(FORTUNE Magazine) – JAMES W. KINNEAR was still vying for the top job at Texaco when, some years back, a reporter asked him whether he disagreed with any of the company's policies. He had a smorgasbord of failed or questionable strategies from which to choose: Texaco had been bloodied in court by the famous $11 billion Pennzoil judgment, its operating performance by almost any measure ranked last among the major integrated oil companies, and its stock continued to trade at depressed 1960s prices. Despite all this, Kinnear said no, he couldn't think of a single thing he disagreed with. To this sturdy Annapolis graduate, a loyal company man for over three decades, that answer must have been obvious. Now Kinnear is CEO and presiding over a near revolution at logy old Texaco -- not always willingly. Ornery investors, including raider Carl C. Icahn, have pushed him against his druthers into settling the Pennzoil case, selling cherished assets, and distributing $1.7 billion to shareholders. The pressure keeps building. Icahn, who narrowly lost a 1988 attempt to unseat Kinnear in a proxy battle, is grabbing for power again, intending to break up the company and distribute the proceeds. To win votes the last time, Texaco promised to dissolve its poison-pill takeover defenses this spring, two months before the annual meeting. Eager investors, expecting a second proxy fight or a hostile takeover attempt, have been pushing up the stock price. Having recently increased his share of the company to over 16%, Icahn thinks Texaco's management should be doing more for shareholders, selling additional assets that would be better used by other owners.

A surreal series of events over the past few years has transformed Texaco into something vastly different from what it was -- and quite unlike most corporations today. Kinnear is conducting business more like a politician campaigning for office than the head of a multinational corporation. He has ended up rolling logs and building coalitions of the company's shareholders just to keep Icahn at bay and hold on to his job. In one sense, by courting the shareholders, he has made Texaco more strictly accountable to the owners than any other FORTUNE 500 company. But his willingness to temporize probably has diminished his ability to increase shareholder value in the long run. The resulting tension shows most clearly in Kinnear's restructuring plan, which betrays a remarkable lack of logic. Among its key features is the $1.7 billion payout to owners -- probably via some form of stock buyback -- due early this year. Promising the giveaway helped Kinnear win the proxy vote, but otherwise makes no sense. If, as Kinnear insists, cash-strapped Texaco has attractive opportunities to invest in operations, it is doing shareholders a disservice by taking $1.7 billion out of the business. Conversely, if shareholders can earn more on the money than Texaco can, then the company probably ought to be liquidating. The pragmatic Kinnear dismisses such abstractions, saying, ''We had to face reality.'' Concern for shareholders' happiness is a marked reversal of attitude at Texaco, where haughty, autocratic leaders once ran the business however they pleased, rarely considering the shareholders. Yet when recently reminded of his insistence that he couldn't think of a Texaco policy with which to disagree, Kinnear shrugged, smiled, and allowed his pale blue eyes to twinkle. ''It wasn't a stupid answer,'' he replied. And that is Kinnear in a nutshell: a calculating corporate politician who knows how to prevail by submerging his own ideas. A PREPPY organization man in the George Bush mold, Kinnear, 60, is an Episcopalian Anglophile who collects fine china, grows orchids, raises Boykin spaniels, and hunts birds. He became a company director in 1977 and CEO two years ago, back when Texaco was still in its arrogant mode. Texaco's board is one of the classiest and hardest working in America, but Kinnear and his estimable fellow directors -- including retired IBM chief Frank T. Cary and Thomas S. Murphy, CEO of Capital Cities/ABC -- seemed to regard Texaco's shareholders a bit disdainfully. The board's views were best expressed in a weirdly imperious line from the 1987 proxy statement: ''The Company strongly supports the role of corporate democracy and the right of stockholders to have their views submitted to, and considered by, the Company.'' To understand Kinnear's transformation from a management-knows-best mind-set to his current position of fighting for his job, one has to go back