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Monday, September 22, 2014

People Over Profits?

A family feud in a grocery chain reveals a vital lesson in business and life

A family feud… Two cousins, whose names differ only by a middle initial… A business battle that captures New England’s imagination. And, most importantly, a demonstration that free markets really can be about both people and profits.

It’s the story of Market Basket. The New England supermarket chain offers some of the lowest prices around. Family owned, this closely held corporation has non-union employees and loyal shoppers. Things seemed to be going fine for the chain.

One day, however, the Market Basket board of directors decided to remove CEO, Arthur T. Demoulas. Upon hearing the news, employees and customers started rallying fiercely for his reinstatement.

Then for weeks, customers began boycotting the chain with the support of the stores’ own management. Rallies drew thousands of employees and customers, but as the dispute raged on, the stores were practically emptied of shoppers.

Over a CEO? What was going on?

It turns out, both the customers and the rank and file had simply been happy with the CEO’s performance.

Of course, some hackneyed anti-market slogans showed up amid the protests: “End corporate greed” and “People over profits.” But, apparently, putting people over profits is exactly what the Market Basket board did to start the firestorm. Prior to Arthur T. Demoulas’s ouster, the company had been the locus of a long-running feud between two branches of the Demoulas family. The faction headed by Arthur S. Demoulas kicked out Arthur T. Demoulas, then fired eight employees who criticized the action. This was a huge disaster in both employee relations and public relations, as workers walked out and customers vanished. Arthur T. Demoulas offered $1.5 billion to buy out the 50.5 percent of the company that the Arthur S. branch owned and then return as CEO, but no agreement could be reached in subsequent weeks.

Finally, on August 28, the purchase went through with an awkward compromise: Arthur T. would have to work with the co-CEOs who replaced him, Felicia Thornton and Jim Gooch, until the transaction was completed. Now customers and workers are back, and Market Basket stores are returning to their former vibrancy.

The acrimony between the family branches goes back even further. Brothers Telemachus (Arthur T.’s father) and George (Arthur S.’s father) were equal owners of the business. After George died, Telemachus acquired a controlling interest from his family. Charges of fraud were brought against him in 1990, a court ruled against him in 1994, and appeals continued until the Massachusetts Supreme Judicial Court confirmed most of the original ruling in 2000. This restored a controlling interest to George’s heirs and produced long-lasting hostility between the family branches.

Control of stock wasn’t the same as dominance in the boardroom, however. One of the members of George’s family supported Arthur T., allowing him to become president. But for whatever reason, that member changed sides in 2014, and the board removed Arthur T.

This turned out to be a huge business mistake. Arthur T. was popular among employees, many of whom saw his removal as a prelude to reduced working hours and higher prices. Resentment increased as employees who criticized his removal were shown the door. The revolt had been nearly unanimous from the store manager level down; local managers even put up signs inside the store, asking people not to shop there. Truckers stopped delivering. Between the passion of the employees and managers—and the lack of goods on the shelves—customers vanished and competing stores enjoyed a windfall.

If business sense had been the only thing driving the board’s decisions, they would have restored Arthur T. Instead they indulged in resentments carried over from the previous generation. This is understandable, but it’s the opposite of profit-maximizing behavior. And it illustrates that people and profit can be two sides of the same coin.

There are plenty who’ll tell you, following Karl Marx, that profit-maximization entails treating workers as poorly as possible, giving them the lowest wages and fewest benefits, and working them to their limits. This view regards workers as a fungible commodity: If they quit, others can be hired and they’ll be just as good. Values such as experience, competence, and loyalty have no place in this picture.

People who run successful businesses know better. True “corporate greed” calls for creating conditions for employees to appreciate their workplace and do their jobs enthusiastically. Sometimes this means setting personal grievances aside.

Market Basket’s employees aren’t unionized. The company threatened to fire everyone who stopped working and could have done so, but at least they had sense enough not to go that far. The employees didn’t need the muscle of unions, the protection of labor laws, or the grandstanding of governors. What they had was their value as good workers and the recognition of that value by Market Basket's regular customers.

“Putting people over profits,” in the context of a free market, makes as little sense as “putting maintenance over profits.” Making a profit is essential to business survival. Having good people is essential to making a profit, as companies with revolving-door policies discover the hard way. When “people over profits” means letting personal issues get in the way of sound decision making, it’s destructive to both people and profits.

  • Gary McGath is a freelance software engineer living in Nashua, New Hampshire.