Thursday, July 11, 2024

Harry Smith goes to Chapel Hill

By Jim Pomeranz
Photos by Bryan Regan

Back in 2012, Greenville filter-company executive Harry Smith got a call from the state’s most powerful lawmaker asking about his interest in serving on one of the state’s most prominent boards. “When I was called by Phil Berger at first about the [University of North Carolina] Board of Governors, I didn’t even know what the Board of Governors was,” Smith says. “‘Who?’ I asked. ‘You know, they manage the University of North Carolina System,’ I was told. I said, ‘No, I’m not interested in that.’ But after several subsequent phone calls, I signed up.”

Six years later, the former chief executive officer of that publicly traded filter company is poised to become chairman of the UNC board, which oversees 17 campuses that enroll nearly 230,000 students and spend about $8 billion annually.It also hires and oversees the system president, often called the state’s most important job. Smith’s ascension — he was elected vice chairman in September — reflects a changing of the guard in North Carolina leadership wrought by the Republican takeover of the General Assembly in 2011. For decades, the Board of Governors was made up of prominent state lawyers and businesspeople, mostly Democrats and many of whom had served on local campuses and given lots of money to universities. Past chairmen included establishment pillars such as Greensboro lawyer Jim Phillips; Brad Wilson, the recently retired chairman of Durham-based Blue Cross and Blue Shield of North Carolina; and the late Cliff Cameron, former chief executive officer of Charlotte-based First Union Corp. Deference to powerful system presidents, including Bill Friday, C.D. Spangler Jr., and Erskine Bowles, was routine.

Berger has chosen a different path by working through hard-driving conservatives such as Smith, 47, with few previous connections to UNC’s power structure. “Harry knows how to run a business, has a keen interest in public education, and we are lucky to have someone of his caliber serving on the Board of Governors,” Berger says in an email. “If I were to meet another Harry Smith today, I would do my best to get that person involved in public service and put his talents and background to good use for the state of North Carolina.” Smith agrees that he represents a new leadership style in Chapel Hill. “I’m not a typical Board of Governors member. I don’t care about the wine-and-cheese approach. I’m a change agent.”

Of course Berger didn’t pick Smith’s name out of a hat. From 2006-17, Smith contributed more than $180,000 to North Carolina politicians and campaigns, almost exclusively Republicans, according to federal election data. That includes a $50,000 gift to the N.C. Republican Party and $4,000 to Berger’s campaign committee, both in 2012. Overall, Smith has given more to state Republican causes than 24 of the 28 current UNC board members. Berger’s spokeswoman, Shelly Carver, says the donations played no role in Smith’s appointment in 2013 or reappointment last year.

“I was contributing to what I consider good, conservative Republican campaigns,” says Smith during an interview at his office overlooking the Pamlico River in Washington, where his former company, Flanders Corp., was headquartered. “I’m no puppet. I’m going to do what’s right for the system with a focus on efficiency and affordability.”
For Smith, his mandate is to cut wasteful spending and find savings to enable lower tuition costs — notwithstanding studies showing North Carolina’s public universities are among the nation’s low-cost leaders. He emphasizes his desire for each campus to retain its identity. But financial efficiency, it turns out, has been his personal passion since at least his senior year in high school.

Smith grew up in Johnston County’s Archer Lodge, near Clayton, the son of parents who didn’t attend college. As a high-school junior, he was on a vocational education track until his girlfriend, Tammy Painter, told him she would enroll at East Carolina University in 1988. Not wanting to lose her, Smith switched to college-prep classes. “I realized to stick with her, I had to change directions and do the same, take courses for college. So I buried my head in my books; I aced my senior year, performed well on the SAT and got accepted to East Carolina.”

In Greenville, Smith worked two part-time jobs while earning a bachelor’s degree in business. He graduated in 1992, and a year later, he and Tammy were married. (The couple has two children, a daughter who is a Wake Forest University undergraduate and a son who attends Arendell Parrott Academy, a private high school in Kinston.) For his first seven years out of college, Smith sold industrial and electrical supplies to customers that included Flanders, an air-filtration company founded in Riverhead, N.Y., in 1950. The company moved to Washington in 1969 and, starting in 1987, was led for the next 17 years by Robert Amerson. Bolstered by several acquisitions, annual revenue soared from about $20 million in the early 1990s to $194 million in 2000.

Smith joined Flanders in 1999 and spent the next eight years selling a wide variety of filters for manufacturers, utilities and homeowners. “I worked my way up in the company,” says Smith, who repeatedly uses four words — quicker, smarter, faster, better — to describe his approach to business, education and life. “I had to be a quick learner, be smarter than anyone else, work fast and produce better.”

It was a turbulent time at Flanders, which moved its headquarters to St. Petersburg, Fla., shuffled top management and recorded lower sales and losses in some years. Smith kept gaining influence, becoming chief operating officer in 2007, and, a year later, with sales sliding amid a burgeoning recession, was named CEO. He was 37. By then, he had formed a partnership with Amerson to buy several plants making up 90% of Flanders’ holdings, leasing them back to the company. The move, which was approved by Flanders’ board, improved the company’s cash flow, Smith says.

