Speaker: William S. Stavropoulos, Chairman of the Board, President & CEO
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Date: 03/13/2003

Good morning and welcome – I hope this meeting format works well for all of you.

We live in what Shakespeare might have called "a scrambling and unquiet time." I return to Dow as CEO at a time of great unrest in the world, a time of great volatility for the world economy, and a time of great challenge at Dow.

I’d like to start with a couple of personal comments. Coming back to Dow as CEO was a very difficult decision for me. Frankly, I was moving into a different phase of my life. I was able to spend more time with my family, with my son, my daughter and their wonderful kids, and of course, all of it with my wife, Linda.

This decision was not an easy one. I’ve been with Dow for 35 years and like so many others, I have great loyalty to this company.

When the board asked me to come back, I immediately went to my family, and we spent a lot of time making this decision together, just as we’ve always made big decisions affecting all of us.

In the end, they basically said, "You need to help where you can. A lot of people are counting on you."

And you know, they were right. One of the things that really encouraged me was the number of emails and phone calls from employees I received thanking me for coming back as CEO and offering support. That’s one of the great things about Dow people. Although at times we have had our different opinions, we share a common love for this company.

So I return to many valued colleagues and I count you, the members of CEAC, among them. I worked with some of you during my five years as CEO and, of course, I’ve kept up with your work in my role as chairman of the board. You provide us with outside perspective that helps shed some light on our internal blind spots and biases. With your input and your feedback, you provide a vital link to an important audience.

I thank you for your contributions and I understand we will have some time for discussion after my remarks.

Our challenge as a corporation committed to sustainable development is to maintain the equilibrium necessary to deliver value on all three of the fundamental elements of sustainability.

I think you know that the year 2002 was one of considerable economic difficulty for Dow, and it led to the decision by our board of directors in December to make a change in the company’s executive leadership. The external factors affecting our unsatisfactory financial results were not unique to Dow. Our entire industry is struggling with volatile feedstock and energy costs, excess production capacity and lagging customer and consumer demand – but Dow’s results placed us behind many of our industry peers over the past two years.

I mentioned energy costs, and I’d like to say a little more about that because it’s important to understand what’s happening. The high cost of energy constitutes nothing less than a crisis for our industry and US industry in general.

Both the private and the public sectors need to take decisive action in conservation, responsible exploration, and alternate sources of energy.

In the U.S., we need a coherent energy policy for both the short and the long term. That’s why I sent a letter to the White House and to CEOs of our major customers about the need to work together to get through this crisis, and that’s why I’ll be in Washington next week talking to members of Congress about a national energy policy.

Now let’s focus on Dow. Starting on the day I returned to Dow – on December 13, we set in motion a plan to improve cash flow, reduce debt and increase profit margins. I will discuss that plan in more detail in a few minutes.

First, I’d like to say a few words about Dow’s board of directors and the sense of responsibility and accountability reflected in the difficult decision they made in December. You can’t pick up a newspaper today without reading about corporate governance. There has been much criticism of board members for lapses in oversight, which has led to accusations that boards do not take their responsibilities seriously enough.

This is not the case with Dow’s board. They made a tough decision in December based on accountability – their own and the accountability they expect from Dow’s senior management. Dow’s board felt that, despite adverse external conditions, the company should have performed better over the past two years. And I should mention that we received some very positive comments – including national news coverage – complimenting Dow’s board on its honesty and transparency regarding the change in leadership. You know, many companies say that a CEO is leaving, quote-unquote, "for personal reasons" or use some other euphemism. Our board wanted to be clear about two things – number one, this was solely due to the under-performance of the company, and number two, there was not even a whiff of scandal here.

Our board’s ability to think and act independently is critical as they provide checks and balances to management activities. More than two-thirds of Dow’s board are non-employee directors. And, historically, Dow’s norm has been separation of the chairman and CEO positions, with a non-executive chairman.

Since I currently serve in transition as both chairman and CEO, the board recently created the position of presiding director and elected Dr. Harold Shapiro, a Dow director since 1985, to serve as Dow’s first presiding director. His role will enhance our corporate governance practices while I serve in this dual role.

I’ve talked a little about the conditions that got us to where we are today – the question now is "what are we doing about it?"

Our immediate tasks are to improve earnings and re-build our company’s financial strength. We are moving quickly to implement a turnaround plan that will generate better financial results this year. Let me tell you a little bit about how we’re doing this.

Our first step was to communicate – via broadcasts, e-mails, website postings, and personal meetings – to achieve the following:

• To calm and stabilize the organization.
• To demonstrate the confidence of our senior leadership and engender a sense of confidence among our employees and investors.
• To understand the challenges we face and the plan to deal with those challenges; and finally,
• A call to action.

People have responded by focusing on the task at hand; not just with well-wishes, but with concrete suggestions on how to improve our cost structure. When I got these ideas from people – hundreds of them that are now being evaluated, and in many cases, implemented – I knew I had made the right decision in coming back to Dow as CEO.

