CRISIS AT BECHTEL The men who ran the premier construction company were at ease with princes and Presidents. Then their world began to change.

(FORTUNE Magazine) – A CHAUFFEUR-DRIVEN CADILLAC arrived in the exclusive Nob Hill section of San Francisco to pick up a solitary passenger. His name was Stephen Davison Bechtel Jr., and to the few who may have seen him emerge from his luxury condominium across from Grace Cathedral that sunny July morning in 1982, there was nothing to suggest anything special about him. Certainly, there was nothing to indicate that this lean, casually dressed man in his late 50s headed one of the richest, most powerful companies in the world. That was how he preferred it. The chairman of the Bechtel Group had a passion for anonymity, and he went to extraordinary lengths to preserve it. Details of his personal life were carefully guarded. His condo and other residences were studded with sophisticated security devices and listed in the name of a company subsidiary, not his own. On all trips, including the one he was making this morning, the route was planned by a former U.S. Army antiterrorism expert. There was some reason for caution; he had once been the target of a death threat. But this was also Bechtel's style, and a reflection of the values of the remarkable company he headed. Founded by his grandfather 75 years before (see box, page 103) and built to prominence by his father, who at 81 still served as a director, the Bechtel Group was at the time the largest engineering and construction company in the world. Its interests and political connections stretched from Saudi Arabia to Indonesia and back again. It had built pipelines in Peru and Venezuela, copper mines in South Africa, synthetic-fuel plants in New Zealand, and the subway system in Washington, D.C. In the Middle East the refineries and pipelines it built helped make the rise of OPEC possible. In Libya, Bechtel-developed oil fields turned out to finance the terrorism of Muhammar Qaddafi. Had the company been listed in the FORTUNE 500 in 1982, its $13.6 billion in revenues would have placed it 20th, ahead of United Technologies and Procter & Gamble. But Bechtel was not listed. It is a private company, one of the largest in the world. That too was the way Steve Bechtel preferred it. He had no patience with troublesome stockholders or filings with the Securities and Exchange Commission, and even less for the prying scrutiny of the public and the press. ''There's no reason for the public to hear of us,'' he once told a reporter. ''We're not selling anything to the public.'' Instead, Bechtel did its selling to companies and to governments quietly and out of public view: in boardrooms, on golf courses, in kings' palaces and prime ministers' residences, or at the site to which Steve Bechtel's chauffeur was now ferrying him -- a secluded 2,700-acre stand of redwoods 75 miles east of San Francisco called the Bohemian Grove. The grown-up equivalent of a summer camp, the Grove is a retreat where the country's corporate, military, and political elite gather for a three-day weekend each July. Like his father before him, Steve Bechtel Jr. had been coming to the Grove all his adult life. Nothing could keep him from this annual outing, for it was friends like those at the Grove -- friends in high places -- who had helped make the Bechtel Group the master builder that it was. It was the Bechtel organization's shrewd courtship of them that had made so much possible: the power, the nearly $2 billion family fortune, the entree to the White House and the seats of foreign governments. This year especially, Steve Bechtel needed to be among friends. Slowly, almost imperceptibly, the world in which Bechtel had done business so long and so profitably was changing. Three weeks before, in a move that had staggered Steve Bechtel, Ronald Reagan had tapped Bechtel Group's president, George Shultz, to be Secretary of State. GEORGE SHULTZ had been with Bechtel since May 1974. Secretary of the Treasury in the collapsing Nixon Administration, he had been eager to find a way out. Bechtel offered him a job as executive vice president at more than $400,000 a year, six times his government salary, plus a stock purchase plan designed to make him a millionaire several times over. Shultz promptly accepted. The appointment broke all company precedent. Bechtel executives, including Steve Jr., worked their way up, one painstaking rung at a time. Now a nonengineer outsider -- Shultz was an economist who had been dean of the University of Chicago business school -- was being catapulted to the top. The question was whether Shultz would fit in.

