Brand Value
Q: If a firm has created value, is it also always able to capture that value?
A better way to phrase this question is, "If a firm has created and captured value, is it always able to RETAIN that value." That answer is a resounding no. See Sears, K-Mart, Hudsons, Macy's, and Abercrombie and Fitch as examples. All these retailers were, at one point in time, leaders in their industry. By taking a closer look at Sears and its current parent company K-Mart, we can see its rise and fall as a valued brand with consumers.
Richard Sears was a watch salesman and partnered with Alvah Roebuck, a watch repairman, and began a mail-order watch and jewelry company in 1887. By 1893, they had diversified into other product offerings, including Craftsman houses (one of which I owned that was built in 1916). In 1925 they opened retail locations and negotiated payment terms to local farmers, hence creating brand value for its consumers. At its peak, in the 1980s, Sears was the largest retailer in the nation, with more than 900 stores until its bankruptcy in 2018. The retailer now has a mere 182 stores open, including the former discount retail giant K-Mart, which K-Mart acquired in 2004 (Sears | history & facts, n.d.)
Sears essentially lost its value with consumers with several missteps, mainly consumer fraud from their automotive centers, billing clients for services that were never performed (Journal, 1999), not taking new big-box retailers like Best Buy seriously, and not closing anchor-stores at shopping malls while ignoring the advent of Internet shopping (Kapner, 2019).
Another firm with a rabid fan-base WAS Abercrombie & Fitch. Founded in 1892 by David Abercrombie as a hunting and fishing store, he partnered with a regular-customer, Ezra Fitch, in 1906. Fitch, the lawyer-turned-retailer, wanted to expand the retail store to offer clothing. After Abercrombie sold his shares to Fitch, the flagship, 12-story retail outlet opened in 1910 on Madison Avenue, expanded its sporting goods offerings with a golf school, and shooting range, as well as the noted distinction of combining men's and women's apparel under one roof. A&F brand value boasted shoppers, such as Ernest Hemingway and President Teddy Roosevelt, as well as the sole clothier for Lindbergh's maiden flight across the Atlantic ocean. By 1947, it had reached its FIRST apex. It was in bankruptcy in 1977, after changing hands and CEOs a couple of times, until Mike Jeffries, in 1992, when the band truly took off.
Jeffries envisioned the brand as a teen retailer, and with the booming 90s economy, used sex as a sales platform, offering online and in-store catalogs by famed photographer Bruce Weber with scantily clad male and female models enjoying outdoor activities featuring *some* of the clothes that were offered in the retailers growing mall locations. By 1999, A&F had reached its SECOND apex with the disposable income of the teen market. Still, that money comes from parents, who were less than pleased with the "sex sells" concept and received push-back from those segments, as well as some minorities from blatantly racist t-shirts the clothier was selling. By 2003, lawsuits claimed unfair hiring practices, as male models were asked to stand outside of mall stores, shirtless, and cheerleader-type females were inside, ringing up clothes. That lawsuit costs A&F $40M. In a 2006 interview, Jeffries said, "...we hire good-looking people in our stores. Because good-looking people attract other good-looking people, and we want to market to cool, good-looking people. We don't market to anyone other than that".
It's unknown if A&F can come back from all of the bad press it created, but under the leadership of Fran Horowitz since 2017, they're offering loyalty programs and overhauling all of its stores with a complete remodel, sparking a 2% increase in sales in 2019.
I don't see any sweeping changes. I was interviewed for a retail store manager position in 2008 and was told by the territory manager that there was a certain "look" that A&F was going for, the all-American guy and girl next door look: little to no makeup, for women and no tattoos or piercings for either sex. Let's see if they can make a third comeback!
Businesses create value by combining both client and company carried choices and finding a sweet-spot for all parties involved. Companies achieve this by creating a strategy that looks at the business and the industry it operates in and the long-term effects it might have on the industry as well as the company, not just the sum of its parts (Brinkley, Smith & Zimmerman, 2016, pg 258, pp 5, pg 259 pp 4, pg 261, pp 2 & 3).
Amazon achieved value by offering a cornucopia of products that are able to be shipped directly to the consumer in as little as 4 hours and having multiple avenues of acquiring those products. Amazon, as well as many other online retailers and entertainment websites, offer recommender systems, suggesting products that other consumers often purchased together (Brinkley et al, 2016, pg 262, pp 1).
Amazon
Amazon.com: Make It So
Executive Summary
Where Rockefeller had oil, Carnegie had railroads, Bill Gates has software, and Zuckerberg has social media, Bezos’ Amazon empire isn’t limited to just one vertical. It can’t be compared to any other entrepreneur endeavor in the pantheon of American capitalism. As former plaintiff against, and author of Jeff Bezos’s Master Plan:
What the Amazon founder and CEO wants for his empire and himself, and what that means for the rest of us, Franklin Foer writes,
“To many Americans, he is a beneficent wizard of convenience and abundance. Bezos’s ventures are by now so large and varied that it is difficult to truly comprehend the nature of his empire, much less the end point of his ambitions. Retailer hardly captures the company now that it’s also a movie studio, an artificial-intelligence developer, a device manufacturer, and a web-services provider. But to describe it as a conglomerate isn’t quite right either, given that so many of its businesses are tightly integrated or eventually will be.”
It’s difficult to separate the founder, Jeff Bezos, from the company, Amazon. He, along with Mark Zuckerberg and Elon Musk, move markets when they speak (Foer, 2019, Zweig, 2021). Sometimes, those comments and actions bring publicity that even the best PR companies can't spin (Canales, 2021). Even amongst themselves (Hartmans, 2021).
Bio
History
To understand the company and culture, you need to understand the man. In doing so, you can see where his passion sometimes gets blinded from reality, mainly due to his upbringing. There are conflicting reports regarding his childhood (Rizzo & Salas-Rodriguez, 2021, Caleb, n.d., Krosofsky, 2020, Chen, 2020). Still, an 11,000-word expo on Jeff Bezos, with five months of research and interviews with his staff, business partners, and people who grew up with him, Foer (2019) has confirmed these facts (Britannica, n.d., Clifford, 2019, Foer, 2019, Hall, 2021).
