Sears and Kmart: A Question of Stewardship
The final entry in the series "Who Killed Sears and Kmart?"
The following was originally published in Medium on March 30, 2022. You can listen to the story by going to the Medium link.
It’s June 21, 1964 in Columbus, Indiana. J. Irwin Miller, the CEO of Cummins Engine gave a speech at the dedication ceremony for a public golf course in Columbus. Cummins had financed the project and in his speech, he explains why it was so important for a company like Cummins to get involved in funding a golf course in a small Indiana city. He says the following:
Why should an industrial company organized for profit think it a good and right thing to take $1 million and more of that profit and give it to this community in the form of this golf course and clubhouse? Why instead isn’t Cummins — the largest taxpayer in the country — spending the same energy to try to get its taxes reduced, the cost of education cut, the cost of city government cut, less money spent on streets and utilities and schools? The answer is that we should like to see this community come to be not the cheapest community in America, but the best community of its size in the country.
Miller backed the words in that 1964 speech with action. Miller connected with some of the world’s greatest architects to come to Columbus and build public buildings such as the local library. Eliel and Eero Saarinen, I. M. Pei, César Pelli were all recruited to build churches, banks, firehouses and other public buildings. He wanted to invest in Columbus partially to attract good talent to the community. Miller believed there was more to life than trying to make a profit or seek a lower tax burden. A business could work for the betterment of society just as much as making money.
Milton Friedman didn’t agree.
Six years after J. Irwin Miller’s speech, the Nobel-Prize-winning economist wrote an essay in the New York Times on corporate responsibility. “The Social Responsibility of Business is to Increase its Profits,” appeared in the New York Times Magazine in September 1970. His essay was a response to those who believed that corporations had some sort of responsibility to society. For Friedman, the only responsibility corporate executives had was to their shareholders, their employers. He says the following:
In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom.
If the corporate executive is to have any sense of social responsibility, it has to be as an individual, not as a business:
As a person, he may have many other responsibilities that he recognizes or assumes voluntarily — to his family, his conscience, his feelings of charity, his church, his clubs, his city, his country. He may feel impelled by these responsibilities to devote part of his income to causes he regards as worthy, to refuse to work for particular corporations, even to leave his job, for example, to join his country’s armed forces. If we wish, we may refer to some of these responsibilities as “social responsibilities.” But in these respects he is acting as a principal, not an agent; he is spending his own money or time or energy, not the money of his employers or the time or energy he has contracted to devote to their purposes. If these are “social responsibilities,” they are the social responsibilities of individuals, not business.
He ends the essay by saying that social responsibility is in the long term, socialist:
But the doctrine of “social responsibility” taken seriously would extend the scope of the political mechanism to every human activity. It does not differ in philosophy from the most explicitly collective doctrine. It differs only by professing to believe that collectivist ends can be attained without collectivist means. That is why, in my book Capitalism and Freedom, I have called it a “fundamentally subversive doctrine” in a free society, and have said that in such a society, “there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
Who is right here, Miller or Friedman? Should businesses be concerned only about the bottom line or should they be concerned about social costs? How has it played out in real life?
Visionaries like Friedman tend to focus on the beauty of their arguments, but they rarely focus on the unintended consequences. This is a human failing. We tend to only look at the upside of our choices and never take into account how things can go awry. When it comes to Sears and Kmart and their former CEO Eddie Lampert, I don’t believe Friedman saw the problem with corporate executives who focus only on making the shareholders a good return. What Friedman didn’t account for is how leaders get focused solely on making a return in any way possible.
Over the years that I’ve written and followed this story, people have told me over and over again that Sears was already in trouble possibly because of actions by other corporate leaders in the 70s or 80s or 90s. I won’t argue that mistakes were made in the years before Lampert came on the scene. I won’t even argue that it might have had a role in the decline of both retailers. Maybe Sears and Kmart were destined to go out of business.
But the focus should be on what happened during Lampert’s tenure. You can argue that he wasn’t the main driver of Sears and Kmart’s collapse, but he did have a role and he was the boss as the two firms failed to invest in stores, failed to invest in employees and failed customers.
It was under Lampert’s purview that Sears and Kmart went from a competitor to an also-ran to nearly defunct. He came in with an agenda to cut costs and increase returns for shareholders, and that was what he did. But you have to wonder if Milton Friedman had this in mind when he called for corporate leaders to focus on good returns for shareholders. A 2019 article in the left-wing Nation magazine shows he brought good returns, but they came at a cost. This is what happened to the company through the work of Bruce Miller, a 36-year employee of Sears in New Jersey:
In 2005, the hedge fund ESL Investments Inc., owned by Eddie Lampert, took over the company. In the 1990s, Sears struggled to keep up with big-box competitors Walmart and Kmart and to compete with online retailers. When Lampert took over, he focused on reducing costs and increasing shareholder returns. Miller immediately noticed the difference that made to the quality of service and offerings in the stores. “We went from the top of retail to the bottom of the barrel,” he said. His pay was changed from an hourly rate to commission-based, which meant he and his co-workers started competing with one another. It also meant that when sales declined, as customers fled the dilapidated stores, his income did, too. When he started, Miller said, a slow day in his department meant repairing 100 cars — at its peak, 185 daily. But toward the end, “We were lucky to get 10 cars a day.”
Benefits changed as well. The company took away five personal days. Sick days disappeared. And though he had worked a steady schedule Tuesday through Saturday from 8 am to 4:30 pm, the company started asking him to work at all hours, he said, adding that some days he worked until midnight and then had to be back at 7 the next morning.
Lampert sold off prized divisions like Land’s End and Craftsman. He stopped updating stores. He bought the two chains using the model of private equity: he used a leveraged buyout which left Sears with a lot of debt while he used little of his own capital. Sears was loaded up with more and more debt, to the point that there was little money available to invest in the stores or in the employees.