Low-key and avuncular, Shultz went out of his way to accommodate company sensibilities. ''George would come into the office Saturday morning wearing a bow tie and a cardigan sweater and wander around smoking a pipe,'' says Fred Jacobs, a former Bechtel executive. ''He was nonthreatening, and he'd take time to sit down and ask people -- secretaries, clerks, anyone who happened to be in the office -- how things were going. You felt comfortable with him.'' With Helena ''Obie'' O'Brien, his wife of 30 years, and their five children, he lived unpretentiously in a modest, Colonial-style house on the Stanford campus. He enhanced his professional image by teaching courses in management and public policy. SHULTZ did have to pass one test, with Bechtel's hard-nosed finance committee -- vice chairman Jerry Komes, company director and outside counsel Bob Bridges, general counsel Bill Slusser, and pipeline division chief Jack Lynch. ''The four of us were old buddies,'' says Lynch. ''We could just look at each other and know what the other guy was thinking. And we knew exactly how far we could go with each other.'' On the Friday before the first committee meeting Shultz was scheduled to attend, the four friends gave him a Bechtel briefing book summarizing the company's monthly and year-to-date financial activities. ''Did you read the briefing book?'' asked Jerry Komes as soon as the meeting got under way Monday morning. Shultz said that he had. ''What did you think?'' Komes inquired. ''I'm impressed,'' Shultz smilingly answered. ''I never realized that a company could have so much cash.'' Said Komes: ''That's right. Now Bob has something to tell you.'' Bridges tried hard to keep a straight face. He, Komes, and the others had rehearsed this conversation, and it was progressing exactly as anticipated. ''Well, George,'' he began, ''what Jerry wants to tell you is a couple of things we've all learned the hard way around here. No. 1, we know how to make money. No. 2, we know how to keep it. Your experience has been in the academic world, where maybe you didn't have to think about money. And you've been in government, where you've been giving money away. So, as Steve Sr. would tell you, whatever you do around here, George, don't f--- with the money.'' Momentarily, the man who a few months earlier had been Treasury Secretary of the United States looked as though he had been poleaxed. Said Lynch later: ''You could see his mind spinning around and Shultz thinking, 'My God, these guys are tough. They're telling me off.' '' Then Shultz, realizing that he had been set up, began chuckling. From then on, he was no longer treated with the formal deference accorded a visiting dignitary. Shultz also proved adept at handling the company's overseas clients. Steve Sr. helped smooth the way by introducing Shultz to old friends like Saudi Arabia's King Faisal and Algeria's Houari Boumedienne, but it was Shultz himself who charmed them. Domestically the new recruit was having an excellent run too, thanks in part to the contacts Steve Sr. had provided. Shultz was soon serving on an array of prestigious corporate boards, including those of General Motors, Sears Roebuck, Dillon Read, Morgan Guaranty, and SRI International. Shultz was also asked to join the Morgan International Council and the Business Roundtable. One area where Shultz needed no help was in Washington. To Steve Jr.'s occasional distress, Shultz continued to keep in touch with the new Administration, including President Gerald Ford, whom he informally advised on economic matters. When Shultz first joined the company, Steve Jr. would grouse about Shultz's government dealings, worrying that publicity about them would damage Bechtel. But there was little he could do about it. Before long, Steve Jr. invited Shultz to become a member of Mandalay, his personal lodge at the Bohemian Grove. Never had such a gesture been made to any Bechtel employee. Shultz immediately accepted. Along Mahogany Row, the Bechtel executive suite, the invitation was read as a portent of bigger things to come. In May 1975, Steve Jr. proposed, and the company's board of directors unanimously approved, Shultz's appointment as president of Bechtel Corp., the most important of Bechtel's three operating companies. It had been a dizzying rise, and in Washington another Cabinet member was about to attempt to match it. SIX WEEKS after Shultz's designation as company president, Caspar Weinberger arrived to take up duties as Bechtel Corp.'s general counsel. He had just resigned as Secretary of Health, Education, and Welfare. Around San Francisco and Washington, it was assumed that the California-born Weinberger had been lured back to his native state by his onetime colleague and boss, George Shultz. It was also assumed that once he was in place, Weinberger's career at Bechtel would be just as glittering as that of his former Cabinet colleague. Neither assumption was correct. Weinberger had come to Bechtel not because of Shultz, but in spite of him. They were different men, with different -- and often conflicting -- styles, and at Bechtel their progress would be dissimilar as well. Weinberger had actively sought the Bechtel job. Much of his motivation was financial. He had developed