It’s Only Fair

Astonishingly, organizations can violate their own mission statement without any manager or non-supervisory employee being aware of the violation. This can happen even when the people in an organization really do take their mission seriously. At Goodwill, the mission is to end poverty, a laudable goal. It follows explicitly (i.e., according to a sign in the stores) that “every customer has an equal opportunity to purchase any item for sale.” Although the sign bases this point on the fact that the goods “come from public donation,” I submit that ending poverty by giving the poor access to relatively low-priced merchandise is hampered if some customers are permitted to fill their carts with on-sale (i.e., color of week) items when the doors open. Certainly allowing those resale-minded customers to deprive other customers of a selection of items on sale (especially clothing, which even homeless people need) is not fair.

According to the sign, possible violations include any employee or volunteer of a store being able to purchase items in the store whether for themselves or others. “Nor may merchandise be reserved or set aside for anyone.” To be sure, recognition is also given to the possibility that a customer might think that the organization is not being fair. When I interviewed a store manager about whether allowing customers who resell items on sale in “garage sales” conveniently misconstrued as businesses to buy in such bulk that effectively deprives other customers, whose use for the clothing is for personal use, she dodged the question itself but took my point implicitly by admitted that she knew of no way in which the practice could be thwarted. I told her I had a few ideas, but she was not interested in them. I topld her I am a business ethicist and would be writing on this case. Patronizingly, she quipped, “Have fun writing your paper!” In retrospect, I wish I had replied, “Have fun managing!” How interested would the organization’s management be? I wondered at the time.

Goodwill could indeed have stepped in to prevent the obviously unfair practice of certain customers, who actually compete with each other in going around—as part of their re-selling businesses—to different Goodwill stores to swoop up as many shirts or pants on sale. 

A "garage sale" of a reseller open for business at her personal residence. Beyond the cars is the Goodwill store at which I had observed the opening of a major, half-off, sale on shoes and clothing (and misc) just a week earlier. Some of the athletic shoes, which sold for $7 without any negotiation (a sign that a reseller is hosting the "garage sale"), I had seen in a cart full of such shoes at the beginning of the sale at the Goodwill store. 

The personal-use customers can have little chance, or practical opportunity, to get an item on sale because Goodwill allows customers even at the opening of a sale to fill their carts entire of one kind of item (e.g., athletic shoes). Even if a wife/mother is buying athletic shoes for her husband and teenage kids, a whole cartful is suspicious. I witnessed a woman head immediately to the shoe section when the doors open and quickly throw as many athletic shoes in her card as she could before other customers had a chance to take advantage of the sale. Clearly, the monopolistic character of the woman’s behavior and that her commercial interests could eclipse the personal-use interest of other customers who would do without as a result not only reek of unfairness, but also violate the “equal opportunity to purchase any item in the store.”

A reseller had her cart full just seven minutes after the Goodwill store opened with a sale that would practically guarantee that the reselling would be lucrative. The number of men's shorts alone in this cart points to something beyond personal use. The resellers do not pay taxes on their profits because the sales, primped as "garage sales," are easy not to report. Legally, the income from genuine garage sales is taxable.

Meanwhile, Goodwill looks the other way undoubtedly because more revenue and less risk of having items unable to be sold are obtained when the re-sellers buy in bulk. In other words, the lack of recognition of the tilted status quo and of ideas on how to restore balance may not be accidents. A false premise that the status quo must be balanced, or that the status quo does not justify effort to achieve balance may also be in the mix. A policy could be put into effect that limits the number of same-classification items on sale that can be purchased by each customer.

Already I can think of ways in which the commercial customers could get around this limitation, for profit-seekers hate limits, whether internal or external. They could bring along family and friends to divide up the quickly stashed merchandise. They could fill their respective carts when the doors open and carefully stash their carts so to be able to make multiple trips to different cashiers.