Jeffery Preston Jorgensen was born in Albuquerque, NM, in 1964 to a 17-year-old high school student/mother, Jacklyn (Jackie) Gise, and 20-year-old traveling carnival worker, and raging alcoholic father, Ted Jorgensen. Less than a year later, Jackie and Ted divorced. Soon after, Jackie would meet recent Cuban immigrant Miguel (Mike) Bezos at a community college where the two studied. After graduating from the University of Albuquerque with a Mechanical Engineering degree, Miguel and Jackie were married and moved to Houston, TX, where Mike accepted an engineering job at Exxon. Soon after, Mike adopted Jeff, giving him the last name of Bezos.
Jeff’s family knew he was gifted when, at three years old, he took a screwdriver and disassembled his crib because he was ready to sleep in a bed. After that, Jackie was laser-focused on Jeff’s education, 40-mile round-trips to an elementary school for gifted students, working the system to get Jeff off the wait-list and into middle school, and countless trips to Radio Shack, where he had turned the family's garage into his laboratory (Foer, 2019).
Jeff’s maternal grandparents lived in rural Texas, where his grandfather, Lawrence Preston Gise, a former Atomic Energy Commission engineer, had turned rancher. Jeff would later say that his grandfather's ingenuity, willingness to take on projects he had no idea how to accomplish, and working them out were key to Jeff’s success. Gise would take Jeff to watch space launches and watch endless hours of Star-Trek on TV. Jeff took a particular liking to Jean-Luc Piccard, whom he sometimes refers to himself (Foer, 2019).
Jeff loved math and would calculate anything for fun. His love of computers, programming, and entrepreneurship began in high school in Miami, FL, where he started The Dream Institute, a summer educational center geared toward creative thinking for young students. Graduating high school as Valedictorian in 1982, Jeff said in a local TV interview that his dream was to colonize the moon. By age 18, he had figured out the mechanics of creating gravity, maintaining oxygen levels, and creating water to house a million people (PBS, 2020).
Graduating Summa Cum Laude in Electrical Engineering and Computer Science from Princeton in 1986, Bezos took a job at a fintech start-up, Fintel, turning down offers from Intel, Bell Labs, and Anderson Consulting. His function at Fintel was developing an international trade network. Following that, Jeff became a product manager at Bankers Trust on Wall Street in 1990. By 1994, Bezos was the fourth 30-year-old Senior Vice President at D.E. Shaw & Co, a company revolutionizing data use in the investment sector. Both Shaw and Bezos would agree, data equals power. Bezos was tasked to investigate the Internet. (PBS, 2020). It was there he met and married McKenzie Tuttle, and there again when he read that the Internet was growing at a rate of 2300% a year, and he wanted in on the action (Fall, 2017).
Original Business Plan
Bezos did some research and realized that there were no mail-order or online booksellers, so he decided that his initial online offering should be books because of the cult-like following with enthusiasts and how he could catalog the entirety of published works, allowing his customers to search for difficult-to-find titles. His original vision to sell everything, including kitchen sinks, still holds today. One happy accident was his vision of housing all of the company’s data at their newly developed distribution centers, popping up like dandelions on the American horizon. Those servers would lead to Bezos housing 40% of the world's Internet traffic with Amazon Web Services (PBS, 2020).
The next decision was where to launch the new business. Bezos immediately thought about Bill Gates and Microsoft and decided that Seattle, Wash. was the perfect place to find tech workers. So Jeff and McKenzie packed their things, rented a house in Seattle, Wash., and left New York City to start a new career. Bezos borrowed a large sum of his parents' savings to launch his online retail store, telling them there’s a 70% chance of failure. Jeff toyed around with names for the company, one of which was, Relentless.com, Cadabra.com, as in Abra Cadabra (Schlumberger, 2019), another was MakeItSo.com, a Star Trek reference to his on-screen idol, Jean-Luc Picard. Make it so was a phrase the character said to confirm orders. Bezos finally landed on Amazon.com because of the vastness of the Amazon River and his plans to sell anything imaginable on the platform (Fall, 2017). It also began with A, an important fact, as internet searches were in alphabetical order at the time (Britannica, n.d.).
Storytelling and The Hero’s Journey
At this point in Bezos's life, Jeff had reached the point which Storytelling calls Call To Adventure. There are twelve steps in the Hero's Journey (Campbell et al., 2003). In the Hero’s Journey, Jeff has lived through the storytellings of:
Ordinary World
This is the hero's safe space. This is about Jeff's past, how his childhood and relationship with his loved ones shaped and molded him.
Jeff’s ordinary world was never hearing no to his curiosity, obsession with space, and entrepreneurship.
Call To Adventure
Also known as a Call To Action. As in all action adventures, the reader expects drama, such as a threat to life or limb, Shootings, bombings, etc. At this point, the hero must leave his Ordinary Life and take on the quest that’s presented itself. In Jeff's case, it was a call to enter into his True Self.
We know that Jeff had a very loving and attentive family. Jeff utilized that privileged upbringing and his past job skills and knowledge of how systems work and combined them all into online retailing. He’d be able to alphabetize the history of books in one repository, creating a competitive advantage over bookstores (Yahoo, 2019). Not only did Bezos write the business plan on the cross-country trip to Washington, but he spent the following months writing all the code for it. Bezos genuinely did craft the inner workings of Amazon (Schlumberger, 2019).
Bezos blew through stages 3 through 6 fairly quickly.
Stage 3 is Refusal, where the hero may have fears to overcome. Leaving a VP position on Wall Street to venture into uncharted territories takes courage, and a lot of research, before becoming an online book retailer.
Stage 4, Meeting With Mentors, finds Jeff speaking with a lot of people for advice, and where he discovers that Internet Searches in the early 90s were sorted alphabetically, so he chose Amazon for strategic reasons, as well as symbolic; Amazon is linked with a vast river with tributaries leading into it. A supply chain lover’s dream.
Stage 5, Cross The Threshold, is where Jeff launches the website (Foer, 2019, PBS, 2020, Schlumberger, 2019).
