Can Meg Whitman save California?

In a bad economy, this sorry state has the worst credit rating and the highest taxes. The former eBay chief wants to run it like a business. Is that a good thing?

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Whitman says she "can't accept the logic coming out of Sacramento these days."
The candidate with advisor Jeff Randle, heading for her first campaign speech.

(Fortune Magazine) -- It's been barely a month since Meg Whitman declared that she was running for governor of California, and the skewers are already out. The state's press has cast her as a political novice. Late-night comics are loving this notion of eBay's former CEO in charge of America's largest state. "Well, that makes sense," said Jay Leno. "I mean, the state's broke. If we're going to start selling stuff, who better to be governor than the head of eBay?"

Many businesspeople, as well as most of her friends, think she's crazy to want to be governor at a time of crisis. Yahoo (YHOO, Fortune 500) CEO Carol Bartz says that when Whitman recently came to her office seeking support, "I asked her, 'Why in the world would you want to do this?' I probably asked her that question 10 different ways."

Flash back to day one of Meg Whitman 2.0. We are sitting in her tidy living room in Atherton, Calif., on a rain-soaked morning in late February, at 24 hours and counting before she is due to give the first campaign speech of her life. Whitman, who left eBay (EBAY, Fortune 500) a year ago after a decade in the job, seems unfazed by the trouble all around her.

Besides waking up this morning to find a giant oak tree toppled in her front yard (it missed her white picket fence by inches), there's the daunting reality of California. "We have the fourth-highest unemployment rate in the country. We're 48th of 50 states in K-12 education," Whitman says, spewing stats and sound bites as if she's rehearsing for her first political debate. "Other states are stealing California's jobs," she says. "California is failing. I refuse to sit by and watch it happen."

Whitman's living room - for now her campaign office - is the starting block of what is certain to be one (no, make that two!) of the most dramatic reinvention efforts in a long while. One reinvention is California, which is more critical to the recovery of the U.S. economy than any other state. Twelve percent of Americans live here. Ten percent of Fortune 500 companies have headquarters here. California's GDP, at $1.8 trillion, makes it the eighth-largest economy in the world. In the past year more people have lost jobs here than in any other state. More homes have gone into foreclosure. More banks have failed. And as Whitman notes, businesses are moving out at an alarming rate, most often citing excessive regulation and intolerable taxes. For top earners, California's taxes are the highest in the U.S. And to what end? California's credit rating is the lowest in the nation.

The other reinvention is the businesswoman who wants to be CEO of the state. Meg Whitman, 52, wasn't born in California - she's from New York's Long Island, and went to Princeton and to Harvard Business School. But she has spent almost half her adult life here. She worked for Disney in strategic planning in the '80s, moved back East, and then returned in 1998 to become CEO of a tiny e-commerce startup. With her big-business knowledge base (from stints at Bain & Co., Procter & Gamble, and Hasbro), she built eBay from 30 employees and $4.7 million in revenue to 15,000 employees and almost $8 billion in revenue.

Her experience growing a large organization and coming to know some of the company's 300 million registered users - 12 million in California alone - fortified her belief that "less government is simply better," she says. She's appalled that California has nearly doubled state spending during the decade through 2008. And she abhors the new budget that Gov. Arnold Schwarzenegger, a fellow Republican and a tarnished model of reinvention himself, muscled through the Democrat-controlled legislature a few weeks ago.

A deal had to get done because California was broke and overdue on $2.8 billion in taxpayer refunds and payments to state contractors. But the new budget that Schwarzenegger signed imposes $12.5 billion in tax increases and $5.4 billion in additional borrowing, along with $15.7 billion in spending cuts.

The tax hike is terrible for California's future, Whitman contends. "The budget is being balanced on the backs of middle-class families that are already stretched to the limit." Insisting that she "can't accept the logic coming out of Sacramento these days," she has hammered together a platform that centers on shrinking the state bureaucracy and holding the line on taxes. Her slogan: "A new California."

Big move for a political novice

What dirt are they going to dig up?" That's one of many questions that Whitman's friends are firing at her. The best "dirt" on Meg Whitman seems to be that in the past decade, she voted in elections less than half the time. There is "absolutely no excuse for it," she has been saying in her campaign speeches, but when I ask her about her voting record, she lobs an excuse my way: "I was head down, building eBay, with two teenage sons and a neurosurgeon husband, and traveling half the time," she says.

