By Ann Reilly Dowd REPORTER ASSOCIATE Barbara Hetzer

(FORTUNE Magazine) – COVER STORY WHAT MANAGERS CAN LEARN FROM MANAGER REAGAN Love him or hate him, everyone agrees the President has achieved an extraordinary number of his goals. How did he do it in what had been one of the world's least manageable organizations? A close look reveals lessons executives everywhere can put to work. A FIRE BURNED cheerfully in the fireplace in the Oval Office. Still, presidential pollster Richard Wirthlin felt a bit chilled on that cold December day in 1982 when the economy looked as bleak as the weather. ''Mr. President,'' he said, ''I have some bad news for you. For the first time in your presidency, our surveys show that more people disapprove of your performance than support it.'' The President flinched slightly. Then he relaxed, reached out his arm, touched his pollster's sleeve, and said with a grin: ''Well, I could always get shot again . . .'' Classic Reagan: funny, reassuring, confident. The President went on, ''With taxes and inflation down, I really believe this economy will soon start growing again. And when people get back to work, those ratings will start coming up again.'' Many of his advisers were skeptical. But Reagan was persistent, optimistic, and right. You don't have to support Reagan to concede that he has had remarkable success in achieving most of the goals he brought to Washington. Principal exception: reducing the deficit, which has mushroomed into his most significant failure. But Reagan has, as he promised, rebuilt the military, cut taxes, slowed the growth of domestic spending, reduced regulation, and put a conservative stamp on the nation's judicial system. The economy is in its 45th month of expansion, however modest, and inflation is low. Radical tax reform -- of which Reagan is not the sole author but for which he can, and will, take much of the credit -- is on the verge of enactment. The jury is still out on the eventual effects of these changes, but for better or worse the Reagan Revolution has largely succeeded, and the world will feel its effects for years. Many pundits continue to regard Reagan's successes as the dumb luck of a good old Irish actor who stumbled onto the right set. Even members of his , Administration denigrate his intellect and lambaste his hands-off management style. It's true that Reagan is lucky. He took over the presidency near the bottom of a business cycle, so by some arguments he had nowhere to go but up. As with most lucky people, though, he makes much of his own luck, and managers can learn a lot from him about how to do the same. Reagan's management principles are few and clear. ''Surround yourself with the best people you can find, delegate authority, and don't interfere as long as the policy you've decided upon is being carried out,'' he told FORTUNE (see interview, page 36). He brings a strong vision to his job but constantly, skillfully compromises. His message to his team and the public is consistent and upbeat. He is painstaking in choosing subordinates but otherwise avoids details. He encourages staff members to speak their minds and defuses tension with an endless repertoire of jokes. Perhaps most important, his decisions, at least on major matters, are fast and firm. His leadership style strikes a constantly recalculated balance between idealism and realism. Reagan demonstrates a realization that his kinds of goals are achieved not overnight, but slowly, day by day, year by year. ''I've never understood people who want me to hang in there for 100% or nothing,'' he told a senior adviser. ''Why not take 70% or 80%, and then come back another day for the other 20% or 30%?'' So he does, again and again, on defense, taxes, budget cuts, all his major initiatives. Says Warren Bennis, who teaches at the University of Southern California's graduate business school: ''Reagan is a master of compromise. Like Abraham Lincoln, he will temporize, but he will never lose sight of his vision.'' More than other recent Presidents and many corporate leaders, Reagan has also succeeded in translating his vision into a simple agenda, with clear priorities that legislators, bureaucrats, and constituents can readily understand. Lyndon Johnson had his vision of a ''Great Society,'' but his legislative agenda was too cluttered. Jimmy Carter's objectives were obscured by frequent flip-flops. In contrast, Reagan's agenda of tax cuts, deregulation, a defense buildup, and a slowdown in domestic spending was set early and pursued consistently. Independent pollster Gerald Goldhaber says that nearly 70% of the American people can name at least one of Reagan's top four priorities. By contrast, such ratings for the Johnson, Nixon, Ford, and Carter Administrations ranged from 15% to 45%. The President makes