Rolla Huff turned EarthLink around by thinking like a shareholder Featured

8:00pm EDT August 31, 2010

In June 2007, on Rolla Huff’s first day as chairman and CEO of EarthLink Inc. (Nasdaq: ELNK), he purchased 100,000 shares of the Internet company’s stock.

And these weren’t stock options.

He opened his own checkbook and wrote a check for $725,000 to reflect the $7.25 per share price.

“I wanted people to understand that I was going to think like a shareholder,” Huff says. “… I wrote a check out of my checking account to buy shares, so I was going to think about this business like a shareholder, and I wanted my shareholders to know that.”

The move was necessary to rebuild confidence in the business. The former CEO, who was well respected and loved by employees and shareholders, had been diagnosed with cancer the previous November and passed away within a couple of months, so EarthLink was being led by an interim CEO.

On top of that, the company had been highly focused on growth, so it had gone off on several paths that it probably shouldn’t have been traveling on, resulting in some not-so-stellar financial results — it would go on to finish the year with a $145 million loss.

“The business was grappling with the loss of their leader, had an interim leader in place, and had two or three growth initiatives going on that were consuming meaningful amounts of cash and also were resulting in the company reporting net losses,” Huff says. “That was the situation. The share price had been under a bit of pressure, but I think, more than anything, shareholders were looking at the cash being consumed, saw the uncertainty in the executive team and were really pressing to understand what the strategy was and when the company would be profitable and create value for shareholders.”

So after Huff bought those 100,000 shares that first day, he began work on making EarthLink profitable for its shareholders once again.

Recognize your strengths

Coming in to the position, Huff knew EarthLink had a lot going for it.

“The first thing I tried to come to grips with was what the core strengths of EarthLink were,” he says. “I would start with the fact that we have an incredible group of employees at EarthLink that were very dedicated to the company and to its customers. That was hugely important.”

He also recognized that the company had millions of customer relationships, and customers actually liked EarthLink.

Seeing these two facts, he came to his first conclusion for how to move forward.

“So I thought that the first thing that needed to happen was we needed to leverage the fact that we had millions of customer relationships and a great team,” he says. “Then, as much as anything, make sure, especially with everything going on in the business that was causing uncertainty, to become very transparent with everybody that we got involved with.”

As a result, after the stock purchase on his first day at the helm of the company, Huff did another big thing on his second day. He had a companywide podcast — the first of many to come — to communicate with his employees around the world.

“While I didn’t have a business plan at that point, I wanted to make sure that people understood that we were in business to create value for our shareholders and take care of our customers,” Huff says. “Those were the prime objectives. While we absolutely wanted to have fun and have a great place for our people to work, if we couldn’t take care of customers and be profitable with the business, that was going to be a problem.

“Secondly, I wanted people to understand that it was critically important that we establish credibility around what we say when we make statements and make commitments to each other and to our shareholders; it was vitally important that everybody was fully bought in to meeting their commitments — their personal commitments and the commitments we had to make as a business — so credibility was absolutely critical.”

Then the last part of his message was that EarthLink needed to retain its customers.

“It was sort of the idea that the customer that we had was far more important to us than the customer we didn’t have,” he says. “That was just a core value that I wanted people to understand. Customers had made investments in us, and we had made investments in the customer, and we wanted to preserve both. That was really critical.”

At the end of this, he had to communicate the ultimate goal to everyone.

“We got everybody’s head around what needed to happen, and part of that was we needed to reduce our cost structure — it was going to impact people, and we needed to make a commitment to our people that they would be extraordinarily valuable in whatever the company did next, but there would be some people that might not be with us a year from now, but we were going to take care of everybody.”

Build a plan

Once he established with his people those fundamental things that he wanted to accomplish, Huff spent the next two months building a plan from the bottom up and trying to understand what worked and what didn’t at the company. He also had to get his team members to agree to either stop doing the things that weren’t working or fix them.

The key to this process was being completely transparent with everyone involved.

He spent the first couple of weeks visiting all of the company’s key partners around the world. He had already told people how he was going to approach the job at hand, so he wanted them to see him in action.

“I wanted people to see that I was looking them in the eye and making that commitment to them because I think it was clear to everyone in the company that there had to be some dramatic changes that occurred,” Huff says. “It was clear. I think calling that out straight away and again being transparent with people mattered a lot.”

He was also transparent with his shareholders and employees.

“I really believe that transparency matters,” he says. “Not just to employees but to shareholders. My first call, I was honest with people and said, ‘Look, there’s a lot of things that need to be changed here, and here’s how we’re going to approach it. We’re going to tell you what we believe is good about this business, what we believe is bad about this business and what we think the prospects are.’”

