Capitalism – Texas Style

We’ve been treated to a great deal of angst in the past week as some on our side have questioned Romney’s work at Bain capital. It’s been described as an assault on capitalism, one of the foundations of conservatism. If you listen to the arguments made from those complaining, you’d believe that leveraged buyouts and layoffs are the cornerstone of capitalism and to question them is to question one’s conservative bona fides.

Capitalism is more than leveraged buyouts and private equity investments. Capitalism is the free exchange of goods for a profit, the ability to accumulate capital and private property rights. Its entrepreneurship and competition and all they do to create a healthy economy. A few companies are changing the way people view capitalism and its happening in that laboratory of innovation known as Texas. The leaders of these companies believe capitalism doesn’t have to be a zero sum game with one winner and one loser. This belief that capitalism maximizes the value for all stakeholders rather than a select few is catching Texas by store. Its this view that should be compared to Romney’s record at Bain and I believe that is exactly what Perry is trying to do.

I’ve spent my entire fifteen year career in business. I’ve participated in mergers, acquisitions, reorganizations and refinancing transactions. My view has always been that the shareholders and investors of a company are the ones putting their money at risk; therefore they rightfully deserve the rewards. That is the beauty of capitalism and thats what makes America great. I still agree with that premise, but today I approach it from a different perspective.  The reason for the change you ask?  A few months ago, I was treated to the most vigorous defense of capitalism I’ve ever heard. Surprisingly, it didn’t come from Limbaugh or Kudlow or anybody from the Republican Party. In fact it came from noted Libertarian John Mackey, founder of Whole Foods in Austin, Texas.

I grew up a Rush baby, but I’ve never heard Rush defend capitalism as eloquently as Mackey did that day. He spoke of competition, entrepreneurship and private property rights. He aimed both barrels at unionization and over-regulation and blew them away. He spoke of capitalism as one of the factors key to ending Communism, how it has improved the life of everyday Americans and spoke of what it can bring in the future as it creates wealth for those around the world. He had both conservatives and liberals eating it up. It was truly amazing.

Mackey defines capitalism as creating value for all stakeholders. Sounds simple enough until you think about all of the stakeholders in a business. The investors, customers, suppliers, and employees are all stakeholders. Maximizing the benefit of one at the expense of another does not create the maximum value for the business. Creating the maximum value of a business means maximum value for all stakeholders, win – win decisions that benefit all. I likely disagree with Mackey on what I’d do with my profits, but I can’t argue with his methodology for making the profits.

It all starts with the leadership. To over-simplify, if you partner with your vendors in a win-win scenario, you can offer a superior product at a price that benefits both of you. If you treat your employees great with better benefits and respect, they’ll treat the customers great and will perform superior work on your behalf. If the customers are treated great and you have a superior product, they’ll reward you with their business which in turn makes the investors happy.  Sounds simple, right?

It took some time to get my arms wrapped around this view of capitalism as it flew in the face of investor first theory I was taught. But I must say it makes sense when you consider everything involved in successfully running a business. What I just described is obviously easier said than done. It takes work and is sometimes counter-intuitive. But again, it takes a special kind of leadership to accomplish.  You must sometimes go against one’s natural interest of placing yourself first. It takes longer to make the profit, but it also can dramatically increase the amount of profit made.  I would argue the leadership required for this form of capitalism is not the kind of leadership that Romney possesses and I think Perry would as well.

So where does Texas fit in to all of this?  As I said, Mackey hales from Texas and this style of capitalism is being led by companies like Southwest Airlines, Whole Foods, and The Container Store.  All are very successful companies, are current or emerging leaders in their industries and all are headquartered in the great state of Texas.

Let’s use The Container Store as an example of what private equity can be under this new vision of capitalism. You can then compare it to Romney’s term at Bain and draw your own conclusions. The Container Store was founded in 1978 in Dallas, Texas. The company experienced modest growth and by 2007 had grown to approximately 40 retail outlets across the United States. In 2007, it was purchased by the private equity firm Leonard Green & Partners.

As you may remember, 2007 was not the best time to purchase a retailer.  The credit market froze and the economy tanked. The newspapers were filled with stories of mass layoffs, bankruptcies and potential delistings. Circuit City, KB Toys, Blockbuster and Home Depot are examples of retailers who experienced mass layoffs.  Bombay, Movie Gallery, and again, KB Toys are examples of retailers who had significant store closings. Every retailer was hit and the American public’s discretionary income disappeared.

So what did Leonard Green do with The Container Store during this time of dread?  They stayed true to The Container Store’s foundation principles (www.standfor.containerstore.com) which mirror Mackey’s description of capitalism. They tightened their belt like other companies, but they executed in a different manner. No store closings and no employee layoffs, everyone pitched in extra during the holidays, company-wide conference calls to reinforce the company’s commitment to its employees were routine, and arrangements were made with vendors to make sure they weren’t squeezed out of business during the tough times. No bailouts or excessive bonuses were paid. Every team member from sales clerk to CEO was in it together. All of this was made possible by management and their equity partners at Leonard Green. Was it the easy thing to do? Probably not, but it was the right thing to do to create maximum value for all stakeholders in the business. It was capitalism at its finest as defined by Mackey.

Let’s fast forward to where Container Store stands now five years later and still owned by Leonard Green. According to an article in the Dallas Morning News this week, they’ve opened up four new stores in the last year.  Total new stores are up 30% since Leonard Green took over and 13 more openings are planned over the next two years. The same article states that same store sales are up 8% over last year as well. All of this is being done during one of the worst times in recent memory for retailers and without any closures or layoffs. Further testament to this ownership and management style is the fact that The Container Store is rated one of Fortune’s 100 best places to work.

In the Container Store example, each of the stakeholders has benefited.  Leonard Green and the investors have seen their investment increase over the five year ownership period; Container Store vendors are selling more products as the number of outlets grows, thus increasing their bottom lines; customers across the country are rewarded with better offerings and supreme customer service; and employees have more opportunities for advancement while earning a better wage and benefits. Its no coincidence that Container Store’s CEO, Kip Tindell, was a college roommate of Mackey.  Together they’re leading this new breed of capitalist that is redefining the public perception of this cornerstone of America.

Ladies and gentlemen, this is the type of capitalism born in the laboratory of innovation known as Texas that Perry champions. He speaks about it at every campaign stop and during every debate. It is the ability to risk capital and reap the rewards of growing a business that benefit many. It is the truest form of capitalism and frankly, we should all spend more time defining capitalism as Mackey has.  If Romney’s record mirrors the capitalism preached by Mackey, he should be out front promoting it. I’ll let you draw your own conclusions why he is not or more likely cannot. What we hear instead is the “profits for me and to hell with thee” mentality painted in the Gingrich film. Whether that accurately paints the picture of Romney’s entire body of work at Bain or not, its a big part of the record and we should not ignore it.  Unfortunately when we raise the question, we have been greeted with the response “… but Staples” or an attack on the character of the questioner for not being a “true conservative.”

To bring this to a close, Perry’s questioning of Bain’s record is not an attack on capitalism; it is an attack on Romney’s decision making while practicing the art of capitalism. When you compare Romney’s version of capitalism at Bain to Mackey’s vision of capitalism the distinction is quite clear. Both Romney’s and Mackey’s are founded on principles of entrepreneurship, competition, property rights, and open markets and are therefore, capitalism in the truest sense of the term. However, when put into practice, one of them is a hell of a lot more rewarding than the other and is a lot easier to sell to the American public. Capitalism doesn’t have to be a zero sum game and everyone on our side would be better of promoting it as such.



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