A Fable

Once upon a time there was a very large enterprise with a long history of being the leader in its industry. In fact, it had a 25% share of the world market – four times its closest competitor. It got to that position by being the most efficient producer in the world. It was able to attract more capital at lower costs because it delivered a much higher return on that capital.  It treated investors well.  Then one day management started to get lazy (as managements are wont to do). They worried less about efficiency,  market share, and investors and started worrying more about rewarding themselves and being popular with the employees of the business.  They hired more and more workers and promised them lavish retirement benefits. But instead of setting aside money in a pension fund, they decided to simply pay those benefits from future cash flow, of which there would surely be plenty.  Over time, the employees became lazier as well (as employees are wont to do). Instead of firing those that didn’t meet productivity standards, management simply hired more and more of them. After all, it was satisfying to come to work every day and read the employee newsletters about how generous and wonderful you were.  Besides, the investors were just being greedy and interested only in the numbers.  As equity investors started moving capital toward start-up businesses with higher potential, management formed an ESOP and simply borrowed more of its working capital. After all, they had the strongest balance in the world. Borrowing was easy. Employees wanted more benefits and fewer working hours. They had needs.  Management borrowed more and more and more until one day, the debt of the enterprise equaled its entire annual production.  Creditors started asking questions. They downgraded the enterprise credit rating. Revenues sagged; benefit costs increased. Management borrowed more and more. They didn’t pass an annual budget for years. Suddenly a large nosy group began to question the wisdom of management. Maybe the business model is broken?  Maybe we need to restructure? You know, the sort of turnaround thing that private equity firms like Bain Capital do? Management was aghast. Private equity firms are cruel and heartless. They fire people and take away your benefits just to create higher returns for capital investors. We don’t need to be more competitive. Things are just fine the way they are. We simply need more time and more borrowing. Maybe we’ll give up one of the company picnics. Buy cheaper paper for the copiers. Make our most productive people foot more of the pension costs. That’s the ticket. Don’t panic. Everything will be alright. We know what’s best for you. Have we ever lied to you?

And so, the enterprise reached a decision point. A turnaround seemed like the necessary thing to keep the enterprise growing, but would surely be painful for many. What if we had to change jobs or work more for what we want? What if we had to live with the consequences of our own decisions? Although they didn’t trust management all that much, their plan sounded a whole lot easier.  No Pain. You Gain.  Don’t Worry. Be Happy. You deserve it! It's only fair. And so, they had to make a choice.