6. Tests
Over the past 25 years, it's been interesting to watch the growth of Amazon and Bezos himself. Early on, Bezos was the face of Amazon, doughy, geeky, and awkward, but the face, nonetheless (Cuccinello, 2019). Amazon grew from $20,000 in sales in its first month in 1995 to $15.5M in sales the following year. 1997 brought an $18 per share IPO offering, which netted $54M in one day (Schlumberger, 2019). For five years, the company would double its sales year over year. It would take Amazon six years and a financial crisis to turn a profit. Internally, Bezos would tell his innermost team that his goal was to put companies out of business so Amazon could gain market share (PBS, 2020).
Amazon’s exponential growth was infectious to investors, as was the company’s customer obsession. Bezos would require every team level meeting to have an empty chair, representing the customer, making sure that every decision made was geared towards them.
The following year, Amazon asked 1000 customers what else the company should sell on its platform, other than books. As a result, 1998 saw music and video streaming being added, and between 1998 to 2000, Amazon’s stock price had climbed to $2000 per share (PBS, 2020).
7. Approach The Innermost Cave
At this stage, we see our hero retreat from the Ordinary World to regroup. Plans are made, troops are rallied, and an attack is made. The 2000s Internet bubble saw Amazon’s offering explode, with other retailers selling on Amazon.
In 2001, Amazon laid off 1300 workers and closed one distribution center due to the 2000s “dot-bomb” collapse. Although sales grew 15% that year and only returned $0.01 to each shareholder, Bezos didn’t come out completely unscathed. In pictures, you see a bit more stoic and refined leader (Cuccinello, 2019).
8. Milestones/Ordeals
Stage 8 has the hero overcoming obstacles. It is here where, either personal or professional, the hero is tested. The hero gathers all his skills and knowledge to be reborn into a Higher Self. The hero has achieved some extraordinary power to conquer all obstacles and reach his destiny.
2002 was the first year Amazon had made a healthy profit, rolling out its Prime memberships, offering free two-day delivery to anywhere in the US for a flat rate of $79 per year. 150M people would sign-up, making Amazon Prime the most successful membership program in history. Now sitting at 200M, bringing in an average of $20B from that program alone (PBS, 2020).
That led to the expansion of distribution centers across the nation. Those distribution centers also housed data centers containing customer information that Amazon would use to analyze buying habits, ultimately implementing a recommender system based on shopping habits. In addition, Amazon’s data centers were expanded to house Amazon Web Services, where now more than 40% of all Internet traffic flows through (Foer, 2019).
The Kindle ebook reader was released in 2007, and by 2010 had sold more books on the digital platform than traditional books. In 2009, Amazon spent $1.2B to acquire online shoe retailer Zappos. In addition, 2010 was the first year that Amazon Studios was launched, adding to its current movie streaming. Today, Amazon Prime Video has four times the offerings of Netflix (Foer, 2019, PBS, 2020).
In 2013 Bezos bought the Washington Post for $250M in cash, saw Amazon become the largest online retailer globally, and Amazon Web Services landing a ten-year, $600M contract to put the CIA in the cloud. That move alone would solidify Amazon to be the most trusted company in the world (Foer, 2019, Schlumberger, 2019).
By 2014, Bezos had landed on Forbes top ten list of wealthiest people in the world. However, that same year, Amazon had a very public and bitter fight with publisher Hachette over Amazon’s business practices, which included Amazon blocking authors' titles, redirecting search inquiries to other publishers, and delaying shipment of books to customers sometimes by weeks. That prompted the International Trade Union to call Bezos the world's worst boss.
By 2016, Amazon had launched in Europe, where nearly half of all online retail sales in the UK were through the company. It was also the year that it was revealed that Amazon was creating merchandise that its competitors sell on the site (Addady, 2016). In 2017, Amazon bought Whole Foods while Bezos hit $100B in net worth (Foer, 2019).
Bezos' zenith was in 2018 when he reached number one on Forbes wealthiest people list. Unfortunately, that same year, the man who had embodied such discipline and regime would reveal that he had an affair with journalist Lauren Sanchez, leading to a very public and expensive divorce. Although it was revealed that Bezos hadn’t signed Bill Gates and Warren Buffett’s Giving Pledge for philanthropy, newly-single McKenzie Tuttle would, after the divorce. He would, however, set up the $2B Day One Fund to assist low-income communities and homeless families through early childhood education programs, given to immigrant rights groups and the LGBT+ community, but was considered lower than most Giving Pledge donations (Schlumberger, 2019).
Amazon began facing significant criticism from every direction. The US president accused the company of dodging sales taxes, abusing the US Postal Service, and anti-competitive pricing (Schlumberger, 2019). Those remarks saw the company’s stock drop 9% in one day.
It was also the year that the company was found underpaying and exploiting workers in their fulfillment centers, prompting Sen. Bernie Sanders, D-Vermont, to say, “Skip Blue Origin, pay your employees a living wage.” That prompted Amazon to raise all fulfillment center workers' pay to more than double the national minimum wage of $7.25. Known for his aggressive business practices and lack of philanthropy, Bezos learned to embrace that not all big businesses were loved (Schlumberger, 2019).
9. Seizing The Sword
It’s 2019, and we are currently at Stage 9, where we see the hero transformed, becoming a new person after reaching the goal. Unfortunately, The Goal was under pressure from corporations and government officials over business practices and workers’ rights. However, his 112 million Amazon Prime members still ranked the company as a trusted entity (PBS, 2020).
2019 is also when Amazon began offering one-day delivery, the expansion of goods being sold directly from China, and allegations that those products were of poor quality and contained dangerous metals and toxins (PBS, 2020)
2020 saw explosive growth due to the pandemic, with Amazon Prime memberships hitting 200 million and the company’s sales increasing by 200% (Wakabayashi et al., 2020)
10. The Road Back
Stage 10 sees the hero returning home with his reward, but that glory is short-lived, for the hero has another journey to embark upon, often choosing between personal goals and a Higher Cause.
