of staff Donald T. Regan, who learned about control in the Marines and as head of Merrill Lynch. Management experts prefer the Reagan style. Says Robert Waterman, co-author of In Search of Excellence: ''Our cultural model of a boss is someone really involved, in control. But that doesn't get the most out of people in terms of productivity, and initiative. I'd go with a hands-off vs. a hands-on manager any day.'' Like any management style, Reagan's has strengths and weaknesses. Delegation frees a manager to communicate direction, goals, and enthusiasm, a leadership function that the charismatic Reagan has raised to a high art. A Reaganesque delegator, however, rises or falls on the people to whom he delegates, and the extent to which he holds them accountable. Warns Waterman: ''You need to pick good people, and you need to kick the tires every once in a while. And if something doesn't feel right, you've got to dig deeper. That's where Reagan fell short.'' Reagan's first big mistake was letting Donald Regan become principal deputy for the second term, a move that initially looked as if it would improve White House management. In Reagan's first term the triumvirate of chief of staff James Baker III, presidential counselor Edwin Meese III, and deputy chief of staff Michael Deaver seemed to outsiders like a messy way to run anything. Baker, a newcomer to the Reagan circle, was supposedly first among equals. But Meese and Deaver were Reagan family intimates who had no qualms about taking advantage of their personal access to the boss. The result was much wrangling, which for all its apparent confusion served to buck issues up the line for the President's attention. Resolution of a particular debate also made for consensus within the executive branch. The result: a string of legislative victories unmatched since the Great Society. The success of the first term apparently lulled Reagan into passivity on staff matters. When Baker and then-Treasury Secretary Regan arranged a swap of duties, with Meese heading off to become Attorney General, Reagan went along with the changes, apparently without much deliberation. Says William E. Fulmer, professor of business administration at the University of Virginia's Darden School of Business: ''Most companies would have done a thorough executive search before filling such a key position.'' The lesson for executives: Don't let success make you think you're such hot stuff that it doesn't matter who your top deputies are. It matters a lot. The skills that made Regan a star at Merrill Lynch may have worked at Treasury. In the White House, other skills were required. Not only did Regan lack political acumen, he fundamentally misunderstood the nature of the job. ''As a Cabinet officer, you're pretty much in charge,'' says former presidential personnel chief Pendleton James. ''But as chief of staff you're an adviser. Regan was not able to make the transition from an executive running his own show to a staff man running someone else's.'' The President's fondness for his new staff chief may have led him to overlook insidious changes Regan was introducing. Reagan liked the rich ex- C.E.O., warming to a man whose inventory of Irish jokes rivaled his own. Also, the triumvirate White House had been rife with leaks, which mightily irritated the President. Regan responded by streamlining the chain of command so that all access to the Oval Office was through him. The leaks stopped. But so did all other communication not bearing Regan's stamp. The chief of staff limited access to the President by Congressmen, longtime Reagan political advisers, and even some Cabinet members. This cemented Regan's personal power, at least for a while. But it left the President dangerously isolated. ASIDE FROM not appointing a control freak as your No. 2, how else do you fight executive isolation? Says Waterman, whose book popularized the notion of management-by-wandering-around: ''Executives need personal ways of staying in touch with their organizations and the outside world. No chain of command will work because it tends to filter out information.'' Some bosses do walk the plant floor; others invite letters from employees. T. Boone Pickens, head of Mesa Limited Partnership, keeps his office door open to anybody in his company. William F. Farley, chief executive of Farley Industries, a manufacturing conglomerate headquartered in Chicago, says he relies on a few trusted executives who ''tell me things I don't want to hear but need to know.'' Keeping informed out of channels is tougher for a President, but not impossible. Franklin Roosevelt sought a variety of views by openly encouraging staff dissent. John F. Kennedy relied heavily on his brother Bobby for unofficial information, though that in turn depended on Bobby's getting around. Both Kennedy and Roosevelt