At some point, however, store employees and even managers can be relied on to help enforce the policy by being on the lookout for such tricks. A customer’s claim that she needs a cartful of sneakers in order to try them on to find one that fits can be easily rebuffed. Only six items are allowed in the fitting rooms anyway. Such games and how to deconstruct them could be incorporated into training. It is not difficult, for example, to see people quickly filling their respective carts with one or two item-classifications shortly after the doors open. The store manager with whom I spoke had no problem in identifying the re-sellers who buy in bulk. Her hands’ off, laissez faire attitude was problematic as it did not fit with the organization’s mission to reduce poverty in a fair way, which in turn requires equal access to the merchandise. Hiding behind the relatively effortless status quo, as if it were intractable or even as fair as possible, evinces a willingness to live with an unfairness that could otherwise be reduced even if it cannot be eliminated. Not having any ideas when imperfect measures could make a dent evinces an unwillingness to think too far from the status quo (i.e., outside the box).

See "A Lack of Good Will at Goodwill."

See also Cases of Unethical Business: A Malignant Mentality of Mendacity, available at Amazon. 

Johnson’s “Reinvention” of JC Penney: Too Much and Too Little

In April 2013, JC Penney’s board wished the CEO, Ron Johnson, “the best in his future endeavors.” His effort to “reinvent” the company had been “very close to a disaster,” according to the largest shareholder, William Ackman. During Johnson’s time at the company as its CEO, shares fell more than fifty percent. In February 2013, Johnson admitted to having made “big mistakes” in the turnaround. For one thing, he did not test-market the changes in product-line and pricing-points. The latter in particular drove away enough customers for the company’s sales to decline by 25 percent. Why did Johnson fail so miserably?

Ron Johnson's short tenure as CEO of JC Penney was disastrous, according to Altman.   Source: Reuters

Some commentators on CNBC claimed that JC Penney’s board directors should have known better than hire someone from Apple to have so much responsibility right off the bat in a department store. However, Johnson had been V.P. for merchandising at Target before going over to Apple. Therefore, Penney’s board cannot be accused of ignoring the substantive differences between sectors. Even so, Target and Walmart are oriented to one market-segment, whereas JC Penney, Kohls and Macys are oriented to another. Perhaps had he taken the time to have market tests done at JC Penney, any error in applying what he had learned at Target could have been made transparent.
Although as the former CEO Ullman who would be replacing Johnson pointed out, customer tastes are always changing so you can’t go back to worked in the past, to “reinvent” a company goes too far in the other direction. For one thing, it is risky for a retail company to shift from one market-segment to another, given the company's image. Additionally, to “reinvent” something is to start from scratch to come up with something totally new. Even if that were possible for a retail chain, the “new front” would likely seem fake to existing customers. “They are trying to be something they are not,” such customers might say. Put another way, Ron Johnson might have gotten carried away.
In an interview just after Johnson’s hiring at JC Penney had been announced in June 2011, he said, “In the U.S., the department store has a chance to regain its status as the leader in style, the leader in excitement. It will be a period of true innovation for this company.” A department store is exciting? Was he serious? Perhaps his excitement got the better of him in his zeal for change. Were the changes really of “true innovation?” Adding Martha Stewart kitchen product-lines was hardly innovative—nor was getting rid of clearance sales and renovating store designs and the company logo.
Renovation generally-speaking is rather superficial, designed perhaps to give customers an impression of more change than s actually the case. Is a given renovation an offshoot of marketing or strategy? Ron Johnson may have been prone to exaggeration, as evinced by his appropriation of faddish jargon, while coming up short in terms of substantive change. In an old company trying to be something it's not (i.e., going from a promotional to a specialty pricing strategy), too much superficial change can easily outweigh too little real change. Sometimes even upper-level managers can get carried away with their own jargon in trying to make their respective companies something they are not. It is like a person trying to be someone he or she is not. In "reinventing" JC Penney, Ron Johnson was trying to make an old woman come off as young by applying make-up and new clothes.

Sources:

Stephanie Clifford, “J.C. Penney Ousts Chief of 17 Months,” The New York Times, April 9, 2013.

Joann Lublin and Dana Mattioli, “Penney CEO Out, Old Boss Back In,” The Wall Street Journal, April 8, 2013.

