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Tuesday, July 16, 2013

It's not just government: How insane hedge fund Objectivist libertarianism is destroying Sears

by David Atkins

In case you thought the cult of hedge fund Objectivist free market libertarianism was just destroying government and the social fabric, never fear that it can destroy companies as well. Just look at what has happened to Sears after it hired insane free market hedge fund libertarian Eddie Lampert to run their company:

Every year the presidents of Sears Holdings’ (SHLD) many business units trudge across the company’s sprawling headquarters in Hoffman Estates, Ill., to a conference room in Building B, where they ask Eddie Lampert for money. The leaders have made these solitary treks since 2008, when Lampert, a reclusive hedge fund billionaire, splintered the company into more than 30 units. Each meeting starts quietly: When the executive arrives, Lampert’s top consiglieri are there, waiting around a U-shaped table, according to interviews with a half-dozen former employees who attended these sessions. An assistant walks in, turns on a screen on the opposite wall, and an image of Lampert flickers to life...

In January, eight years after Lampert masterminded Kmart’s $12 billion buyout of Sears in 2005, the board appointed him chief executive officer of the 120-year-old retailer. The company had gone through four CEOs since the merger, yet former executives say Lampert has long been running the show. Since the takeover, Sears Holdings’ sales have dropped from $49.1 billion to $39.9 billion, and its stock has sunk 64 percent. Its cash recently fell to a 10-year low. Although it has plenty of assets to unload before bankruptcy looms, the odds of a turnaround grow longer every quarter. “The way it’s being managed, it doesn’t work,” says Mary Ross Gilbert, a managing director at investment bank Imperial Capital. “They’re going to continue to deteriorate.”

Plagued by the realities threatening many retail stores, Sears also faces a unique problem: Lampert. Many of its troubles can be traced to an organizational model the chairman implemented five years ago, an idea he has said will save the company. Lampert runs Sears like a hedge fund portfolio, with dozens of autonomous businesses competing for his attention and money. An outspoken advocate of free-market economics and fan of the novelist Ayn Rand, he created the model because he expected the invisible hand of the market to drive better results. If the company’s leaders were told to act selfishly, he argued, they would run their divisions in a rational manner, boosting overall performance.

Instead, the divisions turned against each other—and Sears and Kmart, the overarching brands, suffered. Interviews with more than 40 former executives, many of whom sat at the highest levels of the company, paint a picture of a business that’s ravaged by infighting as its divisions battle over fewer resources. (Many declined to go on the record for a variety of reasons, including fear of angering Lampert.) Shaunak Dave, a former executive who left in 2012 and is now at sports marketing agency Revolution, says the model created a “warring tribes” culture. “If you were in a different business unit, we were in two competing companies,” he says. “Cooperation and collaboration aren’t there.”

Although Lampert is notoriously media-averse, he agreed to answer questions about Sears’s organizational model via e-mail. “Decentralized systems and structures work better than centralized ones because they produce better information over time,” Lampert writes. “The downside is that, to some, it appears messier than centralized systems.” Lampert adds that the structure enables him to evaluate the individual parts of Sears, so he can collect “significantly better information and drive decision-making and accountability at a more appropriate level.”

Yes, decentralize and let the company's divisions battle one another. Who needs that mushy cooperation business, even within a company?

While he often clashed with retail veterans, Lampert got along better with businessmen from finance and technology. “[Lampert] valued the outsider view,” says Bill Kenney, a former vice president who now runs his own consultancy. “He tends to bring people into the company who don’t have a lot of retail experience.”..

The newly merged Sears Holdings thrived at first, boosted by aggressive cost-cutting. By 2007, though, profits had declined 45 percent....

Executives close to Lampert expressed concerns that the new model would create rival factions. The chairman responded by comparing Sears to Greenwich Avenue, the ritzy shopping district near his home in Connecticut. There, he argued, the individual stores are run separately, but shoppers view them collectively as a premier brand. Why wouldn’t the same logic apply to Sears?