What was most important to him was that these two constituent groups weren’t sitting around second-guessing him and the management team, so he did podcasts every two weeks so they knew what progress had been made and what Huff was finding.

“I didn’t want the rumor mill to shape opinion,” he says. “People may not ultimately like what the result is, but I wanted them to never doubt that we were being honest with them and open with them.”

He also looked at what EarthLink did well and not so well.

“Being transparent, first and foremost, is critically important, and then I think focusing on what your core strengths are as a business and building off of those as opposed to trying to build off of something that you’re not as strong on — getting that great foundation is great,” he says. “I think the second thing is making sure that whatever you’re rebuilding, you’re rebuilding it with the idea that you’re going to create value for the people that have invested in you. Any other model is not a business. I truly believe that you need to be focused on building business models that create investor returns.”

He says, “If I put $1,000 into this business, explain to me in two minutes how much you think I’ll get back and how you would conduct business to give me a return on that money.”

It often stumps people.

“I certainly wouldn’t say nobody thinks about it, but there are a surprising number, especially of smaller companies, that the business was built around a passion as opposed to a business model, and that’s probably the difference. You need equal doses of both,” he says. “If you’re not building something that provides a return for the people who are giving you money to build the business and investing their careers in the business, you probably ought to rethink the model.”

So EarthLink had to rethink its strategy in a couple of areas. He decided to pull out of a wireless mobile joint venture because it didn’t have a core wireless network and would have to complete with people who had full networks. He also saw that EarthLink was spending tens of millions of dollars on initiatives to build out municipal WiFi networks, but there wasn’t a model to create any shareholder value, so he had to go to those municipalities and tell them that he wouldn’t be working with them anymore.

“Again, it’s this idea of knowing what your core strengths are and building off of those and being close enough to reality to know where you don’t have core strengths,” he says. “You can really want to grow wings and fly around a building, but the likelihood of you being able to do it is slim, so moving your business in that direction is probably not a good idea. I think being connected with the reality of the environment is critically important. You can’t sell yourself an idea. It’s got to be grounded in reality. It can’t be based on you just convincing yourself that it’s a great idea in spite of the weaknesses in the strategy, and, again, just being as open and honest with people as you communicate the strategy as you can possibly be.”

Move forward

In October, about three months after he started, he made the fateful announcement about job losses.

“This was when the market was still pretty hot and everything was a growth company,” Huff says. “We had to get our house in order, whether it was popular or not. We had to get it done.”

It was a big reduction — between 800 and 900 people. But Huff had been honest with employees, so they knew this was likely coming.

He gave as much notice as he could — four weeks for some and up to seven months for others — so they had time to prepare.

He used the company’s cash to offer severance packages based on years of service so they were taken care of — even giving employees their share of the bonuses they would have received for their work.

“If we have to reduce somebody during the middle of the year, we give them their proportional share of the bonus they would have earned if they would have been here the whole year,” he says. “We want people to share in the value that they had a role in creating. It might have been that they only had the opportunity to create value for six months, but they should participate for six months.”

He didn’t pay it out until they knew what the results were, so some had to wait for that money, but he made good on his promise.

He also had a support structure for people to help with the transition out and offered outplacement services.

He says the key to all of this was being honest and transparent.

“If you’re honest with people, they have the capacity to deal with difficult situations, but what people don’t have the capacity to do, honestly, is work all day and then be concerned whether their boss and their company is being honest with them,” Huff says. “It’s just too much, and it’s too much for the families to go through, especially if you’re a sole breadwinner in your house.

“You need to have a clear view of reality; even if you don’t like the reality, you need to have a clear view of it, and they deserve that. The people that we had to reduce were good people. It’s so important [not only] that you treat them right but that the people who stay behind see that you treated them right. It’s just absolutely critical. … It made a statement — to someone that was staying with us — that we would be staying with them much more credible.”

It created the buy-in and trust needed to move EarthLink forward, and that’s exactly what he got. After the reductions, the company was prepared to move forward, and that it did.

Fast-forward a couple of years, and as a result of Huff’s early decisions, last year EarthLink generated $723.7 million in revenue and $287.1 million in net income — more than $100 million more than the previous year, and the most profitable year in the past five years. The share price has also increased by about $1 a share, bringing more value to the shareholders like he originally sought to do. And through it all, he never got any nasty e-mails or mutinies from employees.

“I think about all of the change that this company went through in such a short period of time,” Huff says. “In most companies, the train would have gone off the tracks. That didn’t happen here. In spite of the massive change, I think people know they did something good here.”

How to reach: EarthLink Inc., (404) 815-0770 or http://www.earthlink.net/