Conflicting Business Models at Singapore’s Airport

Singapore’s Changi may have been “the world’s most fabulous airport” in 2011, according to Scott McCartney of the Wall Street Journal. To be sure, the airport’s amenities were amazing. How they are were being operated, however, detracted in certain respects with the goal. “We wanted to transform the way travel is done and create a stress-free experience,” Foo Sek Min of the airport’s management said. This goal dovetailed with the airport being “a key economic development element” for Singapore. Accordingly, the state-owned company that ran the airport received “plenty of government support.” In line with these goals was there a business model that was long-term oriented? Rather than trying to “nickel and dime” customers so as to minimize the funding from airlines and the government while maximizing revenue on a daily basis, resisting such urges in order to provide a truly stress-free experience would, I contend, be more consistent with the goals. 

I contend that a stress-free experience in a pure (and realistic) sense does not include feeling manipulated or pressured to do or buy something. More concretely, paying for X and Y during one’s stay brings with it stress. Even the thought of one’s credit card or cash balance brings with it some stress. To be stress-free, an experience should not include even the thought of money—much less using it. This is where Changi fell short of its own mission: to attract more flyers to the airport and ultimately to (indirectly) add positively to Singapore’s economic development.

Not charging for the local bus tour that for immigration purposes was considered within the airport is perhaps the epitome of how the stress-free and economic development objectives dovetail with a business model. The lack of stress that comes with not having to do anything but get on the bus and take in the sights could have led to interest in investing in Singapore in some way. Indeed, potential business deals may even have been negotiated during the tour as tourists chatted. The lack of stress (i.e., lack of demands) on the people using the airport could thus have benefitted Singapore down the line, whereas charging for the tour, collecting the fare, and having the passengers go through immigration would hardly have been conducive to a mood to invest or even visit Singapore.

Generally speaking, charging for each service in order to (ideally) cover the airport’s operating costs on a daily basis is eons away from the business model that is oriented to long term investment even with regard to particular services. Having the roof-top pool free to customers who stayed in one of the airport’s in-transit hotels while costing people going through the airport $11 not only added to stress monetarily, but also insinuates an insider/outsider exclusivism that was not going to endear the travelling public to Singapore, whether to visit or invest in economically. Similarly, having a four-story amusement-park type slide “tied into retail” at the airport by requiring users to show a receipt from an airport merchant showing roughly $8 or more in purchases or else only the bottom one and a half stories of the slide could be ridden evinces a pettiness that even in itself could be expected to have given rise to stress in others—not to mention the stress involved making sure your receipt is “enough” as your kids pull at you demanding a FULL ride. Feeling manipulated to buy something at the airport’s “mall” just added to the stress. Considering the limited cost of the slide and how eliminating the financial “rules” and price itself would make a huge difference in terms of stress (both for the employees and the public), one might wonder if the stated goals were authentic, or even known by the managers themselves. 

My favorite example of Changi’s management working at cross-purposes with its own mission unnecessarily would have to be the $17 for 20 minutes—are you ready for this?—“to put your feet in a tank with tiny fish that eat dead skin.” Similarly, charging $23 for three hours in a nap room could paradoxically add to wallet-stress for people already under stress en transit. 

Thank goodness the bus tour of Singapore was free—people could finally relax after having their dead skin eaten off and being woken up by some noise or demand for more money after having had to deal with a child not terribly convinced by the need for only a $7.50 receipt. Lest the butterfly garden seem like an alternative escape (it was free), it was also apparently a smoking garden. There were, however, two (smoke-free) complimentary movie theaters. 

In short, while the innovative approach at Changi airport does warrant some praise (e.g., free wifi and movies, and in general for the extent of amenities), the major inconsistencies within this business model demonstrate how difficult it is to shift from the dominant model in business to one characterized more for its long-term investment orientation to eventual pay-offs. Given the government’s involvement in the state-owned corporation, the airport’s management company should have had enough cushion from competitive pressures to be able to go all-out with the new model. Either amenities like the pool and nap rooms would have been free, or else perhaps everyone passing through the airport could have paid a general airport fee that would cover all of the perks (other than in the merchants’ stores, of course). The fee would either have been low enough that it was not stressful and inconvenient (given the sheer volume) or, more ideally in terms of the new model, money would have been “recouped” in future tourism and foreign investment instead of any fee on air travelers. The government’s involvement in the operating company could effectively support the longer-term and less direct financial loop, as well as buffer any “pressures” from the old model for specific charges to be added during customers’ “experience.”