The High Cause for Bezos is space. Blue Origin, Bezos says, is his most important work. Stepping down from his role as Amazon CEO, Bezos was replaced by Amazon Web Services CEO Andy Jassy. It’s too soon to know how steps 11 and 12, Resurrection and Return With Valor, will end.
Major Challenges
In 2016, Bezos wrote in a letter to shareholders, “Our focus is on customer obsession rather than competitor obsession, eagerness to invent and pioneer, willingness to fail, the patience to think long-term, and the taking of professional pride in operational excellence” (Davis, 2016). Amazon’s business practices resemble Relentless.com, in full-effect. Clearly they’re winning. The three major stories Amazon has faced over the past 25 years have been business practices, data use, and employee relations.
Business practices
Since its inception, the cries from authors and publishing houses, and brick-and-mortar booksellers have been about Amazon’s unfair business practices. Austrian economist Friedrich Hayek wrote in 1941,
“No bureaucracy could ever match the miracle of markets, which spontaneously and efficiently aggregate the knowledge of a society. When markets collectively set a price, that price reflects the discrete bits of knowledge scattered among executives, workers, and consumers. Any governmental attempt to replace this organic apparatus—to set prices unilaterally, or even to understand the disparate workings of an economy is pure hubris.”
This seems to be the view of Bezos, and as such, Amazon. Foer (2019) speaks of Bezos inner-circle of executives, and how his philosophy of business has been ingrained into their very beings. Foer is an author through Hachette Book Group, in which both Foer and Hachette were the end recipients of Amazon’s business practices. In his article, he acknowledges that Amazon is an unstoppable behemoth, shaping supply chains, managing the bulk of the Internet's data, and taking to the skies with drone delivery. That kind of power from one man was given without a vote.
Data-use Practices
Those same business practices were used via data manipulation. Hachette and Foer attest to the blocking of their titles, sometimes month-long delays in shipping titles, and redirecting title and author searches to other publishers' titles. Add to that the allegations of Amazon pushing their brands in front of others and the dispute over potential copyright infringement from Amazon’s third-party sellers (PBS, 2019).
Employee Violations
Beginning in 2010, during Amazon’s exponential growth, complaints came into the Occupational Safety and Health Administration, claiming Amazon’s fulfillment centers were violating laws. For example, the insides of warehouses would reach over 90 degrees, sending workers to local emergency rooms and prompting several doctors to call OSHA about their concerns. The scanners the warehouse workers use track the employees movements, and are compiled to create individual weekly quotas. Employees said that quotas would rise each week if you hit your goals, and it never stopped rising. This led to workers in New York City trying to unionize in 2021. A year earlier, Amazon had withdrawn their offer to build HQ2 in New Your City when government officials pressured the company on how it would react if employees tried to unionize (Selyukh, 2021).
Brand Image
When respondents were asked where they go to search for retail products, 71% said Amazon first. All search engines combined totalled 50%. You know you have brand loyalty when you see those kinds of numbers. Globally, the results are close to the same, coming in second place in Brazil, Mexico, Columbia, and Canada, in ninth place in the UK, but only by 4.2% less than the top brand. Chile, however, placed Amazon last (Chevalier, 2021).
Davis (2016) tells of his friend who has welcomed Amazon’s Alexa into his home, and how it changed the way he interacts with the company. Need soap? Tell Alexa to put it on your shopping list. Virtually anything you may need, from brown rice to high-end office furniture, you can tell Alexa to ship it to you. Davis' headline reads, “How Amazon's Brand And Customer Experience Became Synonymous.”
James (2020) thinks Amazon’s brand is a ticking time bomb. Not to be confused with business disasters, the likes of which can be fixed after a couple of good earnings reports. Brand disasters, such as Boeing, and the disaster that uncovered profits over safety in the 737 MAX plane crashes. Wells Fargo, putting profit over customer respect.
James warns that Amazon has created customer trust by equating its brand to the products it sells, few of which Amazon makes. Amazon, as a company, is not held responsible for the products they offer to consumers, as stated in the Terms Of Service you agreed to, but probably didn’t read when you created your account. Recently, ProPublica, a public interest group, found more than 4,000 items purchased from Amazon were deemed unsafe by federal agencies. James warns that if a number of people die, or get injured, the brand could be done for. PBS (2019) tells of a hair dryer that shot flames onto someone's head, a hoverboard that ignited and consumed a family's home.
Recommendations
Amazon's business practices have been shaped by one man who owns 10.7% of the company. Bezos' ethos has been Relentless. In countless letters to shareholders, the word is peppered throughout. Trying to see Life in a post-Amazonian world feels strange. Amazon is an international supply chain with a network of warehouses, trucks, planes, and delivery drivers, a data center, an entertainment company, an AI company, and a retailer. Amazon is facing major scrutiny with feds and elected officials, and the only way to stop this charging bull is to take it apart, piece by piece. Companies like Motorola, AT&T, and recently GE have all spun off divisions and remained attractive to investors. Perhaps Amazon’s new CEO might bend to the calling pressures of spinning off portions of its business (PBS, 2020). .
References
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Clifford, C. (2019, May 16). Jeff Bezos says dad emigrated from Cuba alone at 16: “His grit, determination, optimism are inspiring.” CNBC. https://www.cnbc.com/2019/05/16/how-jeff-bezos-dad-who-came-from-cuba-alone-at-16-inspires-him.html
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Davis, S. (2016, July 14). How amazon’s brand and customer experience became synonymous. Forbes. https://www.forbes.com/sites/scottdavis/2016/07/14/how-amazons-brand-and-customer-experience-became-synonymous/
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Hall, L. (2021, July 20). Who is Mark Bezos? Meet the younger brother of Jeff Bezos who will accompany him to space. https://news.yahoo.com/mark-bezos-meet-younger-brother-083950941.html
Hartmans, A. (2021, October 21). Jack Dorsey and Mark Zuckerberg were rivals long before Dorsey mocked Facebook’s metaverse plan. Theirs is just one of a dozen yearslong feuds between some of the world’s most powerful tech leaders. Business Insider. https://www.businessinsider.com/tech-rivalries-elon-musk-jeff-bezos-bill-gates-steve-jobs-2020-3
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Selyukh, A. (2021, October 25). Amazon warehouse workers in New York file for a union vote. NPR. https://www.npr.org/2021/10/25/1048956134/amazon-warehouse-workers-in-new-york-to-file-for-union-vote
Yahoo, F. (2019, January 30). The history of Amazon: How Amazon came to dominate retail. https://www.youtube.com/watch?v=StaMb1iwPNE
Zweig, J. (2021, February 12). How the stock market works now: Elon musk tweets, millions buy. Wall Street Journal. https://www.wsj.com/articles/how-the-stock-market-works-now-elon-musk-tweets-gamestop-millions-buy-11613147654
Branding: Elon Musk
This week I’ll be addressing Branding. The good, the bad, and the, well… keep reading:
Editor's Note: This was written prior to Musk buying the dumpster fire platform formerly known as Twitter, now X.