a few years. From the time U.S. oil production began to decline in the Seventies, Texaco and the other major integrated oil companies were scrambling for reserves. Texaco's chances of finding them in the ground were not promising; it had one of the worst exploration records in the industry. So in 1984 CEO John K. McKinley, an old-line Texaco autocrat, moved fast to buy reserve-rich Getty. With Kinnear's help, McKinley pulled the historic $10.1 billion deal together in just two days. That bold move doubled Texaco's reserves. IT ALSO BROUGHT on the Pennzoil catastrophe. Believing it already had a binding agreement to buy part of Getty, Houston-based Pennzoil charged Texaco with illegally interfering with its deal. A Houston jury agreed, awarding Pennzoil that astounding $11 billion judgment. McKinley insisted Texaco had done no wrong, and Texaco embarked on a go-for-broke strategy of spurning settlement opportunities in favor of appeals in court. Texaco had to file for bankruptcy to avoid posting a multibillion-dollar bond. But being protected by the bankruptcy court carried an enormous price: Howard Schwartzberg, 58, a mild-tempered, balding bankruptcy judge, became the final authority over Texaco. After surveying the company's finances, he decided that Texaco's shareholders were the only parties at risk. To protect them, he appointed a committee of stockholders and granted it extraordinary power. The long-voiceless shareholders were at last being put in charge. Enter the loudest-voiced shareholder of all: Carl Icahn, 52. After the October 1987 stock market crash, the brusque, impatient chairman of TWA picked up the 12% Texaco stake owned by Australian dealsmith Robert Holmes a Court at fire-sale prices averaging $31 a share. After Kinnear rejected several schemes for a settlement with Pennzoil, Judge Schwartzberg allowed the shareholders' committee to negotiate independently. The committee's success forced an infuriated Kinnear into making a $3 billion deal. No sooner was the settlement signed than Icahn began pushing for a restructuring that would quickly boost Texaco's stock price. He proposed selling assets worth $10 billion or so and distributing much of the resulting cash to Texaco's owners. Kinnear negotiated for weeks with Icahn, but they could not come to terms. Icahn increased the pressure by launching his proxy fight and then, shortly after Texaco emerged from bankruptcy last April, offering to take the company over at $60 a share in cash. Texaco stock was selling for $46 at the time, yet the directors unanimously rejected the offer without consulting the shareholders. Says James R. Ullman, portfolio manager for Batterymarch Financial Management, which owns 2.3 million Texaco shares (almost 1%): ''It's hard to see how the shareholders would have been harmed by voting on that.'' As the battle continued, Texaco gradually began to grasp how greatly company-shareholder relations had changed. In the old days, remembers Texaco Chairman Alfred C. DeCrane Jr., 57, small investors held the bulk of Texaco's stock. They depended on dividend income and seemed not to worry much about the stock's price. By 1988 institutional holders owned nearly 40% of the company, and even loyal individual investors had been shaken by the dividend interruption during bankruptcy. Now Texaco has to please what DeCrane quaintly calls the ''go-go investor,'' who demands stock price appreciation to feed total return. Most worrisome for Texaco's leaders, the new breed of owner will hang on to the stock even if displeased -- to vote against management. Once he absorbed that concept, Kinnear proved adept at winning a majority of Texaco's owners to his side. Discussions with institutional investors led him to back a number of bylaw changes that added to shareholder power. No longer can Texaco pay raiders greenmail without approval by the shareholders -- who got angry when Texaco paid the Bass brothers a premium of $350 million over their share price to go away in 1984. Kinnear also made a vague commitment to ! consider adding a representative of the institutions to Texaco's board. Nothing has come of that yet, and perhaps nothing ever will. Kinnear knows that if he can keep enough of the institutions on his side, they can outvote Icahn in a proxy fight. Barnstorming the country, Kinnear got an earful of advice from major shareholders, and their demands helped him formulate a new strategy as an alternative to Icahn's bust-up plan. At first he proposed selling $3 billion of assets and using the proceeds to pay