Imagine the stress-relief among the flying public just in knowing that for a few hours nobody would demand money for something or other. Business managements seem blind to the benefit to a business from such an approach. In knowing that you don't have to worry about money—even from being reminded of it in being manipulated into using it—you could spend a few hours in an oasis of sorts where “real life” is put on hold. Is this not part of the allure of going to a movie theater, where you can sit for a couple of hours without any demands or pressures?  

So my verdict on the most fabulous airport in the world—which, admittedly, I have not seen in person—is: so close and yet so far. The sad thing is that the airport’s management need not have been so far from it's own objectives. Given the gravity of the “maximize daily revenue” business model that assumes that a constant focus on getting and an uncompromising rigidity are necessary in dealing with customers, a rocket—rather than merely a jet—is undoubtedly necessary to travel to the sort of business model that I have in mind, and not just for airports. If I am correct in this, then business schools are perpetuating the problem in their training rather than teaching alternative business paradigms. That dog is chasing its own tail.

Behind the new model hinted at (but not achieved) by the example of Changi airport is the basic feeling that life doesn’t have to be as hard as we make it. We don’t have to check receipt totals before letting a kid slide down a slide. It is as though managers set up jungle-gym bars right in front of themselves (and their customers) and then convince themselves (and others!) that the equipment must be navigated in order to get to the other side. Moreover, managers seem to have great difficulty simply in relaxing enough to play and enjoy other’s playing. Beyond the greed and urge to manipulate others (i.e., selfishness), the modern managerial mentality is too constricted, even as it paradoxically assumes that societal rules do not apply to it. So, for example, we have managers redefining words such as “guest” to suit a business interest; the rest of us are somehow obliged to recognize the validity of the misuse as a legitimate use, as in “customers are guests” (who must pay nonetheless). It is as though managers as so fixated on manipulating others without any limit or external constraint that the too-serious creatures cannot let themselves or other people simply enjoy something without required procedures and an immediate monetary exchange. The new model rejects the typical managerial mentality as too petty—too small.

I suspect that many elderly people on their death-beds shake their heads as if in achieving distance from us they have suddenly been freed in the awareness that the world is much more petty in what it takes as important and necessary that it knows. We moderns, complicit stewards of the hegemonic business model, micromanage ourselves right out of life experience itself, and we even impose our modern sickness on others. Then we act surprised when they get annoyed at us!

It is like the steward on the Titanic who (in Cameron’s film at least) shouts (little men do that), “You’ll have to pay for that!” to the young couple just after they have broken through a wall to escape the rapidly rising water. Everything must be paid for. No free ride, even on the Titanic on its way down to the darkness. This is the modern dogma that has been instilled in all of us, and we are utterly ignorant of the fact that it is exceedingly petty and narrow-minded even in its ideal. In the movie, the steward gets hit (justifiably) by the hero.  In cheering this, we, the audience, feel the hero’s natural reaction is our own, vicariously. We regard it as a valid verdict on the extant business model that stood for modernity itself back in 1912. A century later, that model had become the default—“the way the world is.” Even so, this need not have been so. Modernity could have developed differently than it did. The example of Changi airport hints at a better alternative in terms of business models. So in advertising a “stress-free experience” only to undercut it by demanding money for various “amenities” and making explicit (or creating) different classes of customers (which is also a theme in Titanic), the managers running Changi airport deserve annoyed customers and charges of insufficiency and even outright hypocrisy. Even so, we can take the Changi example as at least pointing to a different alternative.

Source:

Scott McCartney, “The World’s Best Airport?” The Wall Street Journal, December 1, 2011. 