Fresh off the heels of our group projects comes Tesla and the bevy of lawsuits and scandals that surround one man’s twitter posts: Elon Musk. My suggestion would have been to muzzle him, or create the Twitter handle, @FakeElonMusk and let him post his snide and rude musings there. That way his posts would be his own, and not attached to Tesla in such a public way.
I suggest this because most of Tesla’s troubles began in Q3 2018 when Musk seemed to be coming off the rails after dating Claire Elise Boucher, a Canadian musician who goes by the stage name Grimes (Scott, 2021). All the world was watching when twelve high-school soccer players and their assistant coach went to a local cave to go exploring for an hour. The team had ventured almost 5 miles into the caves several times before and had written their new team members' names on the cave walls as a ritual for years. The team had entered the cave system during monsoon season and got trapped by flooding about two miles into the cave. They would remain trapped there for almost two weeks, with international Navy teams searching for the group. Elon Musk had offered a kid-sized submarine, however, it would be rejected as unsuitable by the commanding officer at the scene. Vern Unsworth, a British diver who was part of the on-site rescue team said Musk’s mini-sub was a PR stunt and Musk could place his sub “where it hurts”, of which Musk posted on Twitter that Unsworth was a pedophile in response to the criticism (Shu, 2018). Unser would later settle out of court with Musk (Czarnecki, 2018).
A month later, in August of 2018, after a particularly poor Earnings Call and the company being weeks away from bankruptcy, Musk tweets that he’s considering taking the company public at $420 a share and funding had been secured (Czarnecki, 2018). Musk’s girlfriend, aka Grimes, invited a fellow musician Azealia Banks to Musk’s place in LA for the weekend to work on a collaborative album. Banks said that Musk admitted to being on a psychedelic drug, acid, at the time of the post, and had spent the weekend scrambling to secure the funding he said he already had (Grady, 2018). By the end of September, both Musk and the Tesla Board would spend $20M in fines for the stunt, with the Tesla Board tasked to vet all future tweets from Musk regarding the company (Czarnecki, 2018).
In September 2018, Musk would go on The Joe Rogan Experience, with 11.4M YouTube followers, and appears to smoke marijuana with the host (Rogan, 2018).
By the close of 2018, Musk would get approval from the Board to buy SolarCity for $2.6B (Hamilton, 2021). SolarCity was founded in July 2006 by Elon Musk’s two cousins, with a business plan and seed money from Musk. SolarCity eventually became the largest mass-production solar company in the US (Hamilton, 2021). In 2013, Musk announced a partnership between Tesla and SolarCity to create better electric vehicle batteries at the Gigafactory in Nevada. 2015 ushered in the Tesla and SolarCity collaboration, Powerwall home, and Powerpack industrial battery packs. Powered by its solar roof business, the combination is able to provide enough electricity to power homes and businesses off the grid (Urian, 2021). Later it was revealed SolarCity had lost $3B over ten years. Some investors sued Musk, calling the investment a bail-out (Kolodny, 2021). Rebranded as Tesla Energy, the company would create an exclusive contract with Walmart to supply its Powerpack solar system on several roofs around the country. Walmart and Tesla would later part ways when the panels would ignite, causing store closures and evacuations, along with millions of dollars in damage. Walmart accused Tesla of negligence and would settle out of court for an undisclosed sum (St John, 2019).
The SolarCity partnership and acquisition caused a corporate, financial, and potentially malicious crisis. The suit questions if Musk withheld the financial instability of SolarCity from Tesla’s board, and strong-armed the company into buying the near-bankrupt business he helped create for his two cousins. Shareholders brought a lawsuit, naming Tesla’s board and Musk as defendants. Several board members decided to settle out of court for an estimated $60M in January 2020.
At the trial held this year, Musk was combative on the stand, personally insulting the plaintiffs' lawyers, and said the acquisition was part of Tesla’s master plan to create a sustainable future. Court documents revealed that SolarCity was in financial trouble in Q3 2015. Musk completed the purchase with Board approval in Q4 2016, with SolarCity saying, “Now is the right time to bring our two companies together: Tesla is getting ready to scale our Powerwall and Powerpack stationary storage products, and SolarCity is getting ready to offer next-generation differentiated solar solutions” (Hamilton, 2021).
Court documents in 2019 show Musk emailing Brad Buss, former SolarCity finance chief, urging him to solve its liquidity crisis in order to win over investors (DeBord, 2016). Analyst Dan Ives thinks if the courts rule against Musk, it could bring serious damage to Tesla’s reputation. Additionally, production issues and serious miscalculations on its new product, Solar Roof, photovoltaic shingles that replace traditional roofing products will continue to plague Tesla Energy (Hamilton, 2021).
In May 2021, China said it was investigating a braking issue with the Model 3. While the validity of the claim and the investigation is still ongoing, Tesla could stand to lose its 50% annual growth rate year over year as a great majority of its sales are from overseas buyers (Hoium, 2021).
In October 2021, Hertz car rental announced it was adding 100,000 Model 3s to its fleet. The announcement pushed Tesla stock past $1T. A fellow Twitter user posted a chart with Tesla’s exponential growth over that week, prompting Musk to reply, “If any of this is based on Hertz, I’d like to emphasize that no contract has been signed yet. Tesla has far more demand than production, therefore we will only sell cars to Hertz for the same margin as to consumers. Hertz deal has zero effect on our economics” (Chokshi, 2021).
