Posted on 07/23/2013 2:09:29 PM PDT by Colonel Kangaroo
How the me-first corporate structure installed by hedge fund manager Eddie Lampert helped ruin the retail giant
Eddie Lampert, the legendary hedge fund manager, was once hailed as the “Steve Jobs of the investment world” and the second coming of Warren Buffett. These days, he claims the number 2 spot on Forbes’ list of America’s worst CEOs. He has destroyed Sears, the iconic retail giant founded in 1886, which used to be known as the place “Where America Shops.”
America now avoids Sears at all costs, thanks largely to Mr. Lampert and his love of twisted economic logic.
A bit of background: Lampert cut his teeth on Wall Street at the risk-arbitrage desk of Goldman Sachs under Robert Rubin, who later became U.S. Treasury Secretary and now serves as vice chairman at Citigroup. In 1988, Lampert founded ESL Investments and joined the billionaire’s club at age 41. He rose to fame in the early 2000s for seizing control of Kmart during bankruptcy and then using it to take over Sears. Along the way he was kidnapped and deposited on a motel toilet in handcuffs for nearly 40 hours, and lived to tell the tale. Lampert is known for his touchiness and odd habits, such as conducting meetings from a bare bones room to Sears executives forced to tune in by videoconference. He hates flying.
You might say that Lampert is the distillation of the fervent market worship and wrong-headed economic approaches that came to dominate the U.S. in the 1980s and have yet to run their fatal course. He adores Ayn Rand, and is reported to have given out copies of Atlas Shrugged during an ESL annual dinner. Lampert is also a fan of Friedrich von Hayek, the Austrian economist beloved by conservatives and libertarians. As a Robert Rubin protégé, he absorbed the lessons of a man whose discredited economic focus on budget deficits ended up starving the country’s infrastructure, education and alternative energy.
Looking at what Lampert has done to Sears, we can see what happens when the lessons of his mentors are actually applied in the real world. It isn’t pretty.
1. Myth: Bigger is better
William Lazonick, an expert on the American business corporation, has written about the rise of the conglomerate movement of the 1960s. At the time, shareholders were clamoring for rapid growth, so they pushed for big mergers and acquisitions. Once-successful firms were pressured to move away from their core businesses, often to terrible effects. In an email to me, Lazonick noted that “the ideology was that a good manager could manage anything, and that all the central office needed was performance statistics so that it could ‘manage by the numbers’.” This foolishness “imploded,” as Lazonick put it, in the 1970s.
Evidently Lampert didn’t get the memo. In the 1980s, as deregulation got the casino games rolling on Wall Street, mergers and acquisition fever once again took hold. This time around, mergers more often involved acquisitions in the same industry, like Bristol Meyers’ acquisition of Squibb. Two new terms entered the American vocabulary, the “hostile takeover” and the “corporate raider.” Oliver Stone made a movie about this episode called Wall Street.
Some refer to Lampert as a corporate raider. He prefers the term “active investor.” It must be admitted that Lampert wasn’t only interested in stripping the assets of his retail giant to make a fortune off it right away. He thought he could increase profits, too. After making a nice wad of cash from Kmart by selling off the valuable real estate sitting under dozens of stores, shutting down 600 stores and laying off tens of thousands of workers in the name of cost-cutting and thereby jacking up the stock price, he got bigger ideas. He would use Kmart to take over another ginormous retailer, Sears.
What background did Lampert have in retail? None at all. But never mind that. He was a Wall Street genius, and he would make this thing work by harnessing the power of data and numbers and letting the invisible hand of the market guide his Franken-company to glory. He even hired Paul DePodesta, the statistician of “Moneyball” fame, to advise him. When Kmart acquired Sears, the new company, Sears Holdings, became one of the largest retailers in the U.S., and Lampert became its CEO. He took on the Herculean task of integrating two vastly complex companies. And he brought on a guy that knew all about restaurants and nothing about retail to help him, Aylwin Lewis, former president of YUM! Brands.
Reactions ranged from surprise to predictions of doom. Mark Tatge atForbes called him “Crazy Eddie” and decided that he must be planning to liquidate the whole shebang, perhaps slowly, by dumping stores (Sears owns a ton of valuable real estate) and using the money to do stock buybacks (more on that later) that would further enrich him.
It turns out that contrary to Lampert’s notion, you actually do need to know something about a business in order to manage it well. There’s really no substitute for industry-specific experience. And bigger is not always better — a gigantic corporation can be too unwieldy and complex to thrive, especially when your management philosophy is derived from a writer of bad novels.