Amtrak: Avoiding the Obvious

According to The New York Times, Amtrak’s management “knew for years that they would have to replace large sections of deteriorating track in Pennsylvania Station in New York City.”[1] The management instead had engineering crews apply “short-term fixes to rows of rotted ties, crumbling concrete and eroded steel.”[2] Incredulously, the management was putting off replacing the tracks in part “to give work time to a nearby passenger hall renovation.”[3] Additionally, the management sought to minimize taking tracks out of service even on weekends so as not to disrupt service. In 2017, three accidents at the station finally got the management to commit to undertake an emergency repair program that “cut back service through the summer for thousands of passengers daily.”[4] Even by the objective of minimizing impaired service, prioritizing a hall renovation and putting off needed track repairs are problematic. The deeper problem is that of seriously misjudging utility.

The utility gained by passengers from a renovated hall is rather superficial, whereas the disutility from derailments at a station could result in passengers deciding to no longer travel by train. Put differently, limited service disruptions on weekends pale in comparison to having trains derail coming into, or leaving a station. Even if the latter are mistakenly deemed low-probability/high impact events, the business calculus that favors short-term fixes over long-term stability is problematic.

I suspect that Amtrak’s management had a hypersensitivity to passengers’ sense of utility because of basic impairments in the routine conduct of the trains. The route between Pittsburgh and Philadelphia, for instance, has been severely impacted as Amtrak trains must wait for other trains to pass because of track ownership. The prioritizing of freight over passenger trains is itself problematic, so the ownership of the tracks that Amtrak uses is as well. Barring outright ownership of the tracks, Amtrak should insist on contracts giving priority to the passenger trains.

I suspect that Amtrak’s management (including on the train level) has looked too tolerantly on delays. Traveling between California and Arizona on an overnight train, I was surprised (and dismayed) to learn that the train stopped somewhere in the desert because a man had been smoking marijuana in a bathroom. The conductor could have waited until the next station stop. A car’s designated employee even woke up all of the passengers in that car by shouting at the man in spite of the fact that he was no longer smoking. I was also surprised when an employee on the train arrogantly informed me that wifi is only for those passengers who had purchased sleepers. That customer service, and thus utility, can be so misjudged is itself a red flag on Amtrak’s management.

Besides having to put up with delays between station-stops and bad on-board service, having too many such stops on a given route can also be distressing to passengers. Why not have express trains run between San Francisco and L.A., for example, two or three days a week? Also, passengers have often had to accept traveling at slow speeds. To be sure, the local laws and bad track conditions go beyond the company’s control. Even so, that the company’s management decided to market its Acela train running between Boston and New York City as “high speed” nonetheless set up passengers to be less than satisfied. I think only twenty minutes were cut by the “high speed” train between the two cities.

In short, the utility of the product in this case may itself be so bad that the company’s management became distorted on just what constitutes real passenger utility. The management’s attention has not been on core matters, whether they be track replacements or the very functioning of the trains on the tracks. The lesson for all companies is that attention should be primarily on the basic quality of the products or services themselves.

---

[1] Michael LaForgia, “Delaying Repairs on Decrepit Tracks,” The New York Times, October 9, 2017.

[2] Ibid.

[3] Ibid.

[4] Ibid.

Hedge Fund Set to Hack Nestlé Up: A Case of Sensationalistic Over-Kill

Does the fact that an earnings-per-share figure has not meaningfully improved over, say, five years justify an overhaul pushed by a hedge-fund activist investor?  Put another way, is a steady earnings-per-share tantamount to failure? Especially for an established company, steady numbers do not evince bad performance. An airline would only foolishly fire a pilot for not climbing once having attained a cruising altitude. Maintaining such an altitude during a flight is hardly a reason to turn a plane around or set it in a radically different direction.

With 40 million shares, which amounts to about $3.5 billion, in Nestlé, Third Point hedge fund urged the company’s management in June of 2017 to “sell its stake on L’Oréal and sell off nonessential operations as part of a broad shake-up.”[1] The conglomerate’s shares had appreciated nearly 15% over the preceding 12 months—behind Unilever but better than Mondelez and Kraft Heinz. So why a shake-up? 