This seems in sharp contrast to what Musk would normally tweet. It seems the board might have chastised him for potentially bringing further SEC investigations, fees, and fines.
The issues:
“With great power comes great responsibility” (Britannica, n.d.). Musk’s quirky sense of humor has cost him and his company $100M+ so far. Aside from production errors, combustible equipment, and fatal car crashes, the way the Tesla Board seems to see it: If Musk’s pop-star status is intact and he’s not manipulating markets, Tesla is in good standing with investors.
Musk needs to realize that his actions have consequences. When WhatsApp was facing backlash over privacy issues, Musk posted “Use Signal”, and SIGL stocks blew up (Ho, 2021). His actions can cause serious harm when Musk posted a link to a Reddit thread hyping GameStop stock (Bursztynsky, 2021). Most stocks were being traded via a trading app called Robinhood, which has come under scrutiny from several sides and potentially led to one man's suicide (Popper et al., 2021).
As Galloway wrote, “Any guy who can land two rockets on two barges, and get … a lot of people to trade-in internal combustion engines for electric engines, and convince the market that the company is worth more than Exxon or Toyota on a fraction of the revenues is a full-stop genius” (Tong, 2020). Regardless, Musk should be subject to the same standards as every other CEO.
Segal (2021) states that all business leaders should attempt to restore the public's trust as soon as possible. Mike Campbell of Fusion Risk Management links trusts to branding. Several of Musk’s tweets haven’t shown any remorse for his actions (Czarnecki, 2018). With the SEC ruling, Musk seemed genuinely remorseful in an interview with the New York Times (Gelles et al., 2018). Other times, he just keeps pushing the narrative forward (Czarnecki, 2018).
As outsiders, the public doesn’t see what’s going on inside the boardroom of Tesla, or how Musk is censured. In a 2019 article on Tesla, Yahoo! Finance senior columnist Rick Newman suggested there was a crisis of confidence inside the company (Sozzi, 2019). That prediction might be true, as Tesla held an earnings call for Q3 2021 without the iconic CEO, Musk (O’Kane, 2021). In the article, O’Kane said, “His absence took what’s normally a venue for his rants and ramblings, dismissals of Wall Street, and attacks on the press, and turned it into a coherent (if scripted) presentation of the company’s recent progress.”
According to O’Kane, Musk has been contemplating stepping down from his CEO post with Tesla, stating he was happy how Models 3 and Y had brought some financial stability to the company. During the trial regarding the SolarCity acquisition, Musk said he was the reluctant CEO, citing that had he not stepped up as CEO, the company would have died. As revealed at the time of the SEC investigation, Tesla was weeks away from collapse during the launch of its Model 3. The subsequent tweet about taking Tesla private was seen as a chance to use his pop-culture status to help raise share prices, hence keeping Tesla out of bankruptcy.
Musk's erratic behavior might be viewed in a different light, as he had revealed in May 2021 that he has Asperger's syndrome.
Defined by the American Psychiatric Association as "a complex developmental condition that involves persistent challenges in social interaction, speech, and nonverbal communication, and restricted/repetitive behaviors" (Doheny, 2021).
That key fact should have been revealed by Musk in Tesla's initial interview for the Board and CEO positions. See my initial solution in the first paragraph.
References
Prior Research
Britannica. (n.d.). Marvel comics | history, characters, facts, & movies | britannica. Retrieved December 13, 2021, from https://www.britannica.com/topic/Marvel-Comics
Chokshi, N. (2021, November 2). Elon Musk says Tesla has not signed a deal with Hertz yet. The New York Times. https://www.nytimes.com/2021/11/02/business/elon-musk-tesla-hertz.html
Czarnecki, S. (2018, October 1). Timeline of a crisis: Tesla and the most expensive tweet ever. https://www.prweek.com/article/1494535?utm_source=website&utm_medium=social
DeBord, M. (2016, June 27). Everybody is missing the point of the Tesla-SolarCity deal. Business Insider. https://www.businessinsider.com/totally-missing-point-of-tesla-solarcity-2016-6
Doheny, K. (2021, May 14). Elon musk: Is it asperger’s or level 1 asd? WebMD. https://www.webmd.com/brain/autism/news/20210514/elon-musk-is-it-aspergers-or-level-asd
Forbes. (n.d.). Tesla(Tsla). Forbes. Retrieved December 11, 2021, from https://www.forbes.com/companies/tesla/
Galloway, S. (2021, May 7). SCOTT GALLOWAY: Elon Musk is now the most influential person in the world — whether or not that’s a good thing remains to be seen. Business Insider. https://www.businessinsider.com/scott-galloway-elon-musk-influential-leaders-impact-2021-5
Gelles, D., Stewart, J. B., Silver-Greenberg, J., & Kelly, K. (2018, August 17). Elon musk details ‘excruciating’ personal toll of tesla turmoil. The New York Times. https://www.nytimes.com/2018/08/16/business/elon-musk-interview-tesla.html
Gura, D. (2021, November 8). Elon Musk asked Twitter followers if he should sell Tesla shares. They said yes. NPR. https://www.npr.org/2021/11/08/1053511530/elon-musk-twitter-poll-tesla
Hamilton, I. A. (2021, July 30). How Elon Musk transformed his cousins’ solar panel company into Tesla Energy, which faces lawsuits from both angry shareholders and consumers. Business Insider. https://www.businessinsider.com/solarcity-tesla-energy-beleaguered-history-elon-musk-2021-7
