Sears Holdings, the storied department store that includes both the Kmart and Sears Roebuck chains, lost $3.1 billion in 2011, $930 million in 2012 and $1 billion in the first nine months of 2013. Its stock has lost half its value over the last five years, even though it spent $6 billion on share buybacks between 2005 and 2011. Recently, the magazine, Business week/Bloomberg, reported on the state of organizational chaos at the company. (http://www.businessweek.com/articles/2013-07-11/at-sears-eddie-lamperts-warring-divisions-model-adds-to-the-troubles). Its CEO Eddie Lampert, the very successful hedge fund investor who owns a $1.7 billion dollar stake in the company, divided the store into thirty business units in such areas as apparel, consumer electronics, footwear and finance. Under this scheme, “Each business unit had its own president, chief marketing officer, board of directors, and, most important, its own profit-and-loss statement… Interviews with more than forty 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 the 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.’”
The reporter goes on to note, “The most cumbersome aspect of the new structure, former employees say, was Lampert’s edict that each unit create its own board of directors. Because there were so many departments, some presidents sat on as many as five or six boards, which met once a month. Top executives were constantly mired in meetings. 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.”
One question is whether or not this organizational structure serves purposeful ends, for example to underline and strengthen managerial accountability for results, or simply expresses the CEO’s irrational response to stresses and difficulties, a way to punish executives for their failure to perform. Lampert owns Sears holdings shares through his hedge fund, ESL. Some journalists and analysts suggest that as a hedge fund investor, he is less interested in the company’s performance and more in extracting cash from it by selling off its assets. For example, one investment house estimates that the Store’s top 350 locations, as standalone properties, were together worth $7.3 billion, about $600 million more than its total capitalization on the stock market. This may be one reason why Sears spends significantly less on upgrading its stores than do other retailers. In 2012, for instance, Sears Holdings spent $1.46 per square foot, on average, on its stores. Five of its peers — J.C. Penney, Target, Lowe’s, Walmart and Home Depot — spent an average of $9.45 a square foot. As a result, “sales at stores open at least one year, a key measure of retail performance, have declined for six straight years.” In this sense, perhaps he divided the business into 30 separate units to assess which assets he should retain and which he should sell off. He is an “asset stripper.”
I am inclined however to reject this interpretation. As one analyst notes his personal stake in the company increased by 41% in 2013, adding that, “There is no apparent news, however, to explain this rapid run-up.” (http://www.institutionalinvestorsalpha.com/Article/3207208/Lamperts-ESL-Boasts-Soaring-Stock-Portfolio.html). Moreover, in 2009, the year he implemented the organization design, he reduced the company’s debt by $2 billion.
Classic “asset strippers” work differently. They typically take on lots of debt to buy a company and then use the loan’s proceeds to reward themselves, while preparing to sell off pieces of the company as quickly as possible to pay off the debt. While Lampert buys distressed properties --he bought the department store, Kmart, out of bankruptcy and later merged it with Sears -- he holds on to his shares for a long time, focusing his investments and attention on a few sectors. As one journalist notes, in contrast to many other hedge funds he holds, “seven or eight investments at a time, investments he knows intimately, after intensive research.” In addition, as another journalist notes, Lampert has invested a great deal of money in the company’s information technology, online site, and membership program. As one journalist writes, “Gary Balter, a retail analyst at Credit Suisse, is negative on Sears Holdings’ stock but is impressed with the online presence Mr. Lampert has created. ‘The irony of Eddie is he’s one of the retailers who did see the Internet coming,’ Mr. Balter said. ‘I have so many retailers who were so blind to the impact. Eddie saw it and he made significant investments.’” In his own defense, Lampert explains the comparatively low level of investment in the company’s stores, by arguing reasonably, “There is more money we could be investing in our stores, but when we did invest in our stores, we didn’t see a return. If I can’t invest in 100 stores and do well, doing that across 1,000 stores doesn’t make sense.”
Moreover Lampert argues, not unreasonably, that a decentralized structure with many business units increases organizational adaptation. As he noted in a 2009 letter to shareholders, “During the past year we underwent a major organizational transformation to help us adapt to the accelerated pace of change across all of our businesses. This change goes far beyond economic conditions. New technology and business models have forced many mature industries and businesses to reassess their ability to compete. We put in place boards and leadership teams and developed internal financial reports for each of the business units. For those who don’t agree with the idea of a portfolio approach as the underpinning of strategy, I respectfully disagree. It is easier in theory to manage to a single scenario and a single plan. It is much easier to communicate based on a single scenario and a single plan. But the world is complex and it doesn’t always cooperate.”