When Mukherjee unveiled the plan in January 2008, many Sears executives were befuddled. From then on, they were told, the units would act like autonomous businesses. If product divisions like tools or toys wanted to enlist the services of the IT or human resources departments, they had to write up formal agreements—or use outside contractors. Each unit had to craft its own financial statement, presenting a strategy to Lampert and his committee of top executives. Frank DeSantis, a longtime Sears staffer who now works for a chamber of commerce, remembers feeling a sense of déjà vu. Back in the ’90s, he says, the company briefly tried to reorganize the business in a similar fashion. “The result was confusing to the customer,” he says. “It became disjointed—we started fighting with each other.”

When Sears publicly announced the move on Jan. 22, 2008, shares shot up 12 percent. Inside Hoffman Estates, the mood was chaotic. Six days later, Sears announced that CEO Aylwin Lewis, a former Yum! Brands (YUM) president, was stepping down. Lampert appointed an operations executive, Bruce Johnson, as interim chief. (He’s now CEO of Sears Hometown and Outlet Stores.) Meanwhile, there were more than 30 slots to fill at the head of each unit. Executives jostled for the roles, each eager to run his or her own multibillion-dollar business. Marketing directors interviewed with the newly appointed presidents, hoping to snag coveted chief marketing jobs. “I worried about the structure—that it would end up breaking apart into people only thinking about themselves,” recalls Bill Stewart, former chief marketing officer for Kmart, now vice president of marketing at solar company Sunrun. The new model was called SOAR, for Sears Holdings Organization, Actions, and Responsibilities. Sears employees would later give it a different name: SORE.

As the company rolled out the plan, Sears executives held dozens of meetings to decide how units would interact. By 2009 there were around 40 separate divisions, according to an internal company document. Lampert expected SOAR to help Sears attract a higher caliber of talent. But it also created a top-heavy cost structure, according to a former vice president for human resources. Because Sears had to hire and promote dozens of chief financial officers and chief marketing officers, personnel expenses shot up. Meanwhile, many business unit leaders underpaid middle managers to trim costs...

Under the new model, Lampert evaluated the different divisions—and calculated executives’ bonuses—using a metric called business operating profit, or BOP. As some employees had feared, individual business units started to focus solely on their own profitability and stopped caring about the welfare of the company as a whole. According to several former executives, the apparel division cut back on labor to save money, knowing that floor salesmen in other departments would inevitably pick up the slack. Turf wars sprang up over store displays. No one was willing to make sacrifices in pricing to boost store traffic.

The bloodiest battles took place in the marketing meetings, where different units sent their CMOs to fight for space in the weekly circular. These sessions would often degenerate into screaming matches. Marketing chiefs would argue to the point of exhaustion. The result, former executives say, was a “Frankenstein” circular with incoherent product combinations (think screwdrivers being advertised next to lingerie).

Eventually Lampert’s advisory committee instituted a bidding system, forcing the units to pay for space in the circular. This eliminated some of the infighting but created a new problem: The wealthier business units, such as appliances, could purchase more space. Two former business unit heads recall how, for the 2011 Mother’s Day circular, the sporting-goods unit purchased space on the cover for a product called a Doodle Bug minibike, popular with young boys.
Needless to say, things quickly turned disastrous.

In the weeks leading up to Black Friday in 2011, Sears discovered that some of its rivals planned to open on Thanksgiving at midnight. Sears executives knew they should open early, too, but couldn’t get all the business unit heads on board, according to former executives. (A Sears spokesman says the decision “was not contingent on the business unit structure.”) Instead, the stores opened early the following morning. One former vice president drove to the mall that night and watched families pack into rival stores. By the time Sears opened, he says, cars were leaving the parking lot.

A month later, Sears announced that its performance during the holidays was poor and it was closing more than 100 stores.

As Sears’s sales declined, its business units found themselves fighting over a shrinking pile of money. Last year less than 1 percent of Sears’s revenue went to capital expenditures, much less than most retailers; even thrifty Walmart invested 2.8 percent of its sales.
Need I mention that Lampert is a big fan of Ayn Rand and Atlas Shrugged? Read the whole article. It's amazing.

I think a lot of progressives don't understand that we're not just dealing with a bunch of big money boys who want to destroy government and social safety nets to benefit business interests. We're dealing with a full-fledged cult that is just as willing to destroy business as it is to destroy government.

It would actually be more comforting to believe that economic self-interest is driving all this foolishness. Self-interest can be negotiated with, intimidated or shamed. Destructive religious cults are much, much scarier. There is no pleading, bargaining or reasoning with them.