communicating seem easy partly because he works hard at it. He understands, as too few chief executives do, that communication is a two-way street. Like all shrewd politicians, he keeps in touch with his constituents by studying polls, reading newspapers, watching TV, meeting with different groups, and getting out on the hustings whenever possible. But Reagan is better than most at reading, and shaping, the public mood. When he gives speeches, he speaks in language his audiences can readily understand -- simple, stark phrases brought to life by tales from the real world. His message is generally encouraging. The President's speechwriters prepare drafts for him, but they say that he reworks all his major addresses, sometimes scribbling in the margins, other times rewriting whole sections in longhand on a yellow legal pad. Invariably, Wirthlin maintains, the lines that move people most are the President's own. THE BEST corporate leaders use these same tactics in communicating with customers, shareholders, and employees. Robert Waterman Jr., coauthor of In Search of Excellence, the best-seller on well-managed companies, notes, ''In all our basic research, C.E.O.s were constantly telling us that you can't reiterate your corporate vision and goals enough. It's just amazing how fast people lose direction and wander from the basics.'' Effective corporate leaders also appreciate the power of infectious enthusiasm. ''If a company's in deep yogurt,'' says Waterman, ''a good policeman can turn it around. But to make it a great company requires a cheerleader. In this we can learn a lot from Ronald Reagan.'' The President's plan to make his vision reality started with a thorough search for the right people to help him. In November 1979, nearly nine months before he won the GOP nomination, he asked executive recruiter E. Pendleton James to begin thinking about staffing his Administration. Working with candidate Reagan, James quickly developed a set of criteria for hiring. Topping the list was loyalty -- not just to the Republican Party, but to Reagan and his program. ''Reagan has been criticized for picking people who shared his philosophy,'' says Defense Secretary Caspar Weinberger. ''But doing otherwise would have been perfectly absurd. Reagan came here to change the direction of the country.'' During the first two years of his Administration, Reagan spent two hours a week working with James on presidential appointments down to the lowest levels. Longtime White House observers say such presidential attention to personnel is unprecedented. Today Reaganites can be found throughout the top ranks of the bureaucracy and judiciary, ensuring that the President's influence will be felt long after he is gone. Reagan's emphasis on loyalty, sometimes to the exclusion of other qualifications, has obvious drawbacks. The so-called sleaze factor in his Administration has been unusually high: Labor Secretary Raymond Donovan was indicted for fraud, former White House deputy chief of staff Michael Deaver is under investigation for influence-peddling and perjury, and many lesser officials have left office after charges of unseemly behavior, usually some kind of cupidity. But in most top posts Reagan has been able to attract and keep loyalists with enough integrity and talent to be independent. Picking competent people who are on his wavelength has also enabled Reagan to delegate more effectively than most Presidents. Former Transportation Secretary Drew Lewis recounts an incident during the 1981 air traffic controllers' strike that set the tone for labor-management relations throughout the Reagan era. Lewis worried that Reagan's friends, whose private planes were grounded, might urge him to back down on his decision to fire the controllers, which Lewis had recommended. So the transportation chief called Reagan to test his resolve. Recalls Lewis: ''The President said: 'Drew, don't worry about me. When I support someone -- and you're right on this strike -- I'll continue to support you, and you never have to ask that question again.' From that day on, it was clear to me -- whether in increasing the federal gasoline tax in 1983 or selling Conrail -- that once he said, 'Fine,' I never had to get back to him. I had the authority.'' Some longtime Reagan associates speculate that his capacity to delegate stems from his Hollywood experience. Says John Sears, his former campaign manager: ''A lot of people in political and corporate life feel that delegating is an admission that there's something they can't do. But actors are surrounded by people with real authority -- directors, producers, scriptwriters, cameramen, lighting engineers, and so on. Yet their authority doesn't detract from the actor's role. The star is the star. And if the show's a hit, he gets the credit.''