a taste for the good life -- among other things, he owned a summer place on Maine's tony Mount Desert Island, a retreat favored by the Rockefeller and Du Pont clans -- which was hard to support on a government salary. Also, his wife, Jane, suffered from arthritis, a condition aggravated by the Washington climate. Weinberger's reception was considerably cooler than that given to Shultz. As general counsel and vice president, Weinberger was replacing Bill Slusser, perhaps the best-liked executive in the company. Says Slusser: ''I'd been bumming around the world with some of these guys for years. Jesus, any new kid on the block would have had difficulties being accepted after all we'd been through.'' Weinberger did little to help his own cause. Where Shultz had shown himself to be a relaxed, affable, open manager, Weinberger gave the impression of having scant time for lesser mortals. When he discovered that some Bechtel clients were behind in paying their bills, he took it upon himself to send out threatening letters. The practice finally stopped when Steve Sr. discovered that one had gone to Sonatrach, the Algerian government's energy company, with which Bechtel had pending contracts of more than half a billion dollars. In the early 1970s Bechtel ran into trouble building the Alaskan pipeline. Relations between Bechtel and the consortium of oil companies that owned the pipeline deteriorated as bitter charges of poor management flew back and forth. After little more than a year Bechtel was replaced as prime management contractor. The company needed a gusher, and it struck one in the wealth of Saudi Arabia. On a sweltering day in March 1977, at a tiny Saudi fishing village on the shores of the Red Sea, Bechtel began work on the largest project in construction history: The creation of the industrial city of Jubail. It was a daunting undertaking by any standard, from its cost -- an estimated $30 + billion -- to the number of men involved in its construction: 41,000 laborers from 39 countries, plus 1,600 Bechtel project managers, civil and mechanical engineers, architects and draftsmen. Jubail would bring in an estimated $200 million in profits every year for the next two decades. Moreover, there were other contracts ahead: a petrochemical complex (the $1 billion Yanbu), the $3.4 billion Riyadh International Airport, and assorted other projects growing out of the Saudi government's decision to commit $145 billion to industrial and civic development between 1975 and 1980. But with the windfall would also come problems. The greed of certain members of the Saudi royal household was growing in direct proportion to the size of Bechtel's contracts. Meeting the demands of various Saudi princes was nothing new to Bechtel, which in its 34 years of operating in the country had paid out millions in ''business commissions.'' There was nothing in either Saudi or American law to prohibit this practice, as long as the commissions on a particular project did not exceed 5%. During the boom days of the 1970s, however, royal profiteering began to get out of hand. Whatever they were called -- bribes, baksheesh, or plain payoffs -- few Saudis were better at extorting them than Mohammad ibn-Fahd al-Saud, the American-educated son of the Crown Prince (and later King) Fahd. Operating through a company called Al Bilad (''the nation,'' in Arabic), Prince Mohammad had received fat ''commissions'' from a number of foreign companies doing business in Saudi Arabia. Until the mid-1970s, however, Prince Mohammad had refrained from putting the bite on Bechtel, mostly because of Bechtel's business relationship with Suliman Olayan, one of the wealthiest and most powerful members of the Saudi merchant class. Olayan was a close business associate of Prince Khaled bin Abdullah bin Abdel-Rahman. The equation was altered by the assassination of King Faisal in 1975. Alarmed by Faisal's murder at the hands of a deranged nephew, Khaled moved to England, taking with him Suliman Olayan's entree to the Saudi royal family. CONVINCED THAT the Prince possessed influence with the Saudi court and unaware, apparently, of his history with other companies, John O'Connell, a top Bechtel official who was critical of Olayan, asked Mohammad for help. In return for his assistance, the Prince wanted a 10% interest in Saudi Arabian Bechtel Co. Ltd., the Bechtel subsidiary that would manage both Jubail and Riyadh. When Bechtel's financial executives totaled up the tab for the prince's demands, they came to more than $200 million. The final decision, though, rested with the Bechtel executive committee: Steve Jr., Shultz, Jerry Komes, and four other senior company officials. While some committee members may have known that meeting Mohammad's terms could violate Saudi law and the U.S. Foreign Corrupt Practices Act, the majority decided to capitulate. Explained a Bechtel vice president afterward: ''The choice was clear-cut. Either give in or get out.'' The executive committee decided to approve giving Mohammad a 10% interest. (A year later, according to Bechtel, the company obtained an opinion letter from an outside law firm stating that the arrangement did not violate the U.S. act.) In late 1978 the well-connected, avaricious Prince became