Hertz. (2021, October 25). Hertz invests in largest electric vehicle rental fleet and partners with seven-time super bowl champion tom brady to headline new campaign. https://ir.hertz.com/2021-10-25-Hertz-Invests-in-Largest-Electric-Vehicle-Rental-Fleet-and-Partners-with-Seven-Time-Super-Bowl-Champion-Tom-Brady-to-Headline-New-Campaign
Hoium, T. (2021, May 4). Why tesla’s china pr crisis is worth watching very closely. The Motley Fool. https://www.fool.com/investing/2021/05/04/why-teslas-china-pr-crisis-is-worth-watching-very/
Lora, K. (2021, July 10). Tesla CEO Musk goes to trial Monday on $2.6 billion SolarCity deal. https://www.cnbc.com/2021/07/10/tesla-ceo-musk-goes-to-trial-monday-on-2point6-billion-solarcity-deal.html
Loveday, S. (2021, November 5). Tesla & hertz both right about “non-deal,” different perspectives. InsideEVs. https://insideevs.com/news/545765/tesla-hertz-deal-two-perspectives/
Marmor Shaw, J., & Assis, C. (2018, October 4). This timeline charts Elon Musk’s dramatic rise to internet fame (Or descent into internet infamy). MarketWatch. https://www.marketwatch.com/story/this-timeline-charts-elon-musks-dramatic-rise-to-internet-fame-or-descent-into-internet-infamy-2018-08-31
O’Kane, S. (2021, October 21). Tesla offers a glimpse of a future without Elon Musk. The Verge. https://www.theverge.com/2021/10/21/22738763/tesla-q3-earnings-call-elon-musk-ceo-departure-succession
Reuters. (2021, November 8). How tweets by Tesla’s Elon Musk have moved markets. Reuters. https://www.reuters.com/business/finance/how-tweets-by-teslas-elon-musk-have-moved-markets-2021-11-08/
Segal, E. (2021, August 4). Johnson & johnson and tesla show importance of restoring the public’s trust after a crisis. Forbes. https://www.forbes.com/sites/edwardsegal/2021/08/04/jj-and-tesla-show-importance-of-restoring-publics-trust-after-a-crisis/
St John, J. (2019, November 6). Walmart reaches settlement with tesla in lawsuit over solar panel fires. https://www.greentechmedia.com/articles/read/walmart-settlement-with-tesla-on-solar-panel-fire
Taylor, K. (2018, August 26). Missed connections, claims of phone theft, and a weekend at Elon’s: Inside the baffling battle between rapper Azealia Banks and Tesla CEO Elon Musk. Business Insider. https://www.businessinsider.com/azealia-banks-vs-elon-musk-timeline-2018-8
Tesla. (n.d.). About tesla | tesla. Retrieved December 11, 2021, from https://www.tesla.com/about
Tong, A. (2020, August 3). Professor Scott Galloway: ‘Elon Musk is a full-stop genius. But he sets a terrible example for young men.’ British GQ. https://www.gq-magazine.co.uk/gq-hype/article/professor-scott-galloway-interview
Urian, B. (2021, June 28). Elon musk turns 50 | here’s a timeline of his achievements. Tech Times. https://www.techtimes.com/articles/262120/20210628/elon-musk-turns-50-heres-a-timeline-of-his-achievements.htm
Woolf, N. (2016, July 7). Elon Musk Twitter rant a “case study” in how not to handle a crisis, experts say. The Guardian. https://www.theguardian.com/technology/2016/jul/07/tesla-elon-musk-autopilot-death-crisis-management
Current Research
BBC. (2018, July 13). The full story of Thailand’s extraordinary cave rescue. BBC News. https://www.bbc.com/news/world-asia-44791998
Bursztynsky, J. (2021, January 26). GameStop jumps after hours as Elon Musk tweets out Reddit board that’s hyping stock. CNBC. https://www.cnbc.com/2021/01/26/gamestop-jumps-as-elon-musk-tweets-out-reddit-board-thats-hyping-stock.html
Czarnecki, S. & 2018. (2018, October 1). Timeline of a crisis: Tesla and the most expensive tweet ever. https://www.prweek.com/article/1494535?utm_source=website&utm_medium=social
Grady, C. (2018, August 16). The billionaire house hostage saga of Azealia Banks, Elon Musk, and Grimes, explained. Vox. https://www.vox.com/2018/8/16/17692700/azealia-banks-elon-musk-grimes-explained
Ho, K. (2021, 12). A misinterpreted Elon Musk tweet sent an obscure stock soaring. Quartz. https://qz.com/1956105/elon-musks-tweet-about-signal-boosts-shares-of-the-wrong-company/
Popper, N., Browning, K., & Griffith, E. (2021, February 2). Robinhood’s c. E. O. Is in the hot seat. The New York Times. https://www.nytimes.com/2021/02/02/technology/robinhood-ceo-vlad-tenev.html
Rogan, J. (2018, September 7). Joe rogan experience #1169—Elon musk. https://www.youtube.com/watch?v=ycPr5-27vSI
Scott, D. (2021, December 6). Fans think Grimes just threw major shade at ex Elon Musk in new song. Cosmopolitan. https://www.cosmopolitan.com/uk/entertainment/a32473692/grimes-elon-musk-relationship-timeline-baby-x-ae-a-12/
Shu, C. (2018, 15). Elon Musk tweets he’ll ‘bet ya a signed dollar that Thai cave rescuer is a ‘pedo.’ TechCrunch. https://social.techcrunch.com/2018/07/15/elon-musk-tweets-hell-bet-ya-a-signed-dollar-that-thai-cave-rescuer-is-a-pedo/
Branding: J&J
I’m prepared to tell you the sorted story of Johnson & Johnson, or J&J as they’re known to their trusted masses.
In 1886, brothers Robert, James, and Edward Johnson founded the now 135-year-old Johnson & Johnson. By 1888, J&J was the first company to offer sterile surgical supplies to doctors and pharmacists, globally. The following year, they published 'Modern Methods of Antiseptic Wound Treatment' in three languages, and distributed it worldwide. In 1894, the company did another first, creating an At Home birthing kit, and introduced Johnson & Johnson Talc Baby Powder.
With kids comes scrapes and cuts, and in 1920, J & J created the first modern-day bandages. In 1959, they acquired McNeil Laboratories, and in 1960 got FDA clearance to sell McNeil's 1933 creation, Acetaminophen, marketed as Tylenol, without a prescription. All of these ground-breaking accomplishments has led Johnson & Johnson to become one of the most trusted companies in the world (Our Heritage, n.d.).