On paper, Lampert did what Friedman said he should do. He focused on making a good return for himself and the other shareholders. The result, according to Nation magazine, was 175,000 employees losing their jobs.
The main question here isn’t who caused the decline of the two chains. Instead, the main thing here is stewardship. In other words, how do we take care of the things we are given? When I think about stewardship, my thoughts tend to drift to the stewardship of natural resources and as a pastor, it can go to the stewardship of finances. But stewardship can and should apply to stewardship of business. How can we use the resources we are given as businesses, land, employees, pensions wisely?
It is by that standard that we can judge Lampert. He was entrusted with two iconic retailers that employed hundreds of thousands of workers. In 2006, a year after the merger, Sears Holdings was still very profitable with shares going for over $132. In fact, things went well until 2012 when they went south and never recovered. When it went into bankruptcy in 2018 and before it went private, Sears Holdings' stock price was at $.37. No, that’s not a typo.
Lampert didn’t see Sears as something that had to be valued and taken care of, he saw it as another venture to make money…which he did at the expense of the company. Because he didn’t see his role as a steward, caring for the resource he had, he used it up, cutting here and there, never doing write by the people that really matter: the employees and customers.
Being a steward doesn’t mean companies will be successful. Indeed, trying to fail through bankruptcy and liquidation is part of the business cycle. But what happened to Sears wasn’t a case of the business cycle acting as normal; this was the result of greed, carelessness and thinking of no one else but himself.
In scripture, Jesus tells the story of three servants and their principal. Each is given a certain amount of money to take care of while the principal goes away. When he returns, he brings his servants in to find out what happened. The servant who received the most money doubled his amount. So did the second servant who received a bit less. The third servant walks in with a grocery bag of money. He tells the principal he was afraid of him, so he didn’t do anything with the money and returns it to him. The principal is enraged. He banishes the third servant calling him lazy and worthless.
Lampert is the third servant. He was given something and instead of making something out of it, he did nothing. The only difference is that he hasn’t been banished…yet.
The whole point of these stories was to help people pay attention. Years ago, I hoped some buyers like a Carlos Slim who owns Sears Mexico would read these stories and buy Sears and Kmart, but it is probably too late for anyone to save the two chains from Lampert’s ineptitude and greed.
As I stated at the beginning of this essay, in the years that I’ve followed the story of Sears and Kmart, there has been one sentiment crossing my screens over and over again, and it goes like this:
“Sears (or Kmart) made bad decisions in the (80s or 90s) and that’s why they’re in the mess they’re in.”
As statements go, there is some truth to it. Both Sears and Kmart made crucial mistakes in the decades before their 2005 merger that did have a role to play in their downfall.
But the problem with this statement is that it tends to ignore the sins of the present in order to focus exclusively on the past. Saying that this executive had a role or that Sears and Kmart were already dead men walking allows Eddie Lampert off the hook. Lampert may not have started the downward spiral, but he didn’t try to stop it, he didn’t care for what was given to him.
Another way of ignoring the present is to say the market decided against these two chains because they failed to be competitive. Again, there is much truth here. But it misses the deeper questions. Was this the normal process of things dying or was this an intentional process that killed an entity?
As you have seen, the issue is one of stewardship. We began this monster essay with the tale of two men: J. Irwin Miller and Milton Friedman. Miller believed in investing not just in his company but in the community he lived in. Friedman believed it wasn’t the business of a company to worry about anything other than making sure shareholders receive a good return. Some writers look at this from a wider lens, but I want to focus on this company. Lampert followed Friedman’s viewpoint and we see the result; closed stores and lost jobs.
Lampert could have invested in updating the stores, hired talent from other retail firms to improve different parts of the business, improved the supply chain or restart the catalog business with an online focus to compete against Amazon. None of these actions would have been a safe bet in reviving the brand, but at least early on the company was in the black and could afford to gamble. At the end of the day, Lampert did none of this. Instead, he reverted to form as a hedge fund manager, cutting and cutting some more in order to get money to shareholders.
At the end of the day, everyone, especially corporate executives is called to be stewards. Lampert ended up in a position of stewardship and failed. The sad thing is that he will have been a bad steward and yet will walk away unscathed leaving a trail of destruction. There is something wrong in not facing the consequences of his actions, but on this side of heaven, that is what will happen. My only hope is that while there is no justice in this world, I hope there is justice in the next where Lampert will face the music. There needs to be an accounting.
I wanted to end this with some final thoughts. As of 2019, there are still nearly 400 Sears Hometown locations. These stores tend to be in smaller towns, but as of late they are opening what is called Hometown Plus stores in some former full-line Sears. Like everything in Sears, these days, they are reports of being woefully mismanaged. I wonder if someone could buy what’s left of Sears and use these stores as a beginning to revive Sears. It’s wishful thinking, I know, but if there is any justice in the world, I would love to see this happen.
Private equity firms and hedge funds have done a number on American retail in the last few years. Is there a way of reigning them in, so that they won’t just take money out of a business or place more and more debt on the company? Right now, these firms can gamble with other people’s money and face no consequences.
Related to this, I worry about the state of American business. It feels at times that we are losing our drive to innovate and instead we are trying to just make as much money for management and damn the employees and customers. As someone who believes in the free market, there has to be more done than just rules from the government. Civil society and the business community must demand more. We must demand better businesses and better incentives for people to start new endeavors.
American business is at a crossroads. Can it try to innovate again, or will it just exist and consume for its own benefit? That remains to be seen.
You can read all the articles in the series by using the following link. Thanks for all of you who’ve read the series over the last month. There is still one more post, a coda to the series, so stay tuned. In the meantime, if you worked for Sears or Kmart, share your story in the comments section. Thanks!