REAGAN SEES his role as that of a leader who establishes the direction for the organization, not that of a hands-on manager or idea man. He delegates day-to-day management to Chief of Staff Donald Regan, the former chairman of Merrill Lynch, who has streamlined White House operations and reduced much internal bickering. Reagan looks to his Cabinet and White House staff to put the flesh on major initiatives and to serve up new ideas, such as Treasury Secretary James Baker's plan for coordinating interest rate policies among several nations. Meanwhile, Reagan focuses on big issues like tax reform or on opinion-shaping events like the summit with Soviet leader Mikhail Gorbachev. Says Harvard presidential scholar Roger Porter, who spent five years in the Reagan White House: ''He does not devote large chunks of time to peripheral issues. That is one of the keys to his success.'' Critics fault Reagan for not wading deeply into the substance of decision- making. Insiders confirm that he is not a detail person, but they insist he receives enough information to make the right decisions on the most important issues. On each one, he gets a two- or three-page memo prepared by Cabinet Secretary Alfred Kingon's office outlining options and their pluses and minuses, and detailing which Cabinet members and top White House aides are pushing what. The agencies involved also prepare longer papers, which, aides say, the President reads and remembers. Then he calls a meeting of principals to debate the issue. Says Porter: ''Reagan has a high tolerance for hearing competing views argued very intensely.'' Most modern Presidents -- and corporate chiefs -- have demanded more detail in preparing for important decisions. Carter, for example, read reams of Treasury documents on tax reform and plunged into the drafting of a final proposal, which got nowhere. Reagan relies on staff analysis plus his own principles and instincts. In his tax reform drive he established his objectives -- among them lower rates, fairness, simplicity, revenue neutrality, and stimuli for growth. Then he delegated the details to Treasury and weighed in at key moments with appeals to Congress and the voters, plus strategic advice to Baker on pushing the program. His formula worked fine, but management experts caution corporate leaders against disdaining detail to the extent Reagan does. Past Presidents, among them Richard Nixon and Franklin Roosevelt, built conflicting views into their staffs to ensure a diversity of opinion. Reagan did not do this consciously. But his choice of strong lieutenants and his willingness to let them knock heads over key issues has had much the same effect. In Reagan's first term, the clash between the tax hikers, led by Budget Director David Stockman and Baker, then White House staff chief, and the antitax team, led by then Treasury Secretary Regan, yielded a wide range of opinion on budget policy. Persistent fights between Weinberger and Secretary of State George Shultz have ensured that Reagan hears different sides on arms control and other foreign policy issues. When does a productive clash of opinions turn destructive? Reagan believes it's when the confrontation gets personal. Says a top White House aide: ''Stockman used to attack other Cabinet members in front of the President. It was clear Reagan did not like that.'' Like most corporate executives, the President expects his aides to fall in line once a decision has been made. But if they don't, Reagan resists firing them, drawing criticism even from admirers. Says Commerce Secretary Malcolm Baldrige, former chairman of Scovill Inc., about the President's reluctance to get rid of people: ''Reagan is not as good at this as business people need to be.'' SOMEWHAT SURPRISINGLY, fear of firing is a common problem among inhabitants of the Oval Office. Says Thomas Cronin, a presidential scholar at Colorado College: ''One of Gerald Ford's biggest failures was not bringing his own people into top jobs. Harry Truman was too loyal to his old friends. Dwight Eisenhower held on to Sherman Adams too long. Warren Harding was done in by his friends.'' In his second term Reagan has partly compensated for this weakness by installing Chief of Staff Regan, who plays the bad cop to Reagan's good cop, and with relish. Says the former Marine lieutenant colonel: ''I could fire anybody and be proud of it.'' For all the jokes about his ''burning the midday oil,'' aides argue that the President is a hard worker. He rises between 7 and 7:30 and typically looks at the Washington Post, Washington Times, New York Times, USA Today, and Los Angeles Times before his first meeting at 9. He almost always has working lunches. He does not, aides insist, take afternoon naps. He rarely leaves the office