Bechtel's latest silent partner. Five months later, on April 7, 1979, the Bechtel Corp. announced that Saudi Arabian Bechtel Co. Ltd. had been awarded the contract to manage the construction of the Riyadh International Airport. The decision to give in left a bitter taste in many mouths at Bechtel, not least of them the one belonging to Weinberger. He didn't like payoffs. He especially didn't like paying them in the Middle East, an area he had frequently visited on Bechtel business and on which he considered himself an expert. But what seemed to nettle Cap most was the fact that the decision had been reached without any input from him. He had not been consulted. The slight was one of many suffered by Weinberger. On several occasions legal advice he had provided on important cases had been ignored or overridden. Weinberger was deeply unhappy. Despite the perks, the big house in the San Francisco suburbs, the salary that topped a quarter-million per year, he conceded to friends that coming to Bechtel had been a mistake. With the approach of the 1980 election, however, Weinberger's mood picked up. The leading contender for the Republican nomination was Ronald Reagan, whom Weinberger had served as finance chief when Reagan was governor of California. Shortly after Reagan's election, Cap accepted an offer from Reagan to become Secretary of Defense. Pleased with his new role and apparently unwilling to share his status with Shultz, Weinberger, some of Shultz's allies later asserted, passed along word to Reagan that Shultz had already committed himself to stay on at Bechtel. Shultz, who during the campaign had served as chief of Reagan's economic advisers, had done nothing of the sort. He was stunned when Reagan called to say that he had talked to a ''friend of yours'' and completely understood Shultz's desire to remain at Bechtel. Perhaps, Reagan added, Shultz could help the Administration in other ways. Before Shultz could protest or explain, the conversation was over, and with it his hope of being Secretary of State. Shultz later told a reporter: ''I never turned it down -- I never had a chance to.'' The immediate beneficiary of Weinberger's artful maneuvering was Bechtel, which retained Shultz and got rid of Weinberger. ''Ronald Reagan did Bechtel a huge favor by saving the company the embarrassment of having to let Cap go,'' said a company executive, one of many who despised Weinberger. Said another: ''They ((Steve Sr. and Jr.)) weren't going to fire Weinberger. That wasn't Bechtel's style. They were just dancing him around and pointing him at the door. When it finally happened, there was an almost audible sigh of relief.'' SHULTZ got a raise, to almost $600,000 a year, and more stock. Though he would slip off to Washington or a foreign capital occasionally to give advice on economic policy, he seemed content at Bechtel, which kept him on the road about as much as he would have been as Secretary of State. He was a company man, and he seemed to relish the role nearly as much as Steve Jr. relished having him play it. It might have continued that way, the affable, clubbable George Shultz a permanent fixture of the Bechtel executive suite, but for the peculiar personality of Alexander Haig. Since becoming Reagan's Secretary of State, the former general and Nixon chief of staff had been engaged in turf and policy battles with virtually every important member of the Administration. He had blustered; he had bullied; he had threatened, more than once, to resign; and Reagan's patience was wearing thin. It snapped, finally, in June 1982. Summoning Haig into the Oval Office, Reagan reached into his desk, pulled out a piece of paper, and handed it to Haig. It was a statement accepting his resignation. Within the hour, Reagan was on the phone to Shultz, then in London on business. Shultz asked for half an hour to think it over, then accepted. Steve Bechtel Jr. was at the company's Alaska fishing camp, and though Shultz had frantically tried to reach him, Steve heard news of Shultz's appointment on the radio. ''I was shocked,'' Bechtel said later. ''I just didn't think it | would happen. ((But)) I knew George well enough that I felt that if the President really wanted him, put the arm on him, George would go.'' Steve Jr. took over Shultz's duties, and the transition at first seemed smooth. But the company, along with the oil business and other key segments of the world economy, was about to go off a cliff. Looking back, some insiders began to think of the departure of Shultz as a disaster. Says Raynal Mayman, a former treasurer of Bechtel: ''Shultz's leaving nearly proved the death knell of the company. Without his financial expertise, Bechtel really got caught with its pants down when the recession hit.'' As oil prices plunged and Third World debt mounted, American construction companies began to feel the pinch. The pain grew as the number of canceled construction projects multiplied until by 1984 the once seemingly invulnerable construction industry was in its worst straits since the Depression. As the biggest company, and the one with the heaviest foreign exposure and commitment to energy, Bechtel was hit hard. The first blow landed in January 1984. Construction on the troubled