Scandal Hits--Now What? Before Enron there was Waste Management. Here's how it came back from the brink.
By Julie Creswell

(FORTUNE Magazine) – Remember Waste Management? In 1998--well before Enron, Tyco, and WorldCom provoked America's outrage--the nation's largest trash hauler was embroiled in one of the biggest accounting scandals ever. Regulators accused its top officers of engaging in massive fraud while pocketing almost $29 million in annual bonuses and gains from insider trading. The company, which restated over $1.7 billion in earnings over five years, went through five CEOs between 1996 and 1999, and its stock lost more than $25 billion in value. The turmoil allowed a smaller company, USA Waste Services, to take over the crippled giant in a merger that later failed miserably and resulted in more than $1.2 billion in charges.

That was the smelly mess facing A. Maurice "Maury" Myers when he took over Waste Management in November 1999. Myers, now 63, had succeeded in turning around two other troubled companies: trucking firm Yellow Corp. and America West Airlines (he left in 1996 after having tripled the stock price in two years). Today, after nearly four years of steady effort, Waste Management's odor is decidedly sweeter. Myers has managed to reduce the company's debt by nearly a third, to $8.3 billion; the stock has soared 85% from its March 2000 low. Meanwhile, net income rose 9% last year; free cash flow is expected to jump 30% this year, to nearly $1 billion. This past spring came a huge milestone: Rating agencies upgraded Waste Management's debt from junk to investment grade. Perhaps most important, Waste Management is no longer a pariah. "There has been a complete change in this company, with new talent, new direction, new focus, and new priorities," says Roman Szuper, a debt analyst at Standard & Poor's Ratings Services. "Investors like what they've seen so far."

What did Myers do, exactly, to scrub the taint of scandal from the garbage hauler and get it performing again? His first task, he told FORTUNE while touring the sparkling-clean company facilities in Rochester, N.Y., where he comfortably cracked jokes with office workers and truck drivers, was to regain the trust of his employees. "In a crisis like this," says Myers, "you don't want to risk losing valuable people" who are critical to driving the recovery.

He was just one week into the job when he realized how dire the situation was. About 10,000 of the 55,000 company paychecks had been sent out incorrect, shortchanging the workers. Myers immediately began visiting Waste Management workers around the country. Employees were upset not only with the paycheck problem, they told him, but also with the company's benefits plan. Within a few weeks he had begun updating the payroll system and offering enhanced benefit options. "We quickly fixed the things we could fix," says Myers, "which showed the employees that we really did care about them."

To get ahead of the hyperdrive rumor mill, Myers also launched a weekly company newspaper. This isn't the typical company mouthpiece trumpeting the firm's baseball team scores or employees' anniversaries. It talks about real company issues, like customers the firm lost and why it lost them.

To show that the new Waste Management valued doing the right thing, Myers created an anonymous hotline for employees to call to report improper behavior. It has logged more than 4,600 calls since early 2001, resulting in the termination of 60 employees (all duly noted in the company newspaper) and disciplinary actions for many more. Myers also reestablished the position of ethics officer--who trains not only the workforce but the board of directors as well.

The CEO was also rushing to clear up any lingering controversy as quickly as possible. The accounting scandal and failed merger had resulted in over 30 shareholder lawsuits against Waste Management. In July 1999 they were consolidated into a class-action suit. Even before Myers agreed to take the job, he met with Waste Management's lawyers to gauge whether the suit could be settled. "As long as there are lawsuits outstanding, you'll have more and more people making claims against you," says Myers. "Furthermore, Wall Street hates uncertainty. They worried the settlement would start with a 'b'--as in billions." (In late 2001, Waste Management agreed to pay $457 million to settle the suit.)

It wasn't until he'd spent three months on the job that Myers finally met with analysts. He didn't promise a quick fix. He told them it would take as long as three years to get the company stabilized and five years to really get it rolling. He explained to the Houston Chronicle in 2000, "We will convince investors and other skeptics by underpromising and overdelivering."

As months went by, it became clear to Myers that Waste Management had another big problem. It didn't know enough about its business. The company had never fully integrated the thousands of mom-and-pop garbage operations it snapped up during the 1980s and '90s. When Myers started, Waste Management didn't know how many landfills it owned and didn't keep safety records. That kept insurance costs and workers' compensation costs high.

What's more, the company was paying little attention to a group it desperately needed to impress: its customers. The claims that Waste Management had been making for years--that it was the best in the industry and that it completely satisfied its customers--were just wishful thinking. The company had no way to measure its performance and had never bothered to ask customers what they wanted.

So the company began tracking numerous data--how long it took to answer a customer's call, how many customers reported billing problems, how many garbage pickups the company missed, how many accidents company workers had. Executives were stunned by what they discovered. For instance, 68% of the company's accidents were being caused by 12% of its drivers. Those drivers had typically worked at Waste Management for less than a year and usually were repeat offenders. The answer was simple: The company revved up training and dumped bad drivers. As a result, in the past two years the driver accident rate has fallen 48%.

Another surprise came when the company asked its commercial and industrial customers what was most important to them. It wasn't low prices, as it had expected. Bigger concerns were incorrect billing and missed garbage pickups. So the company upgraded its billing program last year. Since then, accounts receivable have fallen from 71 days to 47 days. "Every day of improvement is worth $30 million to us," says chief information officer Tom Smith, who also worked with Myers at Yellow and America West. "That translated into a lot of free cash flow."

The company knew that missed pickups were often a result of cars blocking garbage bins. So Waste Management launched a program called Haul or Call. Now if a driver sees something blocking the container, he calls the local Waste Management office. The office then calls the customer and asks when it can reschedule a pickup, typically within 24 hours. "Our customers were shocked--literally shocked--when we started to call them, asking when we could reschedule," says Myers, laughing. As a result, the company's customer churn rate has fallen from 12% to 8.6% in the past year.

Analysts say that Waste Management's hefty investment in technology will help boost profits further next year and beyond. For example, for years garbage routes were configured using maps and pushpins. Now, borrowing from FedEx and UPS, Waste Management is using global positioning system (GPS) technology in combination with route-optimization software to create the most efficient pickup schedules. "The company's goal is to reduce its 1,500 routes by 10% over the next two years," says Trip Rodgers, a research analyst at UBS. "That should result in savings of about $180 million, or 20 cents a share. That's significant."

Next up: Waste Management is giving drivers digital cameras they can use to take pictures of customer bins overflowing with garbage. Those pictures are e-mailed to customers with the suggestion that they consider getting a bigger container. "It's fun for the drivers, and almost always we end up with an upgrade in container size for the customer," says Myers. "This is a very simple way to use technology to drive revenues."

The company has also begun to capture gases released from landfills it owns and convert them into fuel for its trucks. Though the savings are small, the company hopes that the practice will help it win eco-sensitive customers.

Waste Management now is casting for two commercials--its first ever--to show how much it has changed. One thing that hasn't changed, of course, is the name. Did Myers ever consider altering it as a way to distance Waste Management from its past? Yes, he concedes--especially after the 2001 Enron scandal once again pushed Waste Management into the limelight (the firms had the same auditor, Arthur Andersen). But "you're not fooling anyone with a name change," says Myers. "In fact, it's almost insulting to investors."

The CEO--who plans to retire from the garbage business at the end of next year--knows that while consistently strong results may diminish scandal, it will never completely go away. "People have long memories," he says with a shrug. It just means that Waste Management has to keep trying harder. Late last year the company missed earnings because, Myers says, it overestimated the strength of the economy. "That was a mistake. We should have been more conservative," he says. "With these types of companies [that are dealing with scandal], everybody is watching you. You just can't mess up."