In a state with a long history of business celebrities vying to be governor and blowing up - Northwest Airlines' Al Checchi and financier Bill Simon, among others - Whitman is a relatively uncontroversial candidate, married to a doctor for 29 years, and with two sons at Princeton. Her background makes her fair game for needling, of course. One blogger on the Huffington Post jibed that she named her sons Prioritize and Skill Set. (Actually, their names are Griff and Will.)

There are, though, valid reasons to question Whitman's fitness to run California. Her business stardom has nothing to do with turnarounds - which is what being CEO of this sorry state is all about. Although Whitman was Fortune's Most Powerful Woman in Business in 2004 and 2005 (and eBay has christened its San Jose headquarters Whitman Campus), there's no denying that her performance as CEO sputtered in her last three years there. The company's growth hit a wall. Profits fell. The stock, as high as $59 in late 2004, now trades around $12 a share.

"She did acknowledge that she left a bit of a mess at eBay," says Bartz, talking of Whitman's recent visit. "But you know, every CEO who has left their job recently has left a bit of a mess, because of internal or external circumstances."

Whitman had no interest in a political career until the fall of 2006, when Mitt Romney, her boss at Bain in the early '80s, invited her to breakfast in Silicon Valley and asked her to help him run for President. Whitman became one of Romney's finance co-chairs and helped him raise $12 million in California, out of $72 million he raised nationwide. She also coached him on team building and, as he says, "making my message more clear."

John McCain, who knew Whitman from their time as allies fighting against Internet taxation, admired her levelheaded effectiveness. "She almost got Mitt elected," he says, only half-jokingly. When Romney dropped out of the presidential race, McCain asked Whitman to co-chair his national campaign. She advised the Arizona senator on technology and economic issues - both fateful gaps for McCain. Whitman was on his list of possible running mates - though not on his shortlist - before he chose Alaska's governor, Sarah Palin.

The person who urged her to run for governor was Romney, whose father is believed to have been the only Fortune 500 chief ever to serve as a governor. George Romney was governor of Michigan for six years during the '60s, after he turned around American Motors. Says Mitt: "I told Meg, 'Most people in the private sector think life is too short to get involved, but if we just leave it to the politicians, we will have lost a lot.'"

As she watched the California economy's "devastating downward spiral," Whitman says, she became convinced that "it's time to run California like a business." While corporate America is out of favor at the moment, a lot of important people agree with Whitman, especially her friends in business. Among her finance co-chairs: Cisco (CSCO, Fortune 500) CEO John Chambers, Activision Blizzard chief Bobby Kotick, Sun Microsystems (JAVA, Fortune 500) chairman Scott McNealy, and Yahoo's Bartz.

That power base will help Whitman raise money and gather support in advance of the June 2010 primary. She is likely to face Tom Campbell, a former congressman, but the fiercer competition will come from Steve Poizner, California's insurance commissioner, who sold his Silicon Valley startup, SnapTrak, to Qualcomm for $1 billion almost a decade ago. Both candidates, like Whitman, are well regarded, smart, not particularly charismatic fiscal conservatives with moderate social views. (She's pro-choice and anti-gay-marriage but supports gay civil unions.) Poizner, a Stanford-educated engineer, says, "If voters are looking to rebrand the state, she's a very attractive candidate. But if voters are looking to rebuild the state, they'll turn to me."

As for Schwarzenegger, he took office in 2003 after voters recalled Gov. Gray Davis and won reelection in 2006, but he can't run in 2010 because of term limits. His public-approval ratings have tumbled to 38% as he's lost favor mainly with his own Republican Party.

The flailing GOP isn't likely to help Whitman if she makes it past the primary (California's voters are 31% Republican, 44% Democrat). The general election would involve Democratic heavyweights in an era when the party's brand is riding high. The rival nominee could be San Francisco Mayor Gavin Newsom, Los Angeles Mayor Antonio Villaraigosa, or attorney general Jerry Brown, an energetic campaigner who was governor from 1975 to 1983. Brown displays a mix of ridicule and respect when he describes candidate Meg's positioning this way: "'I ran a business. I can buy my campaign. I have zero experience in government. I want to take on the most difficult state government job in America. Therefore, make me governor.' That's her campaign."