before 5:30. (Like many a good businessman, he lives above the store.) Usually he takes two to four hours of reading home, principally briefing papers on the next day's events and upcoming issues. But does he do his homework? ''Religiously,'' says Edward Rollins, his 1984 campaign director. ''The President has a clean-desk attitude. If you give him four hours of reading, he'll do it all. He won't talk about it. But you'll see his notes on page 40.'' Reagan uses humor as a management tool. It helps that he likes jokes, many of them unprintable. A Cabinet member says Reagan can match anyone dirty joke for dirty joke, golf joke for golf joke, dialect joke for dialect joke. Critics cite Reagan's tendency to joke as a sign that he lacks seriousness; insiders say it serves a useful purpose. As Waterman points out, ''Humor facilitates change by taking the tension out of situations.'' Regan says the President ends even the most serious meetings with a funny story, ''so staffers go away smiling.'' Nearly every President promises to manage the federal behemoth more effectively. But Reagan has introduced government to the how-to's of efficient management more successfully than any modern President, often importing procedures from private industry. Standout example: a new system of credit management. With about $1 trillion owed to it, the federal government is the nation's largest financial intermediary. Yet in 1980 the government had no standard system for screening loan applicants or reporting defaults. Says Joseph R. Wright Jr., deputy director of the Office of Management and Budget: ''You could default on a small business loan, then turn around and get a student loan, a housing loan, and a military contract, and still get a tax refund.'' Today the government reports 77% of its commercial and delinquent consumer accounts to private credit bureaus, and all federal agencies must use those bureaus to prescreen loan applicants, except when creditworthiness is not a criterion for eligibility, as with student loans. The government is also using private collection agencies, taking deadbeats to court, withholding tax refunds, and, when federal employees are involved, garnisheeing wages. OMB expects these reforms to save $7.9 billion this fiscal year. In addition, the Reagan Administration has launched a new cash management system. The federal government spends more than $1 trillion a year, 25% of the gross national product. Yet, amazingly, the government had no system for managing this money before Reagan took office. ''Checks would be stacked up for weeks in the agencies in canvas bags,'' says Wright. ''There was absolutely no concept of float.'' Today the government pays 99% of the dollar volume of its bills on time, and it uses electronic funds transfer to speed deposits. These cash management reforms will save $1.7 billion in fiscal 1986, according to OMB. Reagan has also attacked the budget innovatively, increasing the Administration's control over it. Budget-making used to be what corporate planners call a bottoms-up process: The agencies drew up their budgets and submitted them to OMB, where they were rejiggered, combined, and sent to Congress. That system could not work for a President who planned to slow spending, cut taxes, and radically shift budget priorities. Reagan turned budget-making upside down: The White House set priorities, and the agencies had to fit their funding requests to the President's blueprint. The President's approach left plenty still outside his control. Congress gave him much of his defense buildup and tax cuts but held back on unpopular domestic spending cuts. Rarely would a business chief encounter such a problem. As Federal Express Chairman Frederick Smith notes, ''Corporate C.E.O.s never need to have their boards sign a purchase order.'' The 1982 recession also added mightily to Reagan's record deficits. History may yet fault this President for urging an inherently unworkable budget strategy. But his aides argue that budgetary balance always took a back seat to tax cuts and the defense buildup among Reagan's goals, and achieving two out of three isn't bad. Early in his Administration Reagan set up the so-called Cabinet Council system, in which committees of Cabinet members regularly thrash out policy issues for the President. Fashioned after a similar system Reagan used in California, the council structure provides a convenient forum for balancing the interests of various agencies. When Cabinet members agree -- as they did recently on a proposal to reform product liability law, for example -- the President typically signs off. In a deadlock -- as there was over whether to subsidize grain sales to the Soviets -- he chooses a winner. In that case he sided with Baldrige and Agriculture