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October 18, 2018
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What Happened to Sears and Toys "R" Us?
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Dear H,
What's the real story behind the sad disappearance of legacy retailers like Sears
and Toys "R" Us, the closing of hundreds of stores and the tragic loss of hundreds
of thousands of jobs? Obviously, the retail markets are changing rapidly, with
corporate conquistadors like Amazon invading the landscape (though Bill Moyers points
out that retailers like Home Depot are still robust). And we don't think a changing
landscape is the whole story.
The Steelworkers ran an article in July about the workers who lost their jobs at
Toys "R" Us, noting that the two private equity companies and a real estate firm
were able "to eke $470 million in fees out of the debt-ridden toy store after acquiring
it in 2005 (Owliaei [http://r20.rs6.net/tn.jsp?f=001MeL8DaWt77p_rBeuU-MsJ6M7zq1kmIQSEAidPh5H2XxsKafJjgXdO5_FbyajmmkEAWreR7w5Dhbm3yYc_TCzUehm9wpJOOKUivK6ghFSWDSRdgIxhJAd7SbWwqI7YbDZ9ACQ2BYxvTZ4pmoZiivt7_ZNU0A_aT6YgLf0L1BWVxby2816QywP5XR2V1ou_vysoXQ54IMp9vux7GbTv66g1WFmjmrZbo9b7mOF1DPJy6g=&c=CVxK6llLfhcZHam0eo1c8ShYYlvVFYvrI2K19xRTke4gqEiQCojuBw==&ch=vrMEEjuEpe1Bl6wc3u8GHTfEg5D32qIIQn1YcgHHPNzXnzL9Drp1Og==])."
And as Bob Kuttner reported in the Huffington Post on a piece about hedge-fund operator
Edward Lampert: "In 2005, Lampert merged Sears with Kmart, loaded both up with
debt, and used some of the debt on stock buybacks to pump up the share price and
enrich shareholders, notably himself and his hedge fund. In a decade, 175,000
people at Sears/Kmart lost their jobs and revenue was cut in half. Various pieces
of Sears were sold off. Lampert did just fine."
We are featuring, in this edition of the Expresso, two stories about Sears and Toys
"R" Us, the struggles of some of the workers who are fighting for severance pay
and respect and the collateral damages left behind by investors.
It's fashionable these days for large financial institutions to establish "impact
investment funds," that claim to save the world. Bain Capital's multi-hundred million
dollar Double Impact Fund claims, on it's website, that, "Impact investing has the
power to build great companies that deliver both competitive financial returns and
meaningful, measurable social and environmental good."
According to ImpactAlpha, one new $1 billion Global Impact Fund will seek to invest
in businesses that deliver "commercial solutions that solve global challenges in
credible and measurable ways," With such a "commercial" focus, the firm says,
"we believe that we can generate private equity returns, while driving positive
impact to global challenges."
Some of these bankers may actually care about workers, the environment and society-at-large.
And they may do some good. But too often these funds are "impact washing," a form
of green-washing. And Bain, one of the three largest investors in Toys "R" Us,
had a bad history of "stripping and flipping" - including the iconic Simmons Mattress
Company a few years ago - leaving in their wake lost union jobs, closed factories,
and abandoned communities. Worse, they are too often using workers' capital to do
so. Today, about 35 percent of private equity's money comes from public pensions,
according to Preqin, a data firm.
In Heartland's Working Capital: The Power of Labor's Capital (2001: Cornell University
Press), Dr. Tessa Hebb eloquently stated our case: "The earnings that workers defer
for a secure retirement inform financial decisions that, in turn, determine the
quality of employment and the character of goods and services they enjoy. Yet the
institutions and individuals that manage pension funds often pursue narrow goals
whose consequences undermine workers who provide the savings they tend." We called
those investments "collateral damage investments," and Tessa asked, "Isn't it perverse
then that workers' assets are so often deployed in ways that work against their
long-term well-being?"
As we pointed out in The Responsible Investor Handbook (2016: Routledge/Greenleaf
Publishing), the increasing misalignment of incentives between the owners and managers
of corporate wealth, coupled with the decline of unions, has resulted in greater
separation between the long-term interests of the beneficiaries of retirement funds
and those that oversee and manage those assets.
In the coming months, we will be starting a broader conversation about how we create
a "stakeholder governance" platform in the U.S., emulating the productive, competitive
business models of Germany and the EU, where workers often have right to sit on
corporate boards. Annie Malhotra and I wrote about this idea presented a paper on
"Commonwealth Companies" at the Chicago Future of Work Conference back in the Spring.
We were pleasantly shocked to recently learn that Senators Elizabeth Warren and
Tami Baldwin have both introduced policy proposals to elevate Euro co-determination
models in the U.S. There are many more paths to get there today, including building
off of the direct experiences of the Steelworkers with board governance, the "social
audits" long used by the Solidarity Fund in Quebec, and the growing human capital
and workforce disclosure initiatives.
The disturbing stories below are proxies for the systemic short-termism plaguing
America's capital markets and its productive economy. Or "commercial sabotage"
as Thorstein Veblen, a progressive economist from the 1920s put it. There are plenty
of responsible investment managers who know how to successfully turn around companies,
work with unions and the workforce, and re-grow under-performing firms; some have
long been Heartland Network members.
