POV: Market Basket “Victory” May Be an Illusion
There are lessons to be learned from this “business tragedy”
Photo courtesy of Flickr contributor .imelda
The world loves stories of “the good” overcoming “the bad,” perhaps because they are so infrequent. Such a story played out this summer in New England, with the near-collapse of the Market Basket grocery store chain. The family feud between two ownership factions of the multibillion dollar enterprise embroiled 71 stores, 25,000 employees (“associates”), hundreds of suppliers, and thousands of customers in Massachusetts and New Hampshire. A massive employee walkout and demonstrations in support of fired CEO Arthur T. (“Artie T.”) Demoulas galvanized public interest and media attention.
As stories hit the media, even candidates for political office pledged either to intervene or stay out of such disputes. Massachusetts Governor Deval Patrick hesitated at first, but eventually joined New Hampshire Governor Maggie Hassan to broker a deal that took agonizing days to finalize.
After more than 40 days of protests, the parties finally reached “yes.” Boston Globe columnist Shirley Leung hailed it as “People Win Over Profit. For Once.”
I say, not so fast.
The agreement of Arthur S. to sell all of his family’s shares to Artie T. may not be the panacea employees and customers are hoping for. Indeed, the Market Basket “victory” may prove to be an illusion.
Market Basket is a business tragedy (Greek or Shakespearean) that stirs the imagination and offers a number of important lessons. There are apparent heroes and villains—Arthur T. Demoulas and Arthur S. Demoulas, respectively. There is intrigue: Why did sister-in-law Rafaela Evans switch allegiance from the “Good Arthur” to the “Bad Arthur,” thereby shifting power in this most recent battle in the continuing “War of the Arthurs”? There is a cast of courtiers, knaves, and advisors who chant homilies of advice, express rage, and otherwise make crowd noise. And, there are lessons to be drawn from the bloodletting.
At the core of this drama is the deep distrust (or worse) between members of the Demoulas family, whose lives have long been tied up in a bitter, mismanaged generational transfer of power. Two brothers (George and Telemachus) purchased the business from their parents in the 1950s and prospered as the family’s grocery business grew into a supermarket chain by the 1970s. But a legal dispute arose when George’s heirs, including Arthur S., charged Arthur T.’s father with fraud in the handling of his late brother’s family’s wealth. The dispute ended up in a Massachusetts court, where Arthur S.’s branch of the family was awarded hundreds of millions of dollars in damages. But the ownership remained divided and left minority shareholder Rafaela Evans (widow of one of George’s sons) in a position to exercise disproportionate influence. She backed Artie T. as CEO for years, but changed her mind in early 2014 and switched her support to Arthur S.
Arthur S. exercised his new power quickly. In June, the board of directors dismissed Artie T. as CEO and named two outsiders as co-CEOs. They began to undo many of Artie T.’s cherished policies and practices. The Market Basket success formula includes generous compensation for associates, profit sharing, low prices for customers, and modest dividends to shareholders. Artie T. had long resisted Arthur S.’s efforts to increase dividends, and the boardroom battles had become ferocious.
Artie T.’s firing prompted associates, including store managers, and loyal customers to walk out and demand the return of Artie T. The protest continued through mid-August when, amidst plunging sales and financial chaos, the new management issued a “return or lose your job” ultimatum to associates. The company stood at the edge of a financial cliff. Only strong public pressure from the governors and sustained public support of the boycott forced the parties to the bargaining table.
Against this background, several lessons stand out.
First, modern organizations are networks of human relationships, held together by trust. Take away the trust and the business fails. Market Basket’s most valuable asset is the loyalty of employees and customers.
Trust grows when people work together, share values, and display loyalty to the principles for which the organization stands. The larger and more complex the organization becomes, the more essential it is that trust be cultivated in deliberate ways. The complex relations between Market Basket and farmers, distributors, truckers, store employees, and many others highlighted the role of trust amidst modern supply chains.
Second, the trust relationship requires leaders with integrity, sound corporate governance, and an organizational culture that fosters communication.
If one of these “legs” is deficient, the culture breaks down. Prior to Artie T.’s ouster, the boardroom acrimony intensified as Artie T. acted more autocratically while Arthur S. challenged real estate and other business deals made by the CEO. Outside directors were ineffectual. Poor governance eventually took its toll.
Arthur T.’s decisions won praise from many of the company’s stakeholders, but failed to satisfy a majority of Arthur S.’s family. Whatever led Rafaela Evans to switch her support from Arthur T. to Arthur S. several months ago, she must have recognized that her vote would be consequential.
Values are not just philosophy. They are the way we live, day by day, and what we stand for as people. They are the bedrock of our culture and the way we raise our children and grandchildren. For decades Market Basket put the values of respect and loyalty to stakeholders into action. That’s what was at the heart of this dispute.
Tragedy can produce a wide swath of injury. The boycott affected many of the 25,000 associates who faced a loss of jobs, pay, and benefits. Customers lost a retailer that provided high-quality products at low prices. New England farmers lost seasonal sales amounting to millions of dollars. Massachusetts and New Hampshire communities lost a respected corporate citizen and community partner. And investors faced huge financial losses as daily revenue losses of $10 million mounted and business dropped off by 90 percent.
Sadly, there are times when all we bystanders can do is bear witness to a tragedy and hope to apply its lessons in the future.
Despite the August 27th agreement, this tragedy may not be over yet.
Artie T. now has “full operational control” of the business. He will spend $1.5 billion to buy Arthur S.’s family’s shares. Arthur S. walks away rich but loses the control he coveted. But the deal requires Artie T. to raise $550 million in the private equity and commercial markets, mortgage Market Basket real estate, and invest a huge piece of his personal wealth. Market Basket will be a debt-laden enterprise that will have a tough time making payments while also keeping good wages and benefits for associates, fair deals with suppliers, and low prices for customers. Something in the traditional success formula will change.
Artie T. and Arthur S. seem destined to carry their feud to their graves. Optimism prevails among associates and customers for the moment, but reality will soon set in. The collateral damage will soon be felt. Who wins in such a case? In my opinion, only the advisors and lawyers who earned lucrative fees as they negotiated the deal for both sides are smiling at their good fortune. Victory may be an illusion. Shakespeare would have it no other way.
James E. Post, Professor Emeritus, holds the School of Management’s John F. Smith, Jr., Professorship in Management.
“POV” is an opinion page that provides timely commentaries from students, faculty, and staff on a variety of issues: on-campus, local, state, national, or international. Anyone interested in submitting a piece, which should be about 700 words long, should contact Rich Barlow at barlowr@bu.edu. BU Today reserves the right to reject or edit submissions. The views expressed are solely those of the author and are not intended to represent the views of Boston University.
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