Zimmer nuclear power plant in Ohio had stopped. Bechtel was so confident of winning a new $700 million contract to complete the job that it had already assigned 500 engineers before it even signed the deal. Instead, the power plant's owner abruptly decided to convert the unfinished plant to coal, and the contract got away. Two months later Saudi Arabia canceled a $1 billion refinery Bechtel was building at Qasim, near the center of the country. Hundreds more engineers were thrown out of work. Says an executive who was working on a different project: ''We came in one morning and they were gone. Their desks were clean. A billion dollars had gone out the window just like that.'' Four months after that, Consumers Power Co. abandoned construction of a huge nuclear plant at Midland, Michigan, a project that had been bringing Bechtel hundreds of millions of dollars a year. With three major projects gone in six months and numerous smaller ones delayed or canceled, Bechtel's revenues fell almost 40% from a record $14.1 billion in 1983 to $8.6 billion. Even more worrisome was the decline in new business booked: down from $13.8 billion in 1983 to $8.2 billion in 1984. No one took the news harder than 84-year-old Steve Sr., who despite a bad heart continued to come into the office every day in his capacity as senior director. He fretted to a reporter: ''Like a savings account, when withdrawals begin to exceed deposits year after year we know eventually there will be a day of reckoning.'' Steve Jr. was even gloomier. ''Our market fell apart on us,'' he said to an interviewer shortly after losing the Midland contract. ''The power business went on its nose; in the petroleum business the price of oil came down and consumption leveled off. We got a little less sure of what the future held, where the opportunities lay, and what the problems were.'' Under pressure on all fronts, Bechtel began going after costs with a meat- ax. Some cuts were comparatively easy -- like selling two of the company's three corporate jets, ordering all but the most senior executives to fly coach, and installing reflector panels behind the fluorescent lights in each office. Others, such as scrapping Steve Jr.'s cherished plan to build a $100 million office complex in Oakland, were more painful. But the biggest wrench came in paring down the work force. Between 1982 and 1987 some 22,000 employees -- almost half the Bechtel ''family'' -- were let go. Some of them went in two mass firings just before Christmas in 1984 and 1985. Enormous bitterness resulted, especially among the many middle managers in their 50s. Said one: ''It's like the military. If you've been a major too long, forget it.'' Added another: ''They tend to act like God, but not with nearly the compassion.'' The survivors began fixing blame, and many traced the problem to Shultz's departure. Said a senior executive: ''Shultz was one of the few people in the company who could -- and would -- bring Steve Jr. the bad news, when there was bad news to be delivered. Most of the corporate vice presidents were afraid of upsetting the chairman. At Bechtel the downside risk in telling the emperor he had no clothes was enormous. You had nothing to gain and your career to lose.'' During the no-bad-news years Bechtel became increasingly bureaucratic. The entrepreneurial flair of founder Warren Bechtel and can-do spirit of Steve Sr. faded away. BELATEDLY, Steve Jr. began to realize that with Shultz gone, he needed some help. Relying in part on his Bohemian Grove friends, he put together what he called ''a board of counselors.'' It included such retired corporate heavyweights as Citibank's Walter Wriston, IBM's Frank Cary, and Du Pont's Irving Shapiro. ''It is our answer to an outside board,'' Steve Jr. told an interviewer. Meeting with Bechtel every few months, the counselors advised the company, among other things, to lower its sights. Soon Bechtel was going after jobs it would have brushed off as too small just a few years before -- a $25 million highway job in Turkey, a $3.5 million energy-from-waste plant in Florida, and a $900,000 concrete-pouring project in Michigan. Proclaiming the company leaner, meaner, and hungrier, an executive told the Wall Street Journal: ''If there's no project, we'll try to find one. If there's no client, we'll try to assemble one. If there's no money, we'll try to get some.'' By the end of 1986 the worst for Bechtel appeared to be over. On Saint Patrick's Day 1987, Steve Jr. addressed a gathering of company executives: ''Our business has had its ups and downs, but don't be disillusioned. We are operating in the black -- many of our competitors are not -- and we are financially sound.'' Looking uncharacteristically drawn and tired, he added a cautionary note: ''We've got to put more emphasis on marketing, on strategic planning, on business management. We need to get back to the attitudes and work practices of 20 years ago. That means less formality, more flexibility, more speed and responsiveness, more teamwork.'' Managing a smile, he asked for questions. ''Is 1987 the bottom?'' asked an executive. ''I hope so and I think so,'' Steve Jr. replied, the tightness showing in his voice. ''I'm more confident than I have been in years.''


