Nearly one-tenth of the 18,000+ employees of Hostess Brands Inc. idled by the company’s demise in bankruptcy work in California, where it has long been the practice to blame “pampered” union members and their “overstuffed pensions” for a perceived inhospitable business environment.
But Hostess may be the poster child for the type of management practices, championed by Mitt Romney’s Bain Capital investment firm, that take control of companies, drain them of resources, eviscerate their labor force and allow top executives to walk away with millions, if not billions, of dollars.
In California, it cost an estimated 1,700 workers at 69 locations their livelihoods.
Although market competition and America’s newfound interest in healthy foods has been blamed for the demise of the maker of Twinkies and Wonder Bread, and it’s cited in the company’s own bankruptcy disclosure statement, the company also blamed union workers for the ultimate collapse and media outlets found that an appealing narrative:
“The Debtors believe that three main factors are responsible for their recent economic troubles: (a) high legacy pension and benefit costs; (b) inflexible labor work rules and structures; and (c) unsustainable debt levels that prohibit the Debtors from adapting their business to current competitive conditions.”
What’s missing from the company narrative and media coverage is the role of management in Hostess’ decline. Michael Hiltzik of the Los Angeles Times sums it up thusly: “It failed because the people that ran it had no idea what they were doing. Every other excuse is just an attempt by the guilty to blame someone else.”
This was actually Hostess’ second bankruptcy. It first sought Chapter 11 protection in 2004 and during its five years in that process, it slashed wages, pensions and health benefits and reduced the workforce from 30,000 to 19,000. But when it emerged from bankruptcy, it had more debt than when it went in. The company went from being three times the size of its chief competitor, Grupo Bimbo SAB, in 2004 to a candidate for purchase by Bimbo, which is now twice its size.
The company went through six chief executive officers in 10 years, management executives continued to raise their own pay, and the private equity firm and two hedge funds that controlled the company for the past decade continued to load the company with debt while they extracted money from the company. Spending on research & development, new products, inventory tracking software, warehouse consolidation and store restructuring—all promised during the first bankruptcy—were never implemented as the company ploughed its revenues back into paying the debt management was accumulating.
In January, New York Times writer Stephen J. Lubben wondered why the Hostess chief financial officer did not list working with the company’s treasury department on his internal job description. Turned out, Hostess didn’t have a treasury department or much of a finance department. However, the company had asked the bankruptcy judge for permission to hire an outside consultant and pay them millions of dollars a year to do the work.
An article in the Wall Street Journal in April of this year cited industry sources that said in July 2011, Hostess approved huge raises for its top 10 executives while planning for its second bankruptcy. Four days after the article was published, Hostess announced it was slashing executive compensation. The July raises reported in the Wall Street Journal were:
Barry Driscoll, CEO: raise from $750,000 to $2.55 million
Gary Wandschneider, EVP: $500,000 to $900,000
John Stewart, EVP: $400,000 to $700,000
David Loeser, EVP: $375,000 to $656,256
Ken Magill, EVP: $375,000 to $656,256
Richard Seban, EVP: $375,000 to $656,256
John Akeson, SVP: $300,000 to $480,000
Steven Birgfeld, SVP: $240,000 to $360,000
Martha Ross, SVP: $240,000 to $360,000
Rob Kissick, SVP: $182,000 to $273,008
–Ken Broder
To Learn More:
Poor Management, Not Union Intransigence, Killed Hostess (by Michael Hiltzik, Los Angeles Times)
Did Hostess Go Bankrupt in 2012 Because People No Longer Find Twinkies Appealing? (by Randall Reese, Forbes)
Labor Union Unfairly Blamed for the Hostess Meltdown (by David Macaray, Huffington Post)
Hostess with the Mostess (Snopes)
Hostess Has a Lot of Debt, but Few in Finance (by Stephen J. Lubben, New York Times)