also demanded raw documentation. They loved to jump over the chain of command to get details. In contrast, Dwight Eisenhower, like Reagan, delegated most of the detail work to subordinates and disdained debate. But unlike Reagan, Eisenhower did not allow Sherman Adams, his Donald Regan, to become sole gatekeeper of information. Says Princeton scholar Fred I. Greenstein, author of The Hidden- Hand Presidency: Eisenhower as Leader: ''He had a very extensive personal- information network built up during many years in public life.'' The National Security Council should also have served Reagan as a forum where the clash of interests raised issues for the President's attention, but Reagan had permitted the NSC to become moribund. From the start he consciously downgraded the post of national security adviser. Says Pendleton James: ''Reagan didn't want another Henry Kissinger or Zbigniew Brzezinski. But the NSC became too weak.'' In six years it had five chiefs. The staff grew mediocre. Top-down discipline disappeared. The situation reached its nadir when Regan forced out Robert McFarlane as national security adviser and replaced him with Vice Admiral John Poindexter, for all his stripes a mild-mannered technocrat. That left an opening for a zealot like Lieutenant Colonel Oliver North to play loose cannon. Says Warren Bennis of the University of Southern California, an authority on leadership: ''Every organization needs guys with daring, imagination, and chutzpah like Ollie North. But you can't let the wimps watch the Rambos.'' MANAGEMENT EXPERTS say Reagan's second major management mistake was his failure to follow up aggressively on implementation of his Iran gambit. ''At no time did he insist on accountability and performance review,'' says the Tower Commission report. Many successful corporate delegators rely on so- called strategic tracking systems to follow major initiatives on a regular basis. Says Eileen Friars, senior vice president of the MAC Group, a Cambridge, Massachusetts, management consulting firm: ''It is very important to have a formalized early-warning system that allows you to know when things are going wrong, before they blow up in your face.'' Well-managed decentralized companies like IBM have them. At the giant computer company, for example, regular surveys of employees alert headquarters to nascent morale problems that may indicate something amiss in a manufacturing plant. Most Presidents have tried to develop their own personalized tracking systems. Activist Presidents like Kennedy, Johnson, and Carter weighed deeply into the day-to-day management of major projects, with mixed success. The Nixon White House had its so-called tickler system. Staff chief H. R. Haldeman assigned various staffers to keep notes at meetings on who promised to do what. The notes were kept in an active file and checked regularly. ''If the job wasn't done,'' says a former staffer, ''the tickling could be pretty rough.'' Reagan defenders point out that Iran came at an extraordinarily busy time, encompassing the President's cancer surgery, the Geneva summit, tax reform, Reykjavik, and terrorist attacks on the TWA jet and the Achille Lauro cruise ship. Moreover, they argue, NSC-run covert operations had produced successes in the past, including the widely hailed midair apprehension of the Achille Lauro hijackers. In the end, though, Reagan supporters have concluded that it was his concern for the hostages that led to a decision that now looks thoroughly wrongheaded. ''He was blinded by his emotions,'' says one close Reagan adviser. For any leader, says USC's Bennis, ''allowing sentimentality to supplant vision is a fatal error.'' IN THE CASE of diversion of money from arms sales to the contras, the President failed to set so-called boundary conditions, limits of authority beyond which employees may not go. ''At the very minimum,'' says management expert Waterman, ''Reagan was guilty of creating a confusing climate so his underlings didn't really know what was intended.'' Worse yet, the President's instructions may have been left purposely vague to permit ''plausible deniability'' were the venture to fail. In business at least, management experts say that this is dangerous. ''A much better rule is no surprises for the boss,'' says Ronald E. Frank, dean of the Krannert School of Management at Purdue University. When the scheme leaked out, Reagan's initial actions turned out to be the opposite of what a good manager should do. The Tower Commission concluded that the President ''did not . . . intend to mislead the American public or cover up unlawful conduct.'' Nevertheless, his contradictory statements created the impression of a cover-up. Says James Kouzes, director of Santa Clara University's Executive Development Center: ''Reagan's handling of the affair made