Whitman is eager to fight what will probably be the most expensive governor's race in history. When I mention that I've heard that her campaign might cost $150 million to $200 million, she doesn't bristle. And when I ask whether she's willing to spend, say, $50 million of her own money, she nods and replies enthusiastically, "It's conceivable!" Brown is amused but also a bit intimidated by the newcomer's challenge: "I would not underestimate her," he says. "Fifty million? That's a lot!"

Changing her image, while staying true to herself

"This feels like a startup." Whitman is in what's known in political lingo as HMU - hair and makeup - inside San Jose's Tech Museum of Innovation. She is standing before a semicircle of a dozen young staffers and thanking them for helping her pull off her first campaign speech with hardly a hitch. This initial week of campaigning reminds her of her first week at eBay, in 1998. "I called the phone company to set up the phone lines," she tells the group. "I bought cubicles and furniture because we only had lawn chairs. I wrote the marketing plan myself."

Whitman the candidate has had to rethink a lot of things, including her identity. In a 2004 story, I quoted the tag line she gave herself: "She's frumpy, but she delivers." When I remind her of that quote, she laughs and says that now she has friends helping her buy new clothes. "Nordstrom, Neiman Marcus, Talbots ..." she says, ticking off the stores where she has shopped lately. "You know the last time I bought a suit?" she asks. "For eBay's IPO. That was Sept. 24, 1998."

These days she carries a big black Prada tote, but she'd rather be viewed as a populist than a billionaire, which she says she still is, despite the market meltdown. (She has sold a lot of eBay stock but still owns almost 2% of the company, worth $253 million.) Inside her hotel room at the Irvine Marriott, right before a lunchtime speech, I ask her to tell me the label of her new pink silk suit. "No, I won't," she says. You really won't tell me? "Absolutely not!" Definitely not Talbots.

Whitman is, she admits, worried about losing her authenticity. Her campaign guide is a 2006 book called "Politics Lost," by Time columnist Joe Klein. It's about what can happen when political consultants and strategists try to turn candidates into something they are not. (See Joe Klein's advice to Whitman.)

From Klein's book, Whitman embraced the idea that every candidate needs a "better angel," a person to keep her true to herself. Her better angel is her husband, Griff Harsh. They met 35 years ago at a party at Harvard, where he was a senior and she was a 17-year-old freshman visiting from Princeton. Though they hardly talked that evening - he's an introvert, while "she's always been a people person," he says - she liked him enough to stay in touch and invite him to her sister's wedding, near Harvard, two years later. (Quite a power play.) It was their first date, and he forgot to show up. Well, actually he arrived at the wedding around midnight, as the band was packing up. He apologized profusely, and she gave him another chance.

They've been married for three decades now and have balanced their careers all the way. When she was at Disney, near Los Angeles, he commuted weekly to his work in San Francisco. She wouldn't have left Disney, except that he got an offer to be head of the brain tumor program at Massachusetts General Hospital in Boston. He took the job and she moved with him. She was at Hasbro, overseeing Teletubbies and Mr. Potato Head, when a headhunter called her and told her about a tiny business that had started by trading Pez dispensers on the Internet. "I told him, I'm absolutely not uprooting my family."

She did, though, and now she's ready to uproot again. But why vie for the top job in the state when she's just now learning politics? "There's no training program for the job," she replies. "What matters is experience. I've successfully balanced budgets, run large organizations, and created jobs my entire business career. And the next governor is going to have to do those things really, really well."

Only a Bain-trained ex-CEO would figure out how she wants to govern by visiting governors across the U.S. That's what Whitman has been doing, seeking best practices from standout Republican leaders. To talk job creation, which she says is the key lever to lift the economy, she went to see the Texas governor, Rick Perry, last October. "More than half of all the new jobs created in the U.S. in 2008 were in Texas," Whitman says, noting that Houston has become a magnet for "green" jobs. "If you can get taxes right and regulation right, you can create jobs."

