Sociopaths and Sweets: Hostess, the Latest Example of Corporate Greed Run Amok

A sociopath is someone whose behavior is often criminal and who lacks a sense of moral responsibility or social conscience. It is a term most frequently applied to individuals, but one that can easily be used in the context of corporate misbehavior, particularly when management makes decisions based on its own needs without regard for the consequences for its workers or shareholders. Such blatant disregard for the repercussions of its own self-serving actions has been consistently and conspicuously present in the behavior of Hostess’ management, in particular over the past year. The people running the company drove it into the ground through sheer incompetence, then awarded themselves salary increases of, in some cases, 300%, while simultaneously demanding that their labor force cut back on their earnings and benefits. The focus on the Hostess bankruptcy shouldn’t be as much on why or how the company went out of business, but on the way management conducted itself once it became clear that saving the firm was a rapidly receding possibility. Regrettably, the Hostess story is only the latest in a long string of examples of corporate management serving its own needs over all others while treating its labor force and stockholders with contempt.  Enron, Worldcom, Tyco and others form a less than exemplarily list of firms whose management acted either incompetently, corruptly or both with their workers and investors bearing the brunt of the fallout.

A brief review of the back story is necessary to set the context. The seeds of the Hostess implosion can be traced back to the first time the company declared bankruptcy in 2004. Hostess spent over five years in Chapter 11 attempting to reorganize with sufficient effectiveness so that the same laundry list of problems that had plagued the previous incarnation of the company – bad management, high levels of debt, antiquated distribution systems and equipment, onerous labor contracts and a lack of focus on marketing and R&D — would not resurface. In the process they were purchased by a private equity company called Ripplewood Holdings who led negotiations that resulted in the company’s two major unions, the Teamsters and the Bakery, Confectionary, Tobacco Workers and Grain Millers International Union, sacrificing about $110 million in annual wages and benefits and the overall labor force being reduced by a third, from 30,000 employees prior to the initial Chapter 11 filing down to the 19,000 employees on the payroll just prior to the second bankruptcy. Despite these efforts, Hostess somehow managed to exit bankruptcy with MORE debt than it started the Chapter 11 process with, no mean feat considering that Chapter 11 is intended to produce the exact opposite result. Three years later they were back in bankruptcy, announcing that they had $935 million in debt while possessing only $982 million in assets. Management demanded further concessions from the unions, while threatening closure and an immediate liquidation of the company if labor did not consent to its terms. The Teamsters voted narrowly to accept the deal, while the Bakers union, fed up with management, went on strike. Later that week, Hostess began liquidation proceedings.

The reasons why Hostess failed are neither singular nor simple; there is, indeed, plenty of blame to go around. That said, management displayed an astonishingly consistent level of incompetence, as the company failed miserably in recognizing that a change in product lines was desperately needed due to an inexorable shift in consumer tastes away from the branded sweet goods, like the inimitable Twinkie, that Hostess was known for. Per a report from Information Resources Incorporated, an independent market research concern that tracks sales trends in most supermarkets, total unit volume of branded sweet goods sold by Hostess declined 4.3% between September 2011 and September 2012, while branded bread products, declined 9.6% over the same time period. Revenue, predictably, traced a similar path; with sales for branded sweet goods declining 1.5% and those from branded bread products dropping 5.3% over the same time period. Despite recognition at a corporate level that this trend was likely to continue, very little was done to change what the company sold beyond the creation of Twinkies with banana filling instead of the traditional cream, a rearrangement of the Titanic deck chairs if there ever was one.

As part of the second bankruptcy petition, then CEO Brian Driscoll presented what was termed as a Turnaround Plan designed to update the company to be competitive in the current environment. Included in this management manifesto were the intentions to close outmoded plants, while improving the efficiency of those retained, upgrading the company’s aging vehicle fleet, merging its distribution warehouses in order to operate more efficiently, installing software at its remaining warehouses to allow the company to track inventory, closing unprofitable retail stores, a restoration of its advertising budget and the establishment of an R&D program designed to develop new products. At first glance this list is impressively comprehensive and well-organized, until you consider the following: allegedly this is what Hostess had spent the five years between 2004 and 2009 accomplishing as part of the first bankruptcy proceedings! The fact that in the age of Walmart, Hostess did not yet possess software that tracked its inventory is particularly astonishing as is the level of inefficient supply chain management implied. The “restoration” of its advertising budget is also a turn of phrase that jumps off the page. Quick, try to recall the last time you saw or heard an advertisement for a Hostess product brand. No? I can’t either. The company had cut back on its advertising to the point where it was barely communicating with its customers, an astonishing misallocation of resources given its desperate need to convince consumers to continue buying their remarkably unhealthy product line. It’s not hard to trace the source of these poor decisions; during the final decade of its existence Hostess had no less than six CEOs. The lack of continuity of leadership at the top crippled Hostess and prevented it from making the right decisions or frequently any decisions at all, on many of the critical items on its survival agenda. This lack of clear-headed guidance was the primary driver of the company’s second bankruptcy and its ongoing liquidation, one that was only exacerbated by changes in consumer preferences and pension commitments to its labor force that it was unable to sustain.

