Fundamentals Always Rule

Election week ended with a bang, bringing news very much in line with this year’s vote to maintain the status quo.  JC Penney’s Ron Johnson continued to reinvent retail, this time coming up with the outrageous new idea of offering coupons and discounts to get holiday shoppers in the door while David Petraeus reinvented Washington-sex-scandals-as-an-older-man-in-a-powerful-position, having an affair with a much younger woman.  But even these great stories weren’t enough to turn our attention away from continued east coast hardships created by Superstorm Sandy.

Take these two NY-based companies that have both severely crippled by Sandy and the storm’s aftermath: Both have suffered damage to their operations, both have had a difficult time getting gas for their vehicles, both serve customer bases equally impacted by Sandy, and both are in extremely competitive industries.  Both companies also have longstanding records of valuing employees, caring deeply about respective workforces. However, one of these companies has had a very strong 2012 ( “Company A”) while the other (“Company B”) has posted declining revenues and profits this year. I was very intrigued to hear how these companies made such vastly different decisions on how to handle rather substantial payroll for the days employees couldn’t get to work due to the storm. Thus I believe is truly newsworthy as this difference illustrates real action that supports turning-around of the US economy.

After much discussion and deliberation, profitable Company A decided not to pay employees for days they didn’t work, instead having workers take them as either vacation or personal days.  By contrast, the struggling Company B CEO made a snap decision to pay everyone for the lost days without even bothering to talk it through with his senior staff.  Seems like that CEO is a better executive to work for and his pro-employee stance is certain to better motivate the workforce, doesn’t it?  Think again.

I marveled at Company A’s careful examination of all the facts and possibilities before making such an enormous decision.  They fathomed that the price of raw materials, notably gas, would continue to rise and likely squeeze profit margins if even temporarily.  They also projected a spike in customer demand which would increase use of overtime hours, while further forecasting that many of their clients would pay slower than usual which might compromise cash flow.  Their conclusion was to base the decision on sound fundamentals: if their conservative views proved wrong they could then elect to distribute greater bonuses at year end and if they proved right they would not then be forced to take more drastic measures in reaction to full payroll days that weren’t worked. 

Little wonder this company has been consistently profitable, weathering several recessions, post-/9/11 trauma and other challenges the business has faced in over 30 years of operation, never taking a layoff or forcing salary cuts on its workforce.  By working as a team, they also incorporated the best in managerial due process.

In his haste, Company B’s CEO didn’t consider any of these trailing issues.  How could he?  He didn’t even bother to discuss it with staff.  Sure, all the employees getting paid for days they couldn’t get to work for no fault of their own will be thrilled…at least in the moment.  But how long will that last? If they run into the same or even similar problems Company A’s management team evaluated, you can bet Company B will face another round of austerity measures.  Indeed, it should not be surprising that since the broad economic downturn 4 years ago Company B has regularly eliminated jobs, imposed pay cuts and frozen hiring. 

Fundamentals aren’t interesting enough to make news, especially because they are the anti-reinvention. But in the end, regardless of the endeavor, fundamentals always rule.  Perhaps this is why JC Penney has learned selling other company merchandise is not the same as selling proprietary technology in today’s retail environment, why the incredibly qualified and talented head of the CIA can’t stay in his job if he violated the trust of his family, and why Company A will continue to thrive as an excellent organization with a true commitment to its employees while Company B will likely join the scrap heap of businesses that failed in the not-too-distant-future.

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