people question his trustworthiness as well as his competence -- two of the most important ingredients in credibility.'' The lesson for a corporate manager is to come clean when confronted with a public disaster. When cyanide in Tylenol capsules killed seven people in 1982, Johnson & Johnson Chairman James E. Burke immediately went on television to explain what the company was doing to prevent a recurrence. The brand bounced back and thrived again. In contrast, Audi of America lost significant market share by initially stonewalling in the face of accusations that sudden unexpected acceleration by Audi 5000s had led to half a dozen deaths. Reagan has taken some belated steps in the right direction. His acceptance of the Tower Commission's critical conclusions, his reorganization of the White House and NSC, and his speech to the nation in which he took full responsibility for mistakes have already restored some of his lost credibility. In one week, Reagan's job approval ratings bounced back about nine percentage points, leaving him below his own highs, but still above those of any postwar President well into his second term. Says Harvard presidential scholar Richard Neustadt, a onetime Carter adviser: ''Reagan will never be the icon he once was. But if nothing else damaging comes out, he could still be more effective in his seventh year than Presidents Eisenhower, Truman, or Roosevelt at about the same stage.'' REAGAN'S GREATEST ASSET will be his new chief of staff, the politically savvy Howard Baker. While Regan was a Washington outsider, Baker is the consummate insider: son of a Tennessee Congressman, son-in-law of Senator Everett Dirksen of Illinois, and himself an 18-year veteran of the Senate, where he was minority and majority leader. While Regan was exclusive, the good-humored Baker is consciously inclusive. During his first days in office, he concentrated on opening the doors of the Oval Office to Congressmen and seasoned political pros. And while Regan was dictatorial, Baker is a master of compromise and conciliation. One of Baker's biggest early contributions has been to shift the White House focus from crisis management to long-term planning. During the first term, James Baker, Meese, and Deaver met regularly to plot legislative strategy. Deaver in particular spent a lot of time sitting around mulling how various actions would play out -- next month, next year, next election. As a young Merrill Lynch manager, Regan made his mark as a long-range planner. In the White House he seemed to forget about this discipline. He allowed the so- called legislative strategy group to atrophy. He concentrated on what came to be called spin control, putting the best face on, say, the failed summit at Reykjavik. In management jargon he was reactive, Deaver proactive. As any first year B-school student knows, proactive is better. Though Howard Baker is no nuts-and-bolts administrator, he has brought in as deputy former Reagan congressional liaison Kenneth Duberstein, who is a tough hands-on manager. Baker is reinvigorating other White House staff offices, particularly congressional and public liaison, domestic policy, and scheduling, that had withered at the hands of Regan yes-men. Thomas Griscom, Baker's congressional press secretary, will oversee White House communications. T. Kenneth Cribb, a longtime Meese aide, will coordinate domestic policy development. Edwin J. Feulner Jr., president of the conservative Heritage Foundation, will serve as a consultant. Reagan's choice of Frank Carlucci to head the NSC is another big plus. No wimp he: Carlucci has a history of standing up to his bosses, not to mention his subordinates. Although he doesn't have the sweeping vision of a Kissinger, he brings a full portfolio of national security experience. He was a career foreign service officer, ambassador to Portugal, deputy director of the CIA, and Deputy Secretary of Defense. He says that he sees his role as a policy coordinator, catalyst, and adviser to the President. Says Carlucci: ''I err on the side of telling him too much, rather than too little.'' Whether Reagan's housecleaning will be enough to stage a grand finale for his Administration remains to be seen. Former Senator Paul Laxalt, Reagan's longtime friend and adviser, insists the President has become a hands-on manager. Most other friends and aides interviewed by FORTUNE say balderdash. Says Washington corporate lobbyist Nancy Reynolds, a loyal Reagan friend: ''I think you'll see some subtle changes, but he won't blossom into a pushy, dynamic, into-every-little-detail type overnight.'' Personnel expert Pendleton James agrees, ''When you're 76 years old, you're not about to change.'' At the least, though, the Great Delegator has finally begun to pay attention to who is on the receiving end of all that delegation.