Then we began a comprehensive review of the entire company, re-establishing a strong financial discipline and putting all options on the table. We have developed an action plan that includes, but is not limited to, the following:

• First, we are focusing on increasing prices and improving volume. As I mentioned earlier, we are working closely with our customers on prices as we confront the current energy crisis.
• Second, we are restructuring, consolidating and streamlining our company in order to improve our cost structure, reduce capital expenditures, and focus on our most competitive assets and businesses. Our actions will include divesting non-strategic and under-performing assets, shutting down manufacturing facilities that are underutilized or non-competitive, and reducing structural costs and capital spending.

We know that the actions we take will have an impact on Dow people and communities, and we will do our best to mitigate that impact. For example, as you are no doubt aware, our merger with Union Carbide resulted in the elimination of thousands of jobs company-wide. One of the sites affected is familiar to many of you – the Carbide Technical Center and manufacturing site in West Virginia. We worked very hard to reduce the impact of workforce changes there – both to the people involved and to the local economy. Carbide people gave Dow high marks for open communication and fairness to people throughout the merger process. We consider this part of our culture.

The measures I’ve just outlined, taken together, are expected to increase our cash flow by more than a billion dollars from 2002 and give us overall positive cash flow in 2003. But these are plans, not results. Someone once said that implementation is 98 percent of everything, and I agree. Turning these plans into results will take discipline and hard work. We are tracking our progress very closely and I’m pleased to report that for the first two months of the year we are doing very well in controlling the things we can control.

Our economic imperative is clear. But equally clear is our continued focus on environmental stewardship, workplace safety and corporate responsibility. We do not view economic growth in isolation from social and environmental issues.

Despite our economic challenges, we had significant accomplishments in all three elements of sustainability in 2002, which Harold Nicoll will highlight later in this meeting in his review of this year’s Public Report.

There is no question in my mind that business and the free enterprise system are essential to making sustainability work. Our focus at Dow is on hard-wiring it into our company in the same way we have fully institutionalized environment, health and safety into our culture and into our work and people processes.

Achieving the triple bottom line means embedding sustainability goals and principles into the core strategies of each of our businesses. That is why we developed the 12-point sustainability management plan. It is our blueprint to incorporate sustainability into everything we do.

But let’s be realistic about this – the economic prosperity of the enterprise is key to sustainability. When you’ve had the kinds of acquisitions we’ve had over the past years, you have to make tough decisions about assets, plants and people. Sometimes you have to retrench before you can build.

Dow’s experience in developing the BSL integrated manufacturing site in the former East Germany is a great example of this. BSL is also a great example of the strength of an integrated business approach based on sustainability.

I understand that many of you have visited BSL and are familiar with its transformation from a non-competitive site with significant environmental damage into a world-class manufacturing complex.

Chemical emissions into the air and water around BSL have been reduced by 90 percent from 1995, when Dow acquired the complex. Solid waste is down almost 75 percent. Wastewater has been reduced by 80 percent. Work-related injuries and illnesses decreased from 250 to 58 per year. Annual spills decreased from 39 to one. Motor vehicle accidents in the complex are down from 18 to zero. All of this was accomplished while substantially increasing production at the site.

The bottom line result is an additional $2 billion in sales for Dow, employment for over 2000 people in the area, and vastly improved environmental performance which has created a better workplace and community for our employees and neighbors. A win-win for all.

Another good example of our integrated triple-bottom line approach is far from Germany in the tropics of Brazil, at a new Dow Automotive manufacturing site that is part of Ford Motor Company’s newest Greenfield site in Bahia. The entire complex has been acknowledged as the most environmentally-friendly site Ford has ever built. Dow’s facility is on its way to becoming an economic success and is already a valuable addition to the local community.

A third example is in our Polyurethanes business. Among the new products we are working on – and in some cases commercializing – is a polyurethane foam that releases fewer emissions into the air, both in manufacturing process and in the final product. They are also developing a run-flat tire – a polyurethane ring inside the tire – that enables a car with a flat tire to go 125 miles at 50 miles per hour. This offers greater safety and security on the road and makes the car lighter because a spare tire is not required, which translates to greater fuel efficiency. Polyurethanes is also developing a polyol that is made from soybeans rather than hydrocarbons, and flooring and furniture that uses agricultural waste rather than wood, including endangered hard woods like Philippine mahogany. And all of this is happening is just one Dow business!

To me, BSL, Bahia and Polyurethanes are great examples of how to incorporate all three elements of sustainability.

And here once again, how you accomplish is often the key element – the idea of implementation. We don’t do it by creating a large bureaucracy in the company; we do it by incorporating sustainability into everything we do, ultimately generating products and practices that people want and need, and will pay a premium for.

We use the same approach to corporate philanthropy. A corporate audit of Dow’s global contributions was completed late last year. As a result, we are working on a number of areas to achieve a higher level of governance. We’ve also organized five geographic contribution committees to increase global involvement in spending decisions, and we have structured our contributions budget to mirror the components of the triple bottom line. This year, as we work to get Dow back on sound financial footing, we have had to delay some of our philanthropic commitments until later in the year. But this delay in no way signals a retreat from those commitments.

In closing, let me state that we have a road map for incorporating sustainable development into processes, products and people. Even in this very difficult economic period, our plan holds strong and our commitment is not wavering

Our challenge is to make sustainability sustainable. Ultimately, the world will judge our commitment to sustainability not by what we say, but by what we do.

I thank you for your important contributions to this effort, and I welcome your honesty and directness – and would like to open this up now to your comments and questions.