Dan Loeb of Third Point.  Relax, Dan, Nestle is not on a nose-dive. 

To be sure, the conglomerate structure is itself arguably too much of a strain on the extant science of management, especially in the United States given the penchant for specialization over “big-picture” management. Selling L’Oréal thus may make sense so the management can concentrate on food. It was not as if such a focus would leave corporate managers with nothing to do.

In May, Nestlé announced a joint-operation with Amazon to offer a cooking companion with recipe instructions and other help for customers. At the same time, Nestlé set to work eliminating unpopular ingredients to its Maggi line. The company had been working to remove preservatives from its ice creams. Lastly, the company announced in June that it was the lead investor in a $77 million in Freshly, a subscription meal service. Such adaption to changing consumer tastes and changes in the industry is a solid means by which an established company improves its profitability. Slogans like “a bold strategy” and a “broad shake-up” make for good press, but they do not fit with a company that has achieved cruising altitude. In other words, severing arms and legs should only be attempted in the more dire of cases, rather than as business as usual.

---

[1] Michael Merced, “Third Point, a Hedge Fund, Sets Its Activist Sights on Nestlé,” The New York Times, June 26, 2017.

On the Value of Business-Societal Linkages: Facebook’s Zuckerberg Opposing President Trump?

In a public letter in February, 2017, Mark Zuckerberg, founder and CEO of Facebook, linked his company’s product, the online social network, to the societal and indeed global level in claiming that “progress now requires humanity coming together not just as cities or nations, but also as a global community.”[1] The New York Times took this to mean that the CEO “stepped into the raging debate about globalization.”[2] Taking sides in a political or cultural debate can both advance and harm a business, hence the matter of the stepping into is worthy of analysis in its own right.

Generally speaking, it is not prudent business for a CEO to plant the company in which he or she works on one side or the other of a controversial matter, as existing and potential customers on the other side can be expected to move to a competitor—even if that competitor has not taken a side in the debate. That the New York Times construes Zuckerberg as taking a position at odds with U.S. President Trump’s nationalism may be an indication that Trump supporters may also interpret Zuckerberg’s move thusly and so gain a negative view of Zuckerberg’s company. This attribution of association may be tenuous, however, as it is possible to be in favor of humanity coming together in terms of human rights, for instance, and minimizing state aggression, and yet still be for penalizing American companies that have taken plants abroad to take advantage of lower wages and less regulation. Even so, perception can become reality, so Trump supporters could view Facebook negatively anyway and the damage would be done.

Zuckerberg might advisably have listed some examples of social goods that could be furthered by humanity coming together—omitting mention of Trump policies. Efforts to assure readers that Trump’s policies are not in the crosshairs would have been a good investment. To be sure, “Zuckerberg said his reasons for writing the . . . letter began to take shape before [the 2016] presidential election, spurred by broader trends. He said he [had] recognized that more people were feeling left behind by globalization, and by societal and technological changes.”[3] His vision was for “a global community that works for everyone.”[4] This includes a viable “social infrastructure” that would include stronger online communities. Given Facebook’s interest in helping people from being left behind technologically, the social infrastructure should be a salient part of the global community that works for everyone.” In other words, helping people to join the technological age (and thus be able to participate on Facebook!) does not necessarily translate into opposition to a tax on American companies with factories abroad or enforcing immigration law. Zuckerberg could have made this point more explicit; his “Facebook-friendly” interpretation of “global community” would actually have been strengthened in the process.

We can conclude from this case that wading into a controversial issue involves pitfalls for a business, yet they can be obviated by steering clear of politics such that efforts to link business strategy to a societal and even global vision can pay off for a company without a lot of risk.  

---

[1] Mike Isaac, “Facebook’s Zuckerberg, Bucking Tide, Takes Public Stand Against Isolationism,” The New York Times, February 16, 2017.

[2] Ibid.

[3] Ibid.

[4] Ibid.