Secretary Richard E. Lyng, who supported the sale as a way to help troubled U.S. farmers. The losers were Weinberger and Shultz, who opposed it as too generous to the Soviets. More than in any other way, Reagan has established his authority by sticking with his decisions. Says Donald Regan: ''The President has a unique talent: He is serene internally. When he has made a decision, he lives with it. He doesn't fret over it. And most of all, he doesn't change his mind. Therefore he doesn't confuse Congress or the public as to what he stands for.'' From where does this serenity spring? Reagan associates cite a combination of principle, instinct, self-confidence, and faith. Says Rollins: ''Reagan is a great believer in destiny. That gives him an inner peace and an ability to do what he thinks is right, regardless of public opinion.'' He continued to push for more defense spending, Star Wars, and aid to the Nicaraguan contras despite considerable public opposition. Measured by his popularity ratings, bucking the tide has not hurt Reagan with his customers, the voters. In this seeming anomaly, management experts say, lies an important lesson for corporate leaders: People want their leaders to do the right thing, not the popular thing. Says Harry Levinson, a psychologist and management consultant: ''A C.E.O. doesn't have to be popular. He has to take charge, point direction. If people see the logic of what he's doing, and believe he's doing it for the good of the organization, they'll buckle down and face the hardships.'' Reagan also relies on a combination of principle and instinct in deciding when to hold and when to fold in negotiations. Says corporate raider T. Boone Pickens, chairman of Mesa Petroleum: ''Reagan's timing is excellent. In certain transactions there may only be a few minutes in which a deal can be cut. A real negotiator is able to pick the right time and not let it get away.'' One example: Reagan's decision last December to go up to Capitol Hill and persuade Republicans to vote for the House tax reform bill, even though it was anti-investment. Reagan vowed to veto the bill if the Senate did not improve it. That timely promise kept the bill moving toward changes Reagan wanted, including lower rates, a higher personal exemption, and more generous depreciation allowances than the House version proposed. The result was a bill he could enthusiastically endorse. Eugene Jennings, a professor at Michigan State's graduate business school, sees a lesson for executives: ''The ability to adapt and adjust tactics while sticking to principles is extremely important. One of the biggest problems with C.E.O.s is that they are flexible on principle and inflexible on plans.'' REAGAN'S MANAGEMENT of crises carries another lesson most executives know but sometimes forget: Don't dissemble. Through the several disasters on his watch, from the terrorist bombing of the Marine barracks in Beirut to the Challenger explosion, Reagan has escaped much of the blame by going quickly to the people with a relatively full account. Says James Kouzes, director of Santa Clara University's Executive Development Center: ''Credibility is very fragile. It's built day by day, and a President or a corporate leader can lose it in an instant by covering up.'' Some of the best executives handle disasters much as Reagan does. In the Tylenol poisonings, Johnson & Johnson Chairman James Burke limited the corporate damage by going right on TV to explain the situation simply and honestly. Jennings of Michigan State adds that the most effective C.E.O.s are ''maze smart,'' like Reagan. ''They have a sixth sense of how to get out of the brier patch without all those briers on their pants.'' After many years in acting and politics, the President also seems to understand that everyone has his share of flops; the key is moving on to a hit next season. Says GOP presidential hopeful Donald Rumsfeld, the former chairman of G.D. Searle and White House chief of staff under President Ford: ''Success tends to go not to the person who is error-free, because he also tends to be risk-averse. Rather it goes to the person who recognizes that life is pretty much a percentage business. It isn't not making mistakes that's critical; it's correcting them and getting on with the principal task.'' Just about every President and C.E.O. gives at least a little thought to his legacy. Reagan's will hinge partly on how many goals he achieves, but probably more on how well the goals he chose serve the nation. With just over two years left in his presidency, it is too early to make those determinations. Still, one extraordinarily important if little-noted element of the Reagan legacy is already established: He has proved once again that the presidency is manageable.