Case closed? Is the design is a rational response to current conditions? I am not sure. There is something worrisome about the emotional impacts of his organizational structure and one wonders how connected he is to the turmoil and anguish he has created. Moreover, what if the structure itself, introduced four years ago is partly responsible for the company’s recent poor performance? Perhaps an assessment of his character and psychology can shed some additional light here.
It is striking in this regard that Lampert seems quite detached from his subordinates. He rarely visits the firm’s official headquarters in Hoffman Estates, Illinois, and conducts most of his meetings virtually from his hedge fund's office, at one time in Connecticut, and now in Miami. As the Business Week journalist writes, “Lampert spends little face to face time with his executives. He regularly holds court in his spartan conference room, diagramming on a big whiteboard for Sears executives who tune in remotely. The executive in the hot seat will begin clicking through a PowerPoint presentation meant to impress. Often he’ll boast an overly ambitious target—“We can definitely grow 20 percent this year!”—without so much as a glance from Lampert whose preference is to peck out e-mails or scroll through a spreadsheet during the talks. Not until the executive makes a mistake does the Sears chief look up, unleashing a torrent of questions that can go on for hours.” This description suggests that he disrespects his subordinates and may in fact be competitive with them.
He also enacted this detached style in the way he participated in the company’s social network. The journalist writes, “He ordered the IT department to build a proprietary social network, called Pebble, which he joined anonymously under the pseudonym, “Eli Wexler.” ..Lampert’s intention, former colleagues say, was noble: He wanted to engage with employees and find out what was happening across the company. It quickly became clear that Eli Wexler was a little too engaged on Pebble. He left critical comments on other people’s posts, according to more than 20 former employees; he even got into arguments with store associates. Word got around that Wexler was Lampert. Bosses started tracking how often employees were “Pebbling.” One former business head says her group organized Pebble conversations about miscellaneous topics just to appear they were active users. Another group held “Pebblejam” sessions to create the illusion they were using the network.” In other words, he engaged his subordinates manipulatively, by participating anonymously in the network, and they in turn manipulated him.
It is also interesting in this regard that he is passionate follower of Ayn Rand's philosophy and gives new employees audio recordings of her famous novel, Atlas Shrugged. Her philosophy, “Objectivism,” rejects emotionalism and believes that feelings per se are not sources of knowledge or meaning. Instead, reason is supreme. As the hero-inventor of Atlas Shrugged, John Galt says in a radio address, “Happiness is possible only to a rational man, the man who desires nothing but rational goals, seeks nothing but rational values and finds his work in nothing but rational actions." Rand also proposed that the commercial transaction “is in fact, a good representation of an ideal human interaction. It embodies the values of productivity, justice and integrity. Trade of values (of any sort) is the most important and just principle of all human relationships and a commercial transaction exemplifies trade better than anything else.” This is of course one reason why Rand rejected collectivism as a principle of social organization.
It is reasonable to ask if Lampert’s organization design has roots in this philosophy. The design too rejects the idea of the organization as a collective whole. Indeed, in providing a rationale for the company’s organization design, a Sears spokesperson, “went as far as to say that competition and advocacy were sorely lacking before and are lacking in socialistic economies.” The reference to “socialism,” at a time when it exists nowhere but in Cuba, suggests that Lampert’s organizational choice was not motivated simply by the requirements of the situation but by his loyalty to a particular worldview.
I am drawn as well to another feature of Lampert’s biography; the fact that he lost his father when he was 14. As several journalists have noted, Lampert’s close friends believe that his drive and ambition are linked to this loss. As his mother recounts, “At his wedding in 2001, held outdoors on his Greenwich estate, he looked up into the sky and made a toast, “How am I doing, Dad?”
The loss of a parent at such an age is without a doubt traumatic. His father was involved with Lampert and his sister, coaching Little League baseball and teaching them the card game, “Bridge.” He died suddenly, and though a lawyer, left the family with little money. Lampert’s mother went to work as a sales clerk and Lampert worked after school in a warehouse. In this sense losing a parent signals a premature end to childhood. Some teenagers may refuse adulthood by acting out, while others may respond adaptively to the loss by internalizing reality as harsh and unforgiving. Perhaps his detachment, as well as his failure to understand the emotional costs of the organization he created, reflects his belief that harshness is an inevitable feature of sociability.
