Rust, Edward B. Jr. 1950–

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Edward B. Rust Jr.
1950–

Chief executive officer and chairman, State Farm Insurance Companies

Nationality: American.

Born: August 3, 1950, in Chicago, Illinois.

Education: Illinois Wesleyan University, bachelor's degree, 1972; Southern Methodist University, MBA, 1975, and JD.

Family: Son of Edward Barry Rust Sr. (former chief executive officer and chairman of State Farm Insurance Companies) and Harriett (Fuller) Rust; married Sally Buckler; children: one.

Career: State Farm Insurance Companies, 1975–1981, corporate attorney; 1981–1983, vice president; 1983–1985, executive vice president and chief operating officer; 1985–, chief executive officer; 1987–, chairman.

Address: State Farm Insurance Companies, State Farm Plaza, Bloomington, Illinois 61710-0001; http://www.statefarm.com.

■ Like his grandfather and father before him, Edward B. Rust Jr. became the chairman and chief executive officer of State Farm Insurance Companies. Having been associated with the company his entire life, Rust was well steeped in the mutual insurer's corporate culture, which placed a great deal of emphasis on serving policyholders, who were the legal owners of the company, and avoiding spending money unnecessarily. However, despite a lifelong association with State Farm, Rust maintained that growing up in the Midwest and learning rural values provided a moral foundation that would become more important to his achieving success as a chief executive. One of those values was respect for education. Rust, who held advanced degrees in business administration and law, became devoted to the advancement of education in America and instrumental in State Farm's contributions in this area, in terms of both money and the time of its employees. Rust served as a trustee of his alma mater, Illinois Wesleyan University, and was a member of the Business Advisory Council of the University of Illinois College of Commerce and Business Administration as well as a member of the advisory council of the Stanford University Graduate School of Business. In addition, he was the cochairman of the Business Coalition for Excellence in Education and was a member of President George W. Bush's transition advisory team on education.

DEEP FAMILY TIES TO STATE FARM

When Rust was born in 1950 in Chicago, his family was already deeply involved in the affairs of State Farm. The company was founded in 1922 by George J. Mecherle of Bloomington, Illinois. His idea was to form a mutual insurance company for rural and small-town drivers, who paid higher premiums than urban drivers despite having fewer accidents. By linking insurance rates to risk levels, Mecherle was able to offer much lower premiums than his competitors. He also signed agreements with the state farm bureaus, which received a fee for each of their members who purchased policies—hence the State Farm name. State Farm soon covered city drivers as well and in 1929 added life insurance. By 1942 State Farm was the largest auto insurer in the country. Rust's grandfather, Adlai H. Rust, was a young lawyer when he helped Mecherle found State Farm and became his right-hand man. Mecherle's son, Raymond, took over the presidency of the company in 1937, and when Raymond died in 1954, Adlai Rust took over as chief executive officer. His son, Edward B. Rust Sr., joined State Farm in 1941, succeeded him as CEO in 1967, and was named chairman in 1983.

According to Edward Rust Jr., his goal while growing up was not one day to work for State Farm. Rather he focused on his education, which was a point of emphasis in his family. His father graduated cum laude from Stanford University, majoring in economics, and was elected to Phi Beta Kappa. His mother, Harriett Fuller Rust, graduated with honors from the University of Southern California. Rust received his under-graduate degree in 1972 from Illinois Wesleyan University in Bloomington, where he was a two-year starting guard in football and became an accomplished wrestler. He then went on to Southern Methodist University in Dallas, Texas, earning a master of business administration and a law degree. Rust told Best's Review in a December 1996 article that going to work at State Farm was not on his mind while completing his education: "It was not until I got out of law school, and, frankly, had a couple good offers from law firms, that I decided to give State Farm a try."

Rust stayed in Dallas and in 1975 became a State Farm management trainee at the local office. After gaining an overview of how regional operations were handled, he returned home to Bloomington to become an attorney in the State Farm corporate law department. He next became involved in marketing and sales before finally moving into general management. In 1981 he made vice president and in 1983 was appointed executive vice president and chief operating officer and named a director. Rust maintained that "being the boss's son was no guaranteed ticket to success" (Best's Review, December 1996). In fact, being the subject of expectations from older generations was often a difficult burden to bear. He was also quick to note that he owed a debt to a number of mentors beyond his father and grandfather.

RUST SR. DIES IN OFFICE

In August 1985 Rust's father died at the age of 66 and his namesake, only 35 years old, was promptly appointed the new chief executive officer. According to a Fortune profile of State Farm, insiders at the company almost took the younger Rust's promotion for granted. However, outside directors, mostly academics and economists, gave some thought to conducting a national search to bring in someone with a prestigious background: "These directors knew Ed Sr. as very private, disciplined, and brilliant. They knew the son as more outgoing but unproved as a businessman" (April 8, 1991). The idea of looking elsewhere was quickly dismissed, however, and Rust was named to the post. He soon proved that despite his age, he was up to the job and two years later, in 1987, was named chairman of the board.