“When I was asked to be CEO, I was not prepared to run a public company, a Nasdaq-traded company,” Smith says. “It had a challenged balance sheet and a negative cash flow, but all of that created opportunity, so I signed up.” Smith says he focused the company on core products, shedding unprofitable product lines, reducing the company’s footprint and raising cash. A deal with The Home Depot for consumer filters sparked much-needed growth. Company headquarters returned to Washington, a city of 9,700, to be closer to its manufacturing roots. “We couldn’t do it any other way,” Smith says. “For the company to succeed, we had to take some drastic action.”

Smith’s faith in turning around Flanders wasn’t shared by the company’s bankers. “We had no money,” says John Oakley, who joined Flanders as CFO about the time Smith became CEO. “We had worked through all of our revolving credit line. Sales were not very good. Bank of America actually told Harry we should shut down. But Harry wouldn’t have anything to do with that.”

Smith and colleagues sold or closed 26 of the company’s 38 sites. “It wasn’t just his ideas,” says Oakley. “I was involved, other managers were involved. We all came up with ideas and ways to turn it around.” The company, which went public in 1995, delisted from the Nasdaq over-the-counter market in 2010 to reduce costs. That same year, Flanders reported a record $16 million net loss, partly because of one-time costs related to the plant closings. In a press release, Smith called it “an exciting but challenging year.” The company returned to profitability in 2011, when Insight Equity, a Southlake, Texas-based private-equity firm, agreed to buy it for $4.40 a share, or $190 million. The deal closed in May 2012.

Smith, who had accumulated shares valued at more than $13.2 million, remained CEO until 2014. His real-estate investments with Amerson paid off, he says, when an investment trust affiliated with New York-based W.P. Carey & Co. acquired four Flanders industrial facilities for $51 million in 2011. It isn’t clear how much Smith, who at that time had sole ownership of those properties, profited from the sale. Meanwhile, Insight’s timing proved shrewd, with Japan’s Daikin Industries Ltd. buying the business for about $430 million in 2016. Flanders’ revenue grew more than 40% from 2010-15, company reports show.

“I got a Ph.D. in business at a young age,” says Smith, who left the Flanders board in 2015. “I was forced by fire to succeed. It wasn’t that I had some lineage set up for me to be the CEO. I probably was blessed with an opportunity to take a much challenged company and fix it. If the company had been doing well, I would have never gotten a shot.”

Today, Smith doesn’t operate any businesses but holds a stake in Pitt Electric, a commercial electrical, heating and ventilation company in Greenville. Smith also is buying real estate in the Greenville-Washington area, including $1.1 million for the historic Havens Wharf, where his office is located, and the adjacent Haven’s Mill lot, Beaufort County records show. The latter property includes land, a house and a 16,500-square-foot riverfront building that will require extensive renovation. “I’m not sure why I bought it,” Smith says. “Not sure what I’m going to do with it. Just an investment.”

Smith plans to return to making and selling air filters, but he’s only halfway through a five-year noncompete agreement with Flanders, which he’s trying to overturn in a legal filing. “Air filtration will never go away, from filters in your home to those in nuclear plants — a filter that costs two bucks or one that costs a million,” he says. “I think the opportunity is there to build a highly automated company, one with three plants, not 10 or 12. I’d like to build a $300 million company from scratch, a ground zero air-filtration company and put some of my old team back together. I want to create jobs in North Carolina.”

Oakley, who now works for Durham-based drugmaker KNOW Bio LLC, expects Smith to make good on those plans. “Harry is decisive, energetic and hardworking at whatever he does,” he says. “He will make a mistake and instead of resetting and restarting that mistake, he’ll change directions to achieve the success he desires.”

Without a day job, Smith has thrown himself into his work on the Board of Governors, even though his main education role previously was as a parent volunteer at The Oakwood School, a private school in Greenville where his daughter graduated in 2016. He says he has no involvement there now.

Smith’s other notable connection to education is a $1 million donation in 2011 to ECU’s Pirate Club, an athletics booster group, to help build a $17 million practice gym for the basketball teams. It’s called the Smith-Williams Center, named after the Smiths and Greenville convenience-store operator Walter Williams and his wife, Marie. Smith says he’s paid about $900,000 of his commitment.

While Smith’s ascension to the Board of Governors may be more about politics than his previous education experience, he hasn’t been shy about pushing for significant change. He suggests lobbying for UNC should come solely from UNC System President Margaret Spellings’ General Administration staff, rather than the current system in which representatives of many campuses roam the halls of the legislature. As a member of the board’s budget and finance committee, he has pushed for issuing tax-advantaged bonds for the entire system rather than each campus handling its own financing. The theory is that consolidating the offerings would cut as much as $90 million in annual interest costs, Smith says, mainly by enabling lesser-known campuses such as Elizabeth City State University to pay the same interest rate on debt as more highly rated UNC Chapel Hill or N.C. State. Similar efforts in the past have met legal and political roadblocks.

