Chapter 10, Part 1

By Frank Tursi, Susan E. White and Steve McQuilkin
JOURNAL REPORTERS
© Winston-Salem Journal

Thirty years later, Rodney Austin can still recall the conversation. It was the late 1960s, and he had walked into Bowman Gray Jr.'s office for a talk about some personnel matters.

Alex Galloway followed his cousin Bowman Gray Jr. as RJR president. (Photo by Jim Keith)

Gray was in poor health but still had some fire in him.

The phone rang and Gray picked it up. He talked for a few minutes, getting more and more agitated. Suddenly, Gray slammed the phone down and pounded his fist on the desk.

''Dammit,'' he said, ''virtue taken to excess becomes a vice.''

In the years surrounding Gray's death in 1969, it was easy to see the virtues of the R.J. Reynolds Tobacco Co. Loyalty. Selflessness. Hard work. And it was easy to see the rewards of that virtue: a profitable company that dominated its industry.

The R.J. Reynolds Tobacco Co. was once the largest cigarette company in the United States with a powerhouse of best-selling brands: Winston, Salem and Camel. But times changed, and as the case against smoking became more pronounced in the 1960s, RJR failed to adapt to the marketplace. Its rivals would eventually rush past it, and RJR's efforts to catch up would have a profound impact on the company and the cigarette industry.

''For years, RJR was a simple, easily managed company which produced inexpensive, habit-forming products with extraordinary margins,'' said Bob Rechholtz, a former vice president of marketing. ''The industry was characterized by smart, good old boys who knew that they had a good thing and were willing to carve up the spoils in five or six good pieces.''

The biggest decisions centered on how much leaf to buy and how much advertising to place. And in those simpler days, Reynolds' top executives had time to mire themselves in minutiae. They would spend hours agonizing over the size of the Christmas wreath, the company's snow-day policy and changes to the menu in the company cafeteria.

But during the late 1960s and early 1970s, the Reynolds Way slowly became a liability. The love of Winston-Salem no longer meant loyalty. Now it meant provincialism and parochialism, crippling attitudes in the growing global economy. The hallowed committee system, which fostered selflessness and teamwork, could stifle innovation and breed a conservative outlook that too quickly reinforced the status quo.

The cigarette business was changing, too. Wall Street was pushing companies to diversify so they could find profits away from the growing war against tobacco. The international tobacco business was gaining importance. And in the United States, it was becoming more of a marketing game, with companies trying to target brands that met narrow tastes and smaller niches.

After Gray's death, the job of transforming the empire would fall to his successors _ men like Alex Galloway, David Peoples, Colin Stokes, Bill Smith and Bill Hobbs. They shared Gray's values but lacked his clout and his vision.

''The company that they all grew up in was a company of consensus and committees and kingdoms and compromise,'' Austin said, ''and it was not without virtue, but also perhaps the virtue became a vice.''

In the immediate years after Gray's death, RJR's leaders could have done much to save the kingdom by making meaningful acquisitions. Instead, the company bought Sea-Land Services Inc. in 1969 and a year later an oil company, largely to ensure inexpensive fuel for its new fleet of ships.

It could have moved forcefully into the international tobacco market. Instead, its efforts were halting and tepid. It could have aggressively marketed its brands with sophistication and consistency. It didn't.

The company stumbled, and its rivals, particularly Philip Morris, gained.

''They were all sweet guys,'' said one former Reynolds executive about the Old Guard leaders who followed Gray. ''But if you turned the lights off they couldn't find their flies.''

The Other Cousin

Alexander Henderson Galloway III, known as Alex, was in many ways an unlikely choice to run one of the country's biggest consumer-products companies. Unlike the sales and manufacturing men who had the job before him, Galloway was a finance guy. He was the wrong man in the right place at the right time.

Galloway would have been happy to finish his career as treasurer or chief financial officer, but events kept pushing him into bigger roles.

The first time was in 1960, when Francis G. ''Bill'' Carter, the company's president, died of a heart attack. At the time, there were a handful of important lieutenants rising in the company _ Peoples, Stokes, Smith, and Spencer Hanes _ but none seemed ready to be president.

''Alex, I don't think, ever wanted the damn job . . . but he was stuck with it,'' said John Dowdle, a Reynolds treasurer in the '70s and early '80s.

The presidency gave Galloway a broader perspective on the industry, but he was still viewed by the board of directors as a numbers cruncher. Reynolds liked its chiefs to have sales or manufacturing experience. Again, Galloway's rise appeared stalled. Again, death lent a hand.

Spencer B. Hanes Jr.'s death in 1966 thrust Galloway into the chief executive's job, one rung below Gray's chairmanship. Gray was ailing, and Hanes had been the heir apparent. When Gray died in 1969, the RJR board was forced to make a tough decision.

The company once again looked inside itself for solutions. Peoples, a longtime financial executive, waited in the wings. Stokes, Smith and Hobbs were now generals waiting their turns. Each felt strongly that he would in time get a chance to run the tobacco company. (Fisher footnote; observations on Reynolds leaders and information about how RJR fared against its competition.)

During this period, RJR's board had few outside directors, and they weren't consulted much on the decision, said J. Paul Sticht, a former chairman and chief executive of R.J. Reynolds Industries Inc. who joined the Reynolds board in 1968. ''The insiders decided Alex should take over,'' Sticht recalled. ''We had little to say about it. However, I've got to say quickly that there was probably nothing else to do anyhow, under the circumstances.''

It helped that Galloway was a Gray. His mother, Mary Eliza ''Mamie'' Gray, was Bowman Gray Sr.'s sister. Bowman Jr. and Alex grew up together. When Bowman Jr. hit the streets as a salesman, Alex went into the financial side of the business.

Galloway was not a strong executive. He was competent and smart but lacked the marketing skills needed to run a cigarette business in a rapidly changing industry.

His main failing was that he lacked Gray's vision. Dignified and unassuming, he wasn't a natural leader like his cousin; he didn't fill a room with his presence. He often seemed uncomfortable in meetings.

''Alex was a little nervous about how much time anything was taking,'' recalled Horace Kornegay, a former congressman and the longtime president of the Tobacco Institute. ''I've seen him in a meeting where a lot of people thought it was a serious discussion _ and he started looking at his watch and you knew you were going to lose him right quick. . . . If you had a civic project you wanted to interest him, you better go in and say it in as few words as possible.''

Galloway seemed to follow the course laid out by Gray. In his four years at the helm, he presided over Reynolds' transformation from a cigarette company to a holding company with varied interests. Reynolds, though, made some serious missteps during Galloway's tenure that would haunt future executives for years.

Galloway could be quite deferential, especially in matters that fell into the gaps in his own experience. Finding the answers, for anyone schooled in the Reynolds Way, was as easy as walking the halls of the Reynolds Building. But some RJR executives who came later said that Galloway's brain trust was too close to the company and too complacent to give him the answers he needed. These old ways may have worked for his cousin, but that happy time was quickly fading away.