The incompetence of management is not the real story here, however, as companies go out of business for similar reasons every day. Capitalism is Darwinian; for every winner there is a loser and the losers often perish as a direct result of their failure. Where the Hostess story takes a turn for the macabre, where it gets truly ugly, uglier, indeed, than the loss of 19,000 jobs, is how management conducted itself once a second bankruptcy became imminent. This is the point in the narrative where capitalism transformed into predation, not of the company’s competitors, but of its own employees. Just prior to management demanding that its employees take a pay cut and a reduction in benefits, the CEO tripled his own salary, from $750,000 a year to $2,555,000 a year while at least nine other executives also received pay raises which appear to be, in retrospect, golden parachute packages. The company’s brass knew that Hostess was likely doomed and made sure they positioned themselves to loot what little remained with a ruthless efficiency they rarely displayed when running the company.  It is little wonder then, that the Baker’s union refused management’s demands; how could the worker’s justify additional sacrifices, in addition to the ones they agreed to during the first bankruptcy, with the company’s top executives handing out raises like candy to each other at Halloween? Justifiably infuriated, the union walked off the job.

Stop Corporate GreedManagement’s unearned pay increases were not, regrettably, the most egregious example of greed and corruption that occurred during this period at Hostess. Around the time of the second bankruptcy declaration wages that were supposed to be paid into the employee pension fund were instead redirected to corporate operations in an effort to help the company remain a going concern. This practice has only recently been discovered and the amount of money and the number of workers affected are not yet clear. Current CEO George Rayburn, who initially was brought on board as a restructuring expert, but almost immediately replaced former CEO Brian Driscoll after the latter abruptly departed the firm, was quoted as saying that the situation was “terrible”. “I think it’s like a lot of things in this case,” he added. “It’s not a good situation to have.” Mr. Rayburn went on to emphasize that this misallocation of funds occurred prior to his hiring, while a spokesman for Mr. Driscoll declined comment altogether. Whether what occurred can be deemed a prosecutable offense is not yet clear as Federal law might not have been violated because the money was not taken directly from employees, but merely redirected away from their pension fund towards other uses.  “It’s what lawyers call betrayal without remedy,” said James P. Baker, a partner at Baker & McKenzie LLP who specializes in employee benefits and isn’t involved in the Hostess case. “Betrayal without remedy” is lawyer speak employed to describe something that, while morally reprehensible, might not represent actual illegality and therefore may be without recourse through our court system.

As the liquidation process moves forward the majority of Hostess employees have been laid off.  An exception is the 3,200 or so members of the work force being retained short-term to help wind down the company as it sells off its assets.  Those that remain have been slapped with an 8% pay cut.  Members of management, however, are being treated quite differently, which should come as no surprise at this point.  19 of the top managers have been asked to stay onboard through the final liquidation and will be awarded $1.75 million collectively for their efforts.  CEO Gregory Rayburn himself will not have his pay reduced next year with the justification provided being that he is technically an outside employee, not on the company payroll, one who is acting only in the capacity of overseer of the asset sales.  This seems to be, at best, a flimsy excuse to continue paying yourself $125,000 per month, but much like many other things about this situation that fails the smell test there appears to be little anyone, least of all those who have lost their jobs or their investments, can do about it.  In Mr. Rayburn’s defense he has agreed to a $1 salary for the remainder of the year and did turn down a large bonus as well; perhaps someone in management at Hostess has a conscience after all.

While the existence of Hostess as a corporate entity is coming to an end, its product line apparently has a brighter future in store for it.  Hostess claims that it has been contacted by 110 different potential buyers of its brands. This should not come as a surprise given the fire-sale nature of liquidation where value can be picked up on the cheap; the added bonus of being able to acquire the Twinkie or Wonder Bread brands without having to purchase along with them any of the associated debt or labor contracts makes such a potential acquisition very attractive.  Hostess products still register between $2.3 and $2.4 billion per year in total sales highlighting only further just how incompetent a management team has to be to squander that much gross revenue. The Baker’s union, understandable distrustful of Hostess management and perhaps still hopeful of some level of financial compensation for its members, has requested that the judge overseeing the bankruptcy case appoint an independent trustee to oversee the liquidation citing current management as having been “woefully unsuccessful in its reorganization attempts.” This quote should qualify among the nominees for “Understatement of the Year” all things considered.

So, as Hostess slowly crumbles into the dustbin of history, even while the future of its signature product, the Twinkie, appears to be bright, the concern over the culture of corporate greed evidenced all too frequently by those in top management remains. The problem is not unique to Hostess; it’s a cultural problem that runs deep in our business practices. The fixation on getting rich and getting out, consequences be damned, was at the heart of the recent credit crisis and the dot-com bubble of a decade ago as well.  How to change the emphasis from the accumulation of wealth by any means necessary to the achievement of success through the construction and maintenance of something tangible and worthy, with monetary rewards as a part, not the whole, of the process, is an open question. If there was indeed criminality that can be prosecuted that occurred at Hostess, I for one certainly hope to see the offenders in orange pajamas, but even if that unlikely event results, I have doubts as to whether it will change anything. Management types from Enron and Tyco are in jail as we speak and it does not seem to have deterred others from committing similar acts. As long as our society worships money as our God and places the accumulation of wealth at the top of the achievement pyramid, reprehensible behavior like this will continue. Make no mistake; I am an ardent capitalist who likes money as much as the next guy, but is it really too much to ask for a little compassionate capitalism for a change?