When they spoke of him in later years, Warren A. Bechtel's sons and colleagues would describe him as ''an American original.'' He was born September 12, 1872, in Freeport, Illinois, the first of six children. His parents, Elizabeth and John Moyer Bechtel, were descendants of German immigrants who had originally settled in Pennsylvania. They migrated west after their marriage, settling first in Illinois and then, in 1884 when Warren was 12, on a farm in Kansas. Warren was a restless youth. School bored him and he attended sporadically. One thing that interested him was the slide trombone. Out on the open range, miles from the nearest house or fellow human, he would play his beloved trombone for hours while coyotes yelped accompaniment. In 1899, at the age of 26, he learned that the Chicago Rock Island & Pacific Railroad was extending lines westward into Indian Territory. A man with a mule team could find work grading track beds and hauling rails at $2.75 per day. With his wife and sons -- and his trombone -- Bechtel followed the railroad across the Midwest into Wyoming and Nevada. It was a harsh, nomadic existence. Often the Bechtels lived in a boxcar. One day in the winter of 1902-03, in the high desert country east of Reno, Warren hitched a ride on a buckboard driven by a Southern Pacific engineer. By the time the ride was over, the man had offered to help the young mule driver get a job on the Southern Pacific. Bechtel signed on for $55 a month. It was less than he had been making on his own, but the work was steadier. After a series of increasingly responsible jobs, he became supervisor of a large stone-quarrying operation that was most notable for its use of a new construction machine -- the steam shovel. Coordinating shovels, horse-drawn freight wagons, and his men, Bechtel proved himself a natural engineer and skillful manager. Eventually settling in Oakland, California, he amassed a small stake and purchased a steam shovel of his own -- one of the huge models originally developed to dig the Panama Canal. He splashed W.A. BECHTEL CO. across the cab and proclaimed himself in business. He was 34 years old.


Construction of Hoover Dam on the Colorado River in the 1930s was a colossal undertaking. Eight companies, including Bechtel, banded together calling themselves ''Six Companies'' as a kind of California in-joke; that was the name of the council of Chinese tongs in San Francisco. The dam consumed 45 million pounds of reinforced steel, eight million tons of sand, 840 miles of pipe, and more concrete than had been needed for all 50 dams previously built by the Department of Reclamation. Working conditions were difficult because of extremes in weather. Sudden storms washed out roads and blew down workers' tents. Temperatures during the summer often hit 120 degrees at river level. If a man unthinkingly picked up a crowbar with his bare hands, he could get second-degree burns. Six Companies had its own truck fleet and a 29-locomotive railroad. On some days the project would take delivery of 60 rail cars of cement and other materials. Forty-two cars were needed just to bring in parts for the two- million-pound bulkhead gates that would open and close in the tunnels being dug through both sides of the gorge. Superintendent Frank Crowe presided over the pouring of concrete like a symphony conductor. Blended at Six Companies' own mixing plants nearby, the concrete was loaded into huge dump buckets that were taken by train to the dam site. There the buckets were hung from hooks on one of four cable systems, which functioned like ski lifts to take bucket after bucket to the appropriate vertical column. Steel tubing filled with water was inserted into the cement to cool it in summer and heat it in winter to prevent expansion and contraction. Every few months Six Companies poured half a million cubic yards of concrete. By the summer of 1935, 18 months ahead of schedule, all 3.25 million yards had been poured and the wedge that would contain the Colorado River was in place. ''A remarkable record,'' one of Crowe's engineers wrote in describing the project for the Smithsonian Institution. In 21 months 1,200 men had built a structure larger in volume than the biggest pyramid of Egypt. That job, according to the ancient historian Herodotus, had taken 100,000 men 20 years.