The Age of the Imperial CEO: The Case of Fred R. Johnson at RJR Nabisco

Fred R. Johnson, former CEO of RJR Nabisco, was known “for the fleet of corporate jets that ferried him to celebrity golf events and other luxurious perks he awarded himself.”[1] The key words here being awarded himself, for Johnson epitomized the sort of imperial CEO that made an oxymoron out of the notion that the corporate board is to serve as an overseer of corporate management in corporate governance. Awarded himself should be the oxymoron, for such a conflict of interest runs against the logic of any viable business calculus.

That Johnson had “scant interest in the daily corporate grind” should also be an oxymoron, for the principle role of a CEO is to manage business.[2] “He was not strategic,” said John Greeniaus, who ran the Nabisco business under Johnson.[3] This too should be regarded as an oxymoron, given the salience of strategic management in a CEO’s role. At some point, the business under such a CEO had to have taken a hit. For example, that offices “were abruptly moved, [and business] units [were] suddenly sold” could not have been good for the bottom-line.

How could such a condition be permitted to go on in a major company? The corporate governance was undone, as Johnson handed out free plane rides, lucrative fees, and consulting contracts—each one representing a conflict of interest for the board members. Even though the board finally said no to Johnson’s attempt at a leveraged buyout because in part he would “reap outsized profits from the deal,” he received $53 million in golden parachute payments after he resigned as the board went with another takeover bid.[4] The golden parachute should have been regarded as an oxymoron, and yet the payments attest to just how easy the CEO had had it.

My point is simply to ask, at what expense? How is it that a major company would even hire a man who was little interested in strategy. Wouldn’t this have shown through in the interviews? When he put cigarettes and cookies together in the same company, wouldn’t it have dawned on the board that the two areas were not a good fit? To be sure, the snacks and cigarettes were broken apart in 1999, but wouldn’t such an acknowledgement have naturally reflected on the CEO? Even so, he received $53 million in golden parachute payments. 

Clearly, this case suggests that the system by which corporations are governed is vulnerable from a business standpoint.  To be sure, decreasing marginal utility means that it would take a lot of money to improve the happiness of a rich CEO, but does a board need to pay so much heed to this dynamic, which flies in the face of sound compensation management. As for Johnson, Greeniaus describes the man as being “like a really intelligent six-year-old in a sandbox.”[5] Just because it would take a lot of money to interest a spoiled rich kid does not mean that boards should become enablers; it is not as if adults would not take the job.

---

[1] James R. Hagerty, “F. Ross Johnson,” The Wall Street Journal, January 7-8, 2017.
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] Ibid.

AT&T Buys Time Warner: An Expansive Strategy Amid Industry Uncertainty

After Comcast’s $30 billion takeover of NBCUniversal and Verizon’s acquisitions of the Huffington Post and Yahoo, AT&T agreed on October 22, 2016 to buy Time Warner for $85.4 billion. The ability to produce content and deliver it to millions of viewers “with wireless phones, broadband subscriptions and satellite TV connections was not lost on either board.[i] At the time, AT&T sold “wireless service in a saturated market, while Time Warner [was] a content company whose primary assets, networks like CNN and HBO, [faced] tougher times in a cord-cutting world.”[ii] Although AT&T’s board could be accused of empire-building, the stabilizing impact of combining wireless service and content could hardly be ignored in a business-environment so full of change and uncertainty. In other words, with the traditional television industry facing such dire threats to its revenue-structure due to the proliferation of high-tech substitutes, having the wherewithal to formulate and experiment with different distribution means and even content was at the time a fitting strategy.