It is striking in this regard, that he has successfully sought out high-powered mentors, father figures so to speak, such as Robert Rubin, the head of Goldman Sachs, James Tobin, the Nobel economist, and Richard Rainwater the successful investor. Yet he did not accept their support and succor for very long. He left Goldman Sachs sufficiently early in his tenure for Rubin to worry that he was hurting his career prospects. He left Rainwater early, after only a year and a half, in disagreement over his role. “Lampert pushed to get involved in deals, but Rainwater wanted him to stay focused on buying and selling stocks. ‘It wasn't that I thought I'd do deals,’ says Lampert, who was 27 when he set out on his own... ‘But I was hell-bent on the principle that I should have the flexibility to do deals.’ He adds, ‘The irony is that I didn't do a deal until 15, 16, 17 years later.’ In other words, he left a mentor on matters of principle rather than on the basis of a relationship. This reflects a conception of sociability based on abstractions rather than on experience.
Warren Buffet was his most important teacher, but was a father figure in absentia. He started reading and re-reading Buffett’s writings while working at Goldman after college. “He would analyze Buffett’s investments, he says, by ‘reverse engineering’ deals, such as his purchase of the insurance company Geico. Lampert went back and read Geico’s annual reports in the couple of years preceding Buffett’s initial investment in the 1970s. ‘Putting myself in his shoes at that time, could I understand why he made the investments? That was part of my learning process.’” He met Buffet for only 90 minutes in 1989 on a trip he took to Omaha.
All this suggests that while he has sought out and found father figures he nonetheless keeps them at some emotional distance. This is a reasonable response to the loss of an actual father. Finding father figures meets a need, keeping them at a distance helps restrain the grief he may feel upon re-enacting the father-son relationship. This stance could make it difficult for him to understand the paternal functions of the “boss” role, that is the leader or authority figure who demands a certain level of performance but also provides subordinates with a sense of security and support. This may be why he is not in touch with the emotional costs his design imposes on his subordinates. After all, if the Business Week journalist is to be believed, they feel “ravaged” by the competitiveness he’s induced.
Colleagues describe Lampert as an information geek. “His chief information officer Karen Austin says Lampert is the company's number one user of a computer-based tool to analyze sales, margins, and inventories by store, by region, and by merchandise group. A geek at heart, he spends hours at his Connecticut office drilling down into the data, zeroing in on whatever isn't making money.” A person who is detached emotionally, can make good use of his resistance to sociability by being a geek. His limitation can become a source of strength. Indeed, this is the hallmark of all neurotics --and I include myself in this group -- and what we mean by the notion of “character.”
Yet at the same time, there is little doubt that we are entering a world in which geeks have power. Lampert’s organization design produces a rich array of data that helps him treat his organization as a collection of assets, each of which must earn a requisite rate of return. Can we say for certain that this conception of an organization results in dysfunction? After all, this conception shares features with other ideas in good currency, for example; the resistance to bureaucracy, the belief that decentralization is good, or that people perform best when they are given discretion but are also held accountable.
Indeed, the good marketing professional once depended on his imaginative grasp of his customers, an ability to empathize with them. But in the world of “big data” marketing professionals rely increasingly on quantitative evidence. This is after, all how Netflix, the movie-streaming company, identifies what movies we will like, how Amazon identifies what books we want to read, how website designers identify what features of a site lead to “click-throughs,” and when, as a result of our online searches, we are about to buy an automobile or a house, or have a baby. It may be that Lampert’s character is fit for the time and that his organization design while stressful may yet help him identify which parts of the organization are productive and promise future returns. The idea of an organization as a whole with a skin that creates integrity and containment may be outmoded. After all, isn’t this what we mean when we describe the world as a set of networks, and isn’t a marketplace one giant network of exchange?
I am of several minds here. We cannot know right now whether or not Lampert’s organization design is the root of the company’s poor performance, or is the basis for its future success. We can be reasonably certain that Lampert has a detached style of relating, and that his resulting “geekiness” is consonant with many of the challenges and tasks facing executives today. We can be reasonably certain that like all of us neurotics, he makes the most of his limitations. We can be reasonably certain that we are entering a period that favors entrepreneurship and that a social world of networks makes organizations less whole and less containing. We cannot know how harsh such a social world should or must be, and what countervailing tendencies may create feelings of solidarity and friendship. I wonder what my readers think.