She has set a goal to create 2 million new jobs in California in four years. California dreamin', her critics say. The Sacramento Bee accused her of "pie-in-the-sky promises" and argued that the state added only 250,000 jobs annually in good times. Poizner, too, says, "I'm an entrepreneur, and I like stretch goals, but I've seen no evidence at all that that's achievable." Says Whitman, who worked with economists at Stanford to come up with her target: "We'll do it by streamlining regulations, restructuring and cutting taxes, spending less and spending smarter."

To talk education, which accounts for half of California's $100 billion annual budget, she visited former Florida governor Jeb Bush. They had met only once before, but he was flattered to spend a day with her and roll out his PowerPoint show. "I just liked her overall style of having the humility to seek answers," he says. Bush explained to her how Florida boosted reading-test scores so dramatically that the lowest-income Hispanic student, on average, now outperforms the average California student. Bush told her about expanding charter schools, grading all schools, literally A through F, and rewarding them monetarily for good performance. Whitman wants to import some of the Florida reforms.

Meanwhile, she's aiming to slash the state's workforce at least 10% and expenses an additional $15 billion. For budget-cutting expertise, she turned to her mentor Romney, who was governor of Massachusetts from 2003 to 2007. He told her she'd need to scrutinize spending - "literally line by line, thousands of lines, and ask, 'Why are we doing this?'" he recalls. "You have to peel the onion." Whitman contends that she'll have more political will to delve in and make cuts than the current governor does. "Being CEO of the state is not a popularity contest," she says - an obvious dig at Schwarzenegger and a warning to the unions. "In the real world business leaders cut expenses until the company is healthy again," she says.

A grand gamble

Her record at eBay gives clues to the kind of governor Meg Whitman would be. She was famously hands-on. "If we had a 911, which is what we called a site outage or other emergency," says OpenTable CEO Jeff Jordan, who ran eBay North America and then PayPal, "it was all hands on deck, and you weren't going to sleep till you were done."

Whitman consistently met ever-rising quarterly profit expectations until 2006. "Meg used to say, 'Last time I looked, the long term is made up of quarters,'" says Rajiv Dutta, eBay's former CFO who went on to head PayPal. (Recently retired, Dutta, a Democrat, is another campaign finance co-chairman.)

When Whitman tried to be a visionary, she sometimes scored (buying PayPal) and other times didn't: She took a $1.4 billion write-down on Skype, acquired for $3.1 billion. "Did we pay too much? Yes," she says, while insisting that eBay is better off owning Skype. Clearly outdone by Amazon (AMZN, Fortune 500) and Google (GOOG, Fortune 500), eBay is undergoing its own reinvention by Whitman's successor, John Donahoe. Analysts speculate that he may sell the Internet telephony service.

No question, her latest career move is Whitman's grandest gamble yet. In the governor's race, the one person who would probably beat her and anyone else who enters is Dianne Feinstein, the U.S. senator who has broad popularity across California. But Feinstein, ever formidable at 75, recently moved up to chairman of the Senate Intelligence Committee. Though she has long wanted to be governor, most people think Feinstein would be crazy to give up her powerful position in Washington.

Of course, politics everywhere is more unpredictable than ever. "If you go back to 2006," Whitman notes, "everybody thought Hillary Clinton was going to be the Democratic nominee and Rudy Giuliani the Republican nominee. Barack Obama was the huge long shot." The fact that Obama beat her man, John McCain, 61% to 37% in California doesn't sink Whitman's chances now, at least one veteran campaigner says. "You're right that I lost badly in California," says McCain, adding, "California voters are notoriously independent. Voters judge candidates on their individual qualifications. It works greatly to her advantage."

Another advantage is something that she didn't learn at Bain or Disney or Procter & Gamble or eBay. P&G CEO A.G. Lafley, on whose board Whitman served, says that she has "the one essential element" that most CEOs don't have: "the passion for public service." Even her early doubters are coming to believe it. "At first I thought maybe it was just a case of 'I've been a successful CEO, and this is my next venture,'" says Yahoo's Bartz. "But she totally convinced me. She does have a passion to make a difference. I think this passion may be greater than the passion she had to be CEO."

She will need it. Just 596 days till Election Day, and so much work to do.

REPORTER ASSOCIATE Jessica Shambora contributed to this article. To top of page

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