Due to the internet and the smartphone, the way people paid for TV, the kinds of programming, and the devices to watch it on were “all undergoing transformational change.”[iii] Accordingly, consumer behavior was “neither settled nor predictable.”[iv] One thing was clear: the ability to avoid having to watch commercials was something that viewers prized, and this meant that the traditional television industry would very likely be transformed. “I think we’re all trying to figure this out — how technology and the consumer is going to change, and who are the winners and losers in this future,” said Walter Piecyk, who studies the telecommunications industry at the research firm BTIG. The best argument for the merger, he said, is that AT&T would be diversified in that the company would have both programming content and distribution channels, rather than just one or the other. When you face an uncertain future, diversity can be an asset. “If it turns out that in the future, content becomes more valuable than distribution, the new AT&T will have that; if the opposite happens, it’s covered there, too.”[v]

Randall Stephenson and Jeffrey Bewkes, the chairmen and chief executives of AT&T and Time Warner, argued, “the future of TV will depend on a lot of new ideas that are tested and deployed very quickly. These might include new business models for paying for shows, new ways to distribute and market that content, and new technologies and industrywide standards to make sure it all works.”[vi] Analysts, however, said a lot of these potential products and services could be created from licensing deals. A merger might actually slow down industrywide collaborations, they argued, because it sets up a new giant that others in the industry may not want to work with. “This appears to be about empire sustenance rather than economic efficiency,” said Brian Wieser, an analyst at the Pivotal Research Group.

Expanding a business empire is never without its ethical challenges, not to mention the possible economic hit on market-competition. In the case of the media, a lot of power in a few hands also presents political risks to democracy, especially when the electorate relies on the media for information concerning candidates and policy. In the case of the United States, where the First Amendment of the federal constitution protects media, giving such license to a few rather than many can result in distortions within the democracy. Not only could the few who control the "public airwaves" (an antiquated expression) influence elections and public policy; interlocking corporate board memberships could make it easy for the few private companies that control the media to act in the interest of corporations in other sectors at the expense of the public good. Rather than taking on these "macro" issues here, I want to suggest how the combined merger in this case can be optimized from a business standpoint. 

Moving to the company-level, a possible conflict of interest is involved in this particular merger. Specifically, would AT&T give priority in its distribution channels to its own content from Time Warner? Also, would AT&T restrict Time Warner’s content to the company’s distribution channels? It would not make sense economically “for Time Warner to offer most of its content exclusively to AT&T’s customers. Not only would that destroy its profitability (Comcast’s customers pay a lot for CNN and HBO, so why would Time Warner want to kill that business?), but it would also be out of step with the future. The notion of content tied to specific distribution lines is exactly what consumers [were] moving away from when they [chose] services like Netflix over cable bundles.”[vii] Clearly, maximizing both the types of distribution and the content would be in the combined company’s best interest, especially considering the tremendous uncertainty playing out in the industry after decades of traditional radio and television. 

So in this case, enlightened self-interest can obviate the conflict of interest that is inherent in having content and distribution channels that show others' content as well. Having the wherewithal to put large sums of money into research and development in new means of distribution and how they would impact the type of content is perhaps the foremost strategic advantage in the merger. With the industry changing so much and so quickly, at least as of the time of the merger, being and staying on the forefront both technologically and in terms of content is a prime advantage of this gigantic merger. 

The strategic standpoint at the company- and industry-level is of course not the whole story, particularly as the industry includes the media, which is very important especially in a large republic such as the United States. Weighing the strategic benefit to the firm and industry from the merger against possible costs including not only political ones, but also economic as well (i.e., diminished competition) is especially difficult because different levels are involved (i.e., society, industry, and company), and analysts reside at these various levels. A CEO talking about the case with a U.S. Senator, for instance, will face the problem of talking from one level to another (i.e., company to societal). Ideally, societal actors can work to create and sustain competitive industries and a free and open media, while CEOs still have enough space to situate their respective firms as best as possible strategically. The present case is interesting because the merger has the potential to facilitate the transformation of how content is delivered due to the combined financial wherewithal even as there are major ethical, economic, and political risks or downsides.

---

[i] Michael J. de la Merced, “AT&T Pledges $85 Billion To Acquire Time Warner,” The New York Times, October 23, 2016.

[ii] Farhad Manjoo, “AT&T-Time Warner Deal Is a Strike in the Dark,” The New York Times, October 24, 2016.

[iii] Ibid.

[iv] Ibid.

[v] Ibid.

[vi] Ibid.

[vii] Ibid.