down debt. When that plan failed to generate much enthusiasm, he upped the ante to $5 billion, and then higher still. THE STROKE that has carried the day so far is Kinnear's promise to distribute the $1.7 billion -- $7 a share -- to Texaco's owners. It is also the most painful of his many compromises. Says Texaco director Tom Murphy: ''Some of that was based on the realities of dealing with Carl Icahn and our shareholders.'' Added to the $3 billion Pennzoil settlement and $1.4 billion of write-offs for restructuring, the payment will cut Texaco's equity capital in half, to roughly $6 billion. At the same time, the company has nearly $9 billion of debt on its books. The result: Texaco, engaged in one of the most capital-intensive businesses around, probably will be short of money to finance its operations for years to come. As Kinnear acknowledges, ''In the oil business you have to invest or your cash flow goes down.'' When he talks to investors these days, Kinnear comes across persuasively. Addressing a recent gathering of security analysts, he conceded Texaco's past mistakes with winning candor, then described his bright vision of a highly profitable ''new Texaco.'' Somehow he created the impression that he hadn't been one of the gang back when Texaco was making all the wrong moves. The analysts liked his restructuring plan, which comes in several pieces. He has already sold Texaco's West German subsidiary for $1.2 billion. In a deal he says is worth $1.8 billion, he has also sold a half interest in Texaco's refineries and gas stations on the East and Gulf coasts of the U.S. to Saudi Arabia. (Texaco will retain its refineries and stations elsewhere in the U.S.) He is still trying to peddle Texaco Canada, which is worth perhaps $3.5 billion, as well as a collection of Texaco's least efficient U.S. oil and gas properties.

His plan goes far beyond an earlier notion, formed before Icahn started closing in, of selling only assets that yielded inferior returns on * investment. By one measure Texaco used, any unit returning less than 11% was fair game, and both the West German operation and the U.S. wells fit that description. The assets going into the Saudi joint venture had also performed poorly for decades -- but in 1988 they turned around dramatically, thanks to improvements Kinnear had made years ago. And Kinnear hates to lose profitable Texaco Canada. To make the most of assets that will remain, Texaco's managers are struggling to change the corporate culture. As he did when trying to keep investors in line last summer, Kinnear has gone on the stump, this time delivering what he calls ''vision speeches'' to employees. From now on, he tells them, Texaco must deliver high returns to its owners. Managers will be held accountable for their profit performance, and their pay will reflect that directly. This message hardly sounds revolutionary, but by Texaco standards Kinnear is a breathtakingly modern executive. He also tells workers about the need to cut through the ''ozone layer'' of overcautious bureaucracy. He urges his 47,000 employees to ''just say no'' -- literally -- when bosses demand the sort of administrative make-work that has long been a Texaco trademark. Kinnear deserves credit for breaking with tradition and increasing efficiency. He has replaced almost all of Texaco's top executives with a new generation more committed to pushing responsibility down the chain of command. One result: In two years Kinnear has cut the reporting layers separating him from the gas station attendant in half, to 11. BUT KINNEAR is still a Navy man. According to his assistant, Robert A. Solberg, 43, he likes to make decisions from a broad choice of options, and he encourages a thorough airing of dissenting opinions behind closed doors. But once he makes a decision, he expects all dissenters to sign on and shut up. That may be why Kinnear's just-say-no program does not seem to be working so well. A reporter recently asked high-ranking Texaco executives when they had last taken Kinnear's advice and said no to their bosses. To a man, they replied that the issue had never come up -- their bosses had never given them a reason to say no. However effective Kinnear's managerial changes, one thing is clear: It's not easy for a chief executive to serve shareholders well while fighting off a raider and bargaining for investor support. Until Kinnear resolves his struggle for control, shareholders shouldn't look for a cohesive long-range strategy at Texaco.

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