“We think the UNC System needs to be a helper to each campus by handling the financial parts instead of each campus going alone,” he says. “We have to look at these types of things to help control tuition and fees.”

He also favors studying whether the UNC System offices should move out of Chapel Hill, citing financial, not political, reasons. “We are located in two buildings a couple of miles apart and neither building may be completely occupied,” he says. “It might make sense to find one building or complex to combine the staff under one roof and reduce the cost of operating two different facilities.”

Smith says one of his most important successes was pressing UNC to take a stronger stand in the combination of state-controlled ECU Physicians group with Vidant Medical Group, a subsidiary of the region’s dominant hospital system. At a board meeting in March, he criticized UNC officials for not negotiating hard enough to seek top dollar for the 400-member physicians group. “[ECU Physicians] was undervalued when first proposed and it was about to be approved, but I stopped it, the deal, until it was valued properly,” he says.

The activity doesn’t reflect a desire “to change the character of the campuses; we don’t want to change the education at each campus.” Smith says. “We just want to make the economics of operating all 17 schools more efficient in an effort to reduce overall operating costs and thereby reducing tuition and fees for students.”

Such assertiveness from Smith and other new governors has drawn criticism from UNC’s old guard, including former Sara Lee Corp. President Paul Fulton, who as head of the Raleigh-based Higher Education Works nonprofit has urged the Board of Governors to avoid meddling in affairs traditionally handled by the system’s president and chancellors. Spellings has politely urged the board to avoid micromanagement. Smith says he contacts Spellings two or three times a week with calls, texts or email.

Over the last year, Smith’s focus has included behind-the-scenes politicking to land the chairman’s post, following Asheville lawyer Lou Bissette’s pending departure in June, according to several people familiar with the vetting process. Because of those efforts, they say, former Vice Chairman Roger Aiken, Secretary Joan Perry and Budget and Finance Committee Vice Chairman Scott Lampe were not reappointed last summer. Also not reappointed: Henry Hinton, a well-known Greenville radio broadcaster who also joined the board in 2013 after an appointment by former House Speaker Thom Tillis.

In place of veteran governors who had not been Berger appointees, the General Assembly approved lobbyists such as former Raleigh Mayor Tom Fetzer and former lawmakers including Robert Rucho and Rob Bryan of Charlotte, and Thom Goolsby of Wilmington. (He is now a lobbyist.) A key ally of Smith during the jockeying for seats was James Holmes, a Raleigh insurance-company owner whose employees include two influential state representatives, Rules Committee Chairman David Lewis of Dunn and House Majority Leader John Bell of Greenville. “Harry brings a unique set of skills to the board,” Holmes says. “I would support him for chairman.”

Critics of Smith’s aggressive style would not comment on the record, citing his political influence. One exception is Charlotte lawyer John Fennebresque, who was chairman when Smith joined the board. After leading the ouster of former UNC President Tom Ross and recruitment of Spellings, Fennebresque resigned amid criticism from Smith and other board members for failing to listen to members’ concerns. All but one of the 32 board members, including Smith, voted to dismiss Ross. But Smith and others blamed the controversial transition on Fennebresque, who has said Holmes, Smith and others pressed him to oppose Spellings’ candidacy.

“You can quote me on this,” Fennebresque says. “My mother taught me years ago that if you can’t think of anything good to say about someone, don’t say anything. I have nothing to say about Harry Smith.”

Other current board members were complimentary. “He understands the financial operation better than anyone else on the board,” Bissette says. “He is very supportive of President Spellings and me. He has matured very much since joining the board. I think he would make a great chairman.” Spellings, in an email, calls Smith “a smart, energetic leader who is passionate about our great university system.”

Smith isn’t a shoo-in for the top UNC post. Fetzer, a former N.C. Republican Party chairman whose clients include hospitals, insurers and tobacco and beer interests, and Raleigh investor Temple Sloan III have shown interest in the post, according to political insiders. Sloan, whose family controlled General Parts Inc. before its $2 billion sale to Advance Auto Parts, campaigned briefly for the vice chairman’s slot in September before yielding to Smith. Neither Fetzer nor Sloan returned requests for comment.

Smith says he hasn’t felt any pressure from lawmakers in his appointed job. “Phil Berger asked me to serve on the Board of Governors because of my business background,” Smith says. “He has never lobbied me whatsoever for anything. He has applied no pressure. All he has asked is that I make decisions that I feel are in the best interests of the system and the state.

“This board is misunderstood by the media, not looking at the good we are trying to do and only thinking of politics. The Board of Governors is trying to make the overall UNC System better.”

Smith agrees that his focus on gaining influence has rubbed some people the wrong way. Once he learned about the Board of Governors, he set his sights on that and hasn’t stopped his quest for power. “When you lead, you can create angst and strife, but if you don’t lead, there can and will be failure,” he says. “I’m not going to force change down anyone’s throat. I’m about fact-based solutions. [The board has] got to get out of operations of the system and drive policy.”

The election for chairman of the Board of Governors is set for later this spring.

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