A Cold Wind Blowing

Happy New Year!

We are deep into January and a cold wind is blowing. Layoffs are all over the news. The seemingly endless boom years of the early pandemic appear to be coming to an end. In 2020 and 2021 interest rates were low, money was cheap, investors moved quickly to put it to work, and businesses got started and expanded and kept afloat regardless of cost. Valuations became unjustifiably high by any means of measurement other than current comparable valuations.

Then came supply chain issues, government subsidies, and inflation. The Fed raised interest rates. Russia invaded Ukraine. Other than the immunocompromised, most Americans decided they could live with COVID19.

The specific circumstances may be different, but I’d been to this movie before. I was reminded of 2008, and 2000, the early 90s and the late 80s. As some people kept investing in bitcoin and NFTs and believing growth was unstoppable, it was obvious to others that this could not go on - even if it was impossible to know just when the music would stop.

Aside from the specific political, economic and social issues at play, I believe the response we are witnessing now is at least partially driven by companies and investors being focused too much on short term shareholder value. That’s not to say that they didn’t over spend and over expand during 2021 and 2022, and a correction is warranted. Nonetheless I can sympathize with CEOs of early stage companies struggling to raise money, or those who completed IPOs in the past two years and now find themselves having to tighten their belts and reduce staff size as valuations have plummeted. I was reminded of an event I lived through some years ago where I also found myself having to dramatically reduce staff size. The following story is loosely based on that real life experience.

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One day while on a trip to a manufacturing site in Sweden we got word that an all-company meeting had been set for the next morning, and that senior company officials from the US would be speaking. None of us had any idea what they would be speaking about. A few of us who were visiting from the US made sure to arrive early and sat in the front row. A crowd of at least 500 employees were sitting behind us, jammed into the large cafeteria which also served as an auditorium. There was a lectern up on a makeshift stage, along with a table with a few folding chairs. As the crowd filled in the dignitaries made their way to the stage, including the local site manager and a few administrators representing the human resources groups from both the US and Sweden.

The site manager called the meeting to order, introducing the visiting executives to the crowd. They may have been there before, but were not frequent visitors, and had never spoken to all of the employees as a group. A tall blond woman wearing a designer dress and expensive gold jewelry stepped up to the lectern and after a few pleasantries delivered with a thick Boston accent, got right to the point.

“As you all know, we sell our products all over the world, and we make them in a variety of countries around the globe. It should be no surprise to anyone in this room that the tax rate is high in Sweden, and the cost of living here is high. That wouldn’t matter if the people who worked here were more productive than those in other places, or more efficient, or could buy components at lower costs - but none of those things are true. The simple fact is that if we continue to make products at this location then we will have a substantially higher cost than our competitors. In order to continue competing we will either have to reduce our costs so that we can maintain market share with adequate profits, or increase our prices. If we increase prices we will and likely lose market share, and we’ve exhausted our efforts at trying to reduce costs.”

There was a brief awkward pause, and you could hear a pin drop in the room. She continued on. “So we’ve made the difficult decision to close this site, and to move manufacturing of all products to other sites around the world that operate with a lower cost structure. We’ll do our best to find jobs for those of you who want to relocate to those other sites, but we can’t guarantee we will have jobs for all of you even if you want to move. I know this is not good news, but you have nobody to blame but yourselves. It’s our job to be responsible for the best interests of the company as a whole, and if we can’t be competitive operating here in Sweden, then we have no choice but to leave.”

The crowd was stunned. So was I. Some of us might have had some concerns, but nobody honestly saw that coming. Aside from being known around the world for the excellence and quality of their products, our Company was a model of stability. Our Swedish site had been producing world class instruments since it was acquired at the end of the Second World War. People worked there for life. They took care of employees as if they were family. The notion that this site would be closed to make the Company more profitable, and increase its public share price, was unimaginable to most who worked there. They couldn’t comprehend this new way of working in a global economy where top management was judged and rewarded on share price performance.

There was silence at first, and I was afraid to turn around and look at the people sitting behind me. Then one man stood up in the back and started talking. He was clearly nervous, and shifting between English and Swedish. He began talking about the long history of operations in this small town, the reputation of the Company that had been built on the backs of the high quality engineering that went into our products, and on and on. His voice got shakier and louder, until he finally started talking in Swedish exclusively in a very loud voice. It was clear that he was unhappy with this decision, and even though I didn’t understand the words, it was obvious that he was cursing before some colleagues managed to calm him down and get him to stop talking and sit down. There were a few other questions about logistics, but after the second of these the well-dressed executive made her exit, telling the crowd that the others on stage were better qualified to answer their questions. The decision had been made, and there was no debating it.

The shutdown of the Swedish site was a rude awakening for me, revealing at a personal level the impact of living in a world in which shareholder profits, executive compensation, and the value of a share of stock mattered above all else. It was simply more profitable to have similar work done in other locations, and the value of the company’s stock, and of the senior executive’s personal compensation, depended on increasing profits no matter what it took. I was aware of these issues around global competition, and the high cost of doing business in Sweden, but I never thought that the company would abandon a workforce it had built up over more than fifty years.

Going to my meetings that day was out of the question. I had to decide which people in my Swedish operation I would try to save. By “save,” I meant finding a role for them in the US and hoping I could make them a satisfactory offer to relocate. I made my way back to the hotel, had a quiet night in my room, and got a ride to the airport in Stockholm first thing in the morning.

Terminating employment for these people, or convincing them to relocate, was one of the most difficult and depressing activities of my career. It had a similar feeling to cutting off rat heads as part of graduate school neurobiology research. I was under the impression there was some greater good being served, but I hoped to never have to do this again. A much as possible, I would try to be involved only in growth situations in the future.

It also left a really bad taste in my mouth for the brutal realities of life in a big multinational public company where senior management was focused on doing anything necessary to drive up stock prices and maximize the value of top executive equity compensation. It was probably the ugliest side of our capitalist system, especially given the associated impact this practice has had on soaring degrees of income inequality. The whole experience pushed me one step closer to a major change in career direction. This simply wasn’t fun anymore.

Recruiters had been calling me regularly in search of leadership talent for new companies. They almost always start the conversation by saying “Hey Stan, you wouldn’t happen to know someone who has the following capabilities…” Then they’d share a list of capabilities that was a dead on description of me. One day, instead of saying “let me think about that and get back to you,” I said “tell me some more.” And one day not too much later, an opportunity appeared that was actually quite interesting.

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NOTE: for more insights into the impact of attempts to maximize short term shareholder value, see article in Forbes by Steve Denning from 2017, Making Sense Of Shareholder Value: 'The World's Dumbest Idea'.

https://www.forbes.com/sites/stevedenning/2017/07/17/making-sense-of-shareholder-value-the-worlds-dumbest-idea/?sh=3fb16ec2a7ed