Sears and Kmart are now on well on their way to becoming vaporized as brands.
2. Myth: Self-interest is the greatest virtue
The neoclassical economic paradigm is built upon the idea a human being is little more than a globule of self-interest. It teaches that the market economy is populated by rational individuals whose selfishness is constrained only by expediency. Ayn Rand was an enthusiastic proponent of this idea in extreme form, and her celebration of it can be found in The Virtue of Selfishness: A New Concept of Egoism, published in 1964, which explains, among other things, the destructiveness of altruism and the virtue of acting solely in your own self-interest.
At Sears, Lampert set out to create the Ayn Rand model of a giant firm. The company got a radical restructuring. It was something that had been tried at giant industrial conglomerates like GE, but never with a retailer.
First, Lampert broke the company into over 30 individual units, each with its own management, and each measured separately for profit and loss. Acting in their individual self-interest, they would be forced to compete with each other and thereby generate higher profits.
What actually happened is that units began to behave something like the cutthroat city-states of Italy around the time Machiavelli was penning his guide to rule-by-selfishness. As Mina Kimes has reported in Bloomberg Businessweek, they went to war with each other.
It got crazy. Executives started undermining other units because they knew their bonuses were tied to individual unit performance. They began to focus solely on the economic performance of their unit at the expense of the overall Sears brand. One unit, Kenmore, started selling the products of other companies and placed them more prominently that Sears’ own products. Units competed for ad space in Sears’ circulars, and since the unit with the most money got the most ad space, one Mother’s Day circular ended up being released featuring a mini bike for boys on its cover. Units were no longer incentivized to make sacrifices, like offering discounts, to get shoppers into the store.
Sears became a miserable place to work, rife with infighting and screaming matches. Employees focused solely on making money in their own unit ceased to have any loyalty the company or stake in its survival. Eddie Lampert taunted employees by posting under a fake name on the company’s internal social network.
What Lampert failed to see is that humans actually have a natural inclination to work for the mutual benefit of an organization. They like to cooperate and collaborate, and they often work more productively when they have shared goals. Take all of that away and you create a company that will destroy itself.
In 2012, Lampert bought a $40 million home on Indian Creek Island, near Miami, just around the time he decided to sell 1,200 Sears stores and close an additional 173. That same year, Sears Holding was named the sixth worst place in America to work by AOL Jobs.
3. Myth: Greed always wins
In the 1980s, a noxious business philosophy developed that said that shareholders were the only true stakeholders in a company, because they made the investments and bore the risk. Forget about the investments and risks born by taxpayer and the people that work for a company. They didn’t matter. A company had no responsibility to anybody but the shareholder.
As a result, executives started using this justification for various kinds of hustles designed to line their pockets. They got very adept at the game of buying back their own stock in a way designed to inflate earnings per share and hide weaknesses.
In 1977, 95 percent of distributions to shareholders came in the form of dividend payments. Today, more than half of the cash returned to shareholders of S&P 500 companies comes from buybacks instead of dividends.
Fortune magazine, in a story about what happens when Wall Street jumps into the retail business, reports that under Lampert, Sears has gone on a stock buyback spree. Between 2005 and 2011, he took what was once the company’s strong cash flow and spent $6.1 billion of it on stock buybacks. During the same time period, only $3.6 billion was spent at Sears on capital improvements. Lampert told investors that upgrades and new stores were not an “efficient” use of capital. Neither was paying workers decently. In fact, Sears workers are paid so badly that they have taken to the streets to protest.
So when you walk into a Sears store today, you find a sad, dingy scene with scuffed floors and chipped paint. Tense-looking workers hover over merchandise scattered onto ugly display tables. Hardly makes you want to buy a microwave.
A handy chart on Yahoo Finance show that buybacks reached a high just about the time that Sears’ sales went into the toilet. Stock buybacks are really just an effort to manipulate stock prices, and they don’t help a company’s long-term health. They divert money away from the things that a company needs to have to succeed, like decent salaries for workers and investments in new products and services. Wonder why Apple is no longer making anything interesting? Why its retail workers get paid squat? Check out what they’ve been doing with stock buybacks.
Lampert’s buyback scheme has raked in a pile of money for him and his early investors, but it’s also flushing the company down the drain. Hoovering cash out of any firm, especially a retailer that needs appealing stores and strong advertising, will eventually crush sales.
And so it has. Sears has lost half its value in five years.
Conclusion: The lessons of Crazy Eddie seem so obvious that a bunch kids running a lemonade stand could understand them. You have to know something about the business you’re running, especially a big one. Success requires cooperation rather than constant competition. Greed is ultimately destructive.