It's high time we reclaim our assets and organize our politics and make them work
for America's working families.
Until next Expresso, keep on keepin' on!
Tom (with a nod to Annie!)
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Laid-Off Toys 'R' Us Workers Find Powerful Ally in Public Pensions
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By: Michael Corkery, NYTimes (via CORPaTH)
Michelle Perez, a former Toys "R" Us worker and single mother, used to have only
a basic understanding of Wall Street. But she recently helped bring one of the
world's most powerful investment firms to heel.
Ms. Perez, 28, from Vancouver, Wash., has been traveling the country, putting pressure
on the private equity firm Kohlberg Kravis Roberts and the other former owners of
the failed retailer to help the 30,000 workers who were laid off this summer with
no severance pay.
Ms. Perez and her fellow employees found a powerful ally in some of the nation's
largest public pension funds, which supply private equity with billions to invest.
In June, Minnesota's state pension fund halted further investments in K.K.R. over
concerns about how the Toys "R" Us workers had been treated. The fund lifted the
suspension last month after K.K.R. agreed to contribute millions to a hardship
fund for the workers. So far, the fund is said to have raised $20 million. [READ
MORE [http://r20.rs6.net/tn.jsp?f=001MeL8DaWt77p_rBeuU-MsJ6M7zq1kmIQSEAidPh5H2XxsKafJjgXdO5_FbyajmmkEbcKwQ386NeUmcFcXjfJ755PB_Z5EE5n_OK8Pb9Mylgqxdl6tNPqDQRolY1x93kvPP0JXag9JgHlAUv2ggVf2nrOLX1knRjeha6CeuZvvgd4hpOjj56l0j8UZ2EI5V8Eafz9ooGX05wLRUDbZ-HmaauMyccWD-Wg4c2FwpKjijAGco-EiF25a26b8fjGe3DVuJhaXBa5DYbjgGKXUs3K8ktIwNMQmkYl7290UsisfBZKrKUspJorJ0e9eMGxErI3ZOsmkjNif2DRsXiORY_2v-wufNAirTVx3&c=CVxK6llLfhcZHam0eo1c8ShYYlvVFYvrI2K19xRTke4gqEiQCojuBw==&ch=vrMEEjuEpe1Bl6wc3u8GHTfEg5D32qIIQn1YcgHHPNzXnzL9Drp1Og==]]
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Sears Didn't 'Die.' Venture Capitalists Killed It.
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Robert Kuttner, Huffington Post
If you've been following the impending bankruptcy of America's iconic retailer as
covered by print, broadcast and digital media, you've probably encountered lots
of nostalgia and sad clucking about how dinosaurs like Sears can't compete in the
age of Amazon and specialty retail.
But most of the coverage has failed to stress the deeper story. Namely, Sears is
a prime example of how hedge funds and private equity companies take over retailers,
encumber them with debt in order to pay themselves massive windfall profits, and
then leave the retailer without adequate operating capital to compete.
Part of the strategy is to sell off valuable real estate, the better to enrich the
hedge fund, and stick the retail company with costly rental payments to occupy the
space that it once owned.
In the case of Sears, the culprit is a hedge-fund operator named Edward Lampert,
once a senior merger guy at Goldman Sachs. In 2005, Lampert merged Sears with Kmart,
loaded both up with debt, and used some of the debt on stock buybacks to pump up
the share price and enrich shareholders, notably himself and his hedge fund. [READ
MORE [http://r20.rs6.net/tn.jsp?f=001MeL8DaWt77p_rBeuU-MsJ6M7zq1kmIQSEAidPh5H2XxsKafJjgXdO5_FbyajmmkEC0s-2rsznlYd8D_r08z7EquMZMzL4Ofl71LuX7FFQA0kqDzSDpTfisJGnGAyyknpOVD15m9kTkQuhwlA1v96L_eKV_u1ldte_lrYu_YrEuDyJJxmszbhcxteHXCNQ9fB4lq-jNBKabIcCyULKZGeqLkpe9mvUyC6tXw9JttKOIEidbmFHhXWVhnJg7J1SzQoia4e2QPFRCmHwJHoBszp5rTlRW97oSQxV47NMIJlnn2YfmpavTbDM7kG73wqHgXa8SWibgajVl5r_cD9m4RNdw==&c=CVxK6llLfhcZHam0eo1c8ShYYlvVFYvrI2K19xRTke4gqEiQCojuBw==&ch=vrMEEjuEpe1Bl6wc3u8GHTfEg5D32qIIQn1YcgHHPNzXnzL9Drp1Og==]]
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fosters a "Community of Practice" for responsible economic impact investments. Heartland
promotes strategic responsible investments to rebuild the rebuilt environment, renew
the industrial commons, grow the clean economy, and make the boss more accountable.
Inspired by the United Nations Principles for Responsible Investment (PRI), Heartland
Capital Strategies (HCS) promotes investments and projects essential for revitalizing
our productive economy and community prosperity.

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