After nearly a decade heading State Farm, Rust outlined to Fortune what made a top executive, observations that were a reflection of his own management style and core values. He said, "You have to live and breathe the business, always exploring new horizons and learning to understand the ever changing world around us" (April 8, 1991). At the same time, Rust emphasized the need to surround oneself with capable people and to have the confidence to delegate authority to them. He also expressed the importance of striking a balance between a personal and work life. As for his role at State Farm, Rust narrowed it down to two areas: "The first is the development of people, and the second is an untiring effort to better understand the marketplace, how customer demands are changing" (Best's Review, December 1996).

With Rust's family fortunes so intertwined with State Farm's history, it was difficult clearly to distinguish the corporate culture from the CEO's personal worldview. The insurer remained conservative in its approach to business, essentially content to continue selling reasonably priced auto and home insurance. In the words of one industry analyst quoted in a 1999 BusinessWeek article, "They don't throw the long bomb; they just move the ball ahead slowly and steadily" ("Father Knew Best—and So Did Grandfather," November 8, 1999). The company was so committed to controlling costs in the name of its policyholders that its corporate culture appeared to take on the zeal of religion, and to many it went too far. In 1989 State Farm was accused in a policyholder lawsuit of being too conservative in maintaining reserves, with the effect of trimming dividend payments to policyholders.

LEGAL PROBLEMS TROUBLE STATE FARM

During the 1990s Rust would face a number of legal problems that critics said were an outgrowth of State Farm's inbred culture and obsession with cost controls. A 1994 earthquake in the Los Angeles area led to lawsuits by homeowners, who charged that the company had secretly reduced their earthquake coverage. The matter was settled in 1997, when State Farm agreed to make $100 million in payments. In 1998 State Farm was "rocked by a string of blistering punitive damage decisions," as reported by BusinessWeek ("State Farm: What's Happening to the Good Neighbor?" November 8, 1999). As the article noted, in Utah the company was fined $25 million in punitive damages, in part for the "systematic destruction of documents" and "systematic manipulation of individual claim files to conceal claim mishandling." An Idaho appeals court then fined the company $9.5 million in punitive damages for making use of "a completely bogus" outside bill-review company that helped lower the cost of medical claims. In October 1999 an Illinois jury rendered a $456 million judgment against State Farm. That amount was then stiffened by an additional $730 million in punitive and other damages awarded by the judge for the insurer's breach of contract with auto policyholders by relying on generic replacement parts. Although the case revealed a number of damning internal documents, Rust was adamant in his insistence that State Farm had not committed fraud. A trained lawyer, Rust made his opinion of the current state of the court system a matter of public record. In 1995 he spoke before the Appellate Lawyers Association, outlining his belief that the civil justice system had undergone a fundamental shift in the years following World War II: "It has gone from a fault-based to a pseudo-compensation-based system" (Vital Speeches of the Day, September 15, 2003). In his opinion, this change was in many ways a reflection of people's decreased willingness to accept responsibility for their actions. Moreover, lawsuits were becoming viewed "a bit like a lottery," with a large number of people looking to turn misfortune into a jackpot. At a lower level, people were more willing than ever to pad insurance claims, but even this activity, he said, was fraud. It was not the insurance company that would foot the bill, of course; the policyholder would pay because in the end, it was the policyholder's money that was at stake. In the corporate culture of State Farm with which Rust so identified, protecting the interests of the policyholder was sacrosanct.

A COMMITMENT TO EDUCATION

While conservative business practices and a devotion to keeping a tight rein on policyholders' money were core values that Rust had essentially inherited from his forebears at State Farm, his devotion to advancing education was very much his contribution to the company's culture. Starting in 1995 State Farm offered its more than 75,000 employees one paid day off each year to offer help at a school, whether that help involve accompanying a class on a field trip or providing expert advice to school administrators. In 1997 State Farm became involved with the National Board for Professional Teaching Standards, a teacher-founded organization that sought to improve the quality of teaching and to provide certification. Moreover, State Farm provided funds for new buildings, fellowships, and other programs at colleges and universities across the country as well as support for the Beyond the Books Educational Foundation, which provided grants to elementary and secondary teachers for special projects that could not be funded at the local level. Rust's personal commitment to education was also evident in his willingness to serve as a trustee and adviser to Illinois Wesleyan University, the University of Illinois, and Stanford University as well as serving as the cochairman of the Business Coalition for Excellence in Education and on President Bush's transition team covering educational issues.

With the start of the 21st century, Rust faced a number of challenges in leading State Farm into the future. The insurance industry was adversely impacted by a string of events: asbestos claims, the sudden drop in the stock market, Enron and other corporate scandals, and the uncertainty that resulted from the terrorist attacks of September 11, 2001. While some were short-term problems, others carried long-term implications for the insurance industry. How Rust would be able to guide State Farm through this period of great uncertainty remained to be seen.