The invisible hand of the market appears to have attempted to slap Lampert upside the head to teach him these things. But he remains committed to his nonsense, and the real losers are all the hard-working people who have lost their jobs, and the potential loss to the American economy of two revered brands.
It’s probably a good thing Ayn Rand never tried to run a business.
Don't give up yet. There's still plenty of time to attempt to read her books.
Cite, please.
Liberals would know. They are the greediest bastards on the planet, always demanding more and more of my hard-earned income at the point of a gun. And yes, their greed is destructive. Just look at Detroit.
You shouldn't, since the budget was never balanced. Another big lie from the Democrat Party. The last time our government did not spend more than it took in was 1957.
On the contrary, conservatives need to keep this philosophy in arms reach. With it I can amaze friends and family by predicting what will be on the next days news!
No cite available. It appears I had it wrong. At your prodding, I checked out a few biographies, and she apparently came to her atheism in high school in Crimea, about four years before the communists had asserted control, which I believe occurred in 1921. From a look at her literary influences during that period, such as Victor Hugo, she was probably influenced toward atheism more by Enlightenment rationalism than Marx. So it is more that they had some common roots.
In any event, I apologize for the error. I am not sure how I acquired the misconception, but I appreciate your pointing it out to me.
still need to reread Witness by Whittaker Chamber, time better spent
Apology appreciated. Now if all the other misinformed Rand haters would consider it, that would be progress.
Anyone who was a communist traitor cannot be forgiven.
In that 35 years I worked for 2 privately held family owned companies. Both were fine organizations.
I saw what happened with the advent of the early LBO’s and then the “acquire/downsize” model of business. No one built anything, just rearranged the pieces and shed a lot of employees and customers. In the long run, that stopped working.
The contributing factor that is never mentioned is the tax rate. When the Reagan administration reduced the top corporate rate (and it needed to be reduced) from 72% to 27% (rough numbers that I remember) there was an explosion of growth. Before it was insanity to make large profits, because you simply gave it to the Feds in the form of income tax. So the model that they pursued was to build the best possible organization and solid growth. The win was in capital gains, not in operating profit. After the tax cut the green eyeshade bean counters said this is nuts, we simply cut the employees in 1/2 and all that money drops to the bottoms line. It worked, the first time, less well the 2nd time, poorer still the 3rd time. Eventually there was no fat to cut and it destroyed the business growth and the companies found themselves in trouble.
Almost all industries practiced some form of this.
But with Obozo boosting the regulation and BS to comply with it is much much worse. The trainwreck approaches.
He saw the light, changed and then turned in the Commie traitors
Ayn Rand’s “Capitalism, the untried ideal” is a very good book.
I have never liked Rand’s nature. I do not think it is necessary. But her rebellion to compulsion is another matter. I totally agree with that part of her make up.
Well, my repulsion toward Rand is not based on when she acquired her atheism, which is a relatively minor historical detail, but that she did espouse atheism, and integrated it into her philosophical system. As I said before, if she comes to certain natural law realizations with which theistic conservatives agree, that’s great. But like Marx, she regarded faith as an enemy to reason, and debilitating to human psychological processes, which is, coincidentally or not, perfectly aligned with the attitude of the old soviet communists, and their modern leftist counterparts, that people of faith are mentally ill. That is not a matter of speculation, and it is due cause to treat her overarching philosophy with considerable caution. That is not hatred. That’s just good sense.
How many perished at the hands of Stalin thanks to WC’s help?
No sympathy.
Blaming Ayn Rand for a poorly run conglomerate is ridiculous. I’m not keen non her writing style and she argues the best of positions to extremes, but the fundamental truths that she conveyed are not discredited by one corporate raider.
Conservatives are under no obligation to worship Ayn Rand. Rand has about as much credibility as Anton Lavey or Ragnar Readbeard. And about as much relevance too.
It is still a very eye opening book. but you have a point I never thought of.
one of the points in his book is that for a large segment of the population, you can just fall into it without being cognizant of what you are embracing
Totally.
For those who didn't/don't need to be ‘educated’ on the realities by having them candy-wrapped in exciting novels there is Rands: “Capitalism: The Unknown Ideal.”
http://www.intellectualconservative.com/article3290.html
postscript: Sears started falling apart long before the Internet when they abandoned what had built them: the one big biannual catalog with everything in it to the plethora of small catalogs that choked your mailbox every week - that highlighted only a few items each. That one big catalog was like Amazon on paper - A one source shopping list. Then they got behind the curve with the advent of the Internet...and never caught up.
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