The company went public with Robert Johnson at the helm in 1943, and penned Our Credo, a document that has guided the company since.
Our Credo
We believe our first responsibility is to the patients, doctors and nurses, to mothers and fathers and all others who use our products and services. In meeting their needs, everything we do must be of high quality. We must constantly strive to provide value, reduce our costs and maintain reasonable prices. Customers' orders must be serviced promptly and accurately. Our business partners must have an opportunity to make a fair profit.
We are responsible to our employees who work with us throughout the world. We must provide an inclusive work environment where each person must be considered as an individual. We must respect their diversity and dignity and recognize their merit. They must have a sense of security, fulfillment and purpose in their jobs. Compensation must be fair and adequate and working conditions clean, orderly and safe. We must support the health and well-being of our employees and help them fulfill their family and other personal responsibilities. Employees must feel free to make suggestions and complaints. There must be equal opportunity for employment, development and advancement for those qualified. We must provide highly capable leaders and their actions must be just and ethical.
We are responsible to the communities in which we live and work and to the world community as well. We must help people be healthier by supporting better access and care in more places around the world. We must be good citizens — support good works and charities, better health and education, and bear our fair share of taxes. We must maintain in good order the property we are privileged to use, protecting the environment and natural resources.
Our final responsibility is to our stockholders. Business must make a sound profit. We must experiment with new ideas. Research must be carried on, innovative programs developed, investments made for the future and mistakes paid for. New equipment must be purchased, new facilities provided and new products launched. Reserves must be created to provide for adverse times. When we operate according to these principles, the stockholders should realize a fair return (Our Credo, n.d.).
J&J has faced two crises in its long history of being a trusted family brand. 1982 saw the company become host to a serial killer in the Chicago area when a lone actor laced packages of Extra Strength Tylenol with cyanide, killing seven people (Corboy & Demetrio, n.d.). Johnson & Johnson's response, guided by Our Credo, has been a case study for decades on the correct way to handle corporate adversity (Google Scholar, n.d.), and solidified its trust in the consumer market (Rehak & Tribune, 2002).
Interestingly, Our Credo author and CEO, Robert Johnson disregarded his own advice in the 50s. Known talcum tests showed asbestos-type materials in its consumer products, including J&J Talc Baby Powder.
Talc is a natural mineral found deep within the earth's crust, composed of magnesium and silicon. The FDA says
Asbestos is also a naturally occurring silicate mineral, but with a different crystal structure. Both talc and asbestos are naturally occurring minerals that may be found in close proximity in the earth. Unlike talc... asbestos is a known carcinogen when inhaled. There is the potential for contamination of talc with asbestos and therefore, it is important to select talc mining sites carefully and take steps to test the ore sufficiently (FDA, 2021, Mount Sinai Health System, n.d.).
When the FDA was considering asbestos limits in products in 1976, J&J flat-out denied known contamination issues from its own testing between 1971-1975 that showed “very high” asbestos levels. This year Johnson & Johnson, worth $400B, has already paid $2.4B to settle claims that their J&J Talc Baby Powder caused cancers from asbestos-laced products. Johnson & Johnson has set aside $3.9B for litigation expenses (Girion, 2018), and funneled $2B into a shell corporation in Texas (LTL Management LLC, n.d.), dumping almost 38,000 talcum powder cancer-causing lawsuit claims into it (Mann, 2021), and sending it off to Chapter 11 bankruptcy (Jiménez, 2021). The exact opposite of everything J&J did right in the 80s (Malone, 2010).
Enter a slew of class-action lawsuits estimated at $4B (Hernandez, 2021, Dean, 2021), with rulings reaching as high as the Supreme Court blocking J&J from dodging responsibility from its actions (Higgins, 2021), including the attempt to file bankruptcy with its shell company, LTL Management, LLC (Church, 2021).
But the talc lawsuit isn’t the only litigation that’s on-going. According to 2019 numbers, talc claims were at 14,000. Today it totals more than 38,000. All claims against J&J in 2019 totalled nearly 50,000. In that Forbes article, $6.2B was estimated to settle those 2019 claims, and would be paid out of the company’s $14.4B liquidity. Fast forward two years and a pandemic later, it’ll probably be the whole 14.4 (Team, 2019)
Johnson & Johnson stopped selling J&J Talc Baby Powder in the US and Canada in 2020 (Romo, 2020).
Like every good story, there’s a cliffhanger. Stay tuned for more self-created drama.
References
Church, S. (2021, October 22). J&J Loses a Round in Bankruptcy Spat Over Baby Powder Suits. https://www.bloomberg.com/tosv2.html?vid=&uuid=4d2b24dc-3f4d-11ec-8669-784f6f685145&url=L25ld3MvYXJ0aWNsZXMvMjAyMS0xMC0yMi9qLWotbG9zZXMtYS1yb3VuZC1pbi1iYW5rcnVwdGN5LXNwYXQtb3Zlci1iYWJ5LXBvd2Rlci1zdWl0cw==
Corboy & Demetrio. (n.d.). The tylenol cyanide deaths and the legacy of the lawsuits. Retrieved November 6, 2021, from https://www.corboydemetrio.com/cases-tylenol-tampering-litigation
Dean, G. (2021, February 23). Johnson & Johnson faces 25,000 US lawsuits over its baby powder. Some users say talc in the product caused their cancers. Business Insider. https://www.businessinsider.com/baby-powder-cancer-lawsuits-johnson-johnson-j-j-asbestos-sec-2021-2
FDA. (2021). Talc. FDA. https://www.fda.gov/cosmetics/cosmetic-ingredients/talc
Girion, L. (2018, December 14). J&J knew for decades that asbestos lurked in its Baby Powder. Reuters. https://www.reuters.com/investigates/special-report/johnsonandjohnson-cancer/
Google scholar. (n.d.). Retrieved November 6, 2021, from https://scholar.google.com/scholar?q=johnson+and+johnson+business&hl=en&as_sdt=0,23
Hernandez, J. (2021, July 29). Johnson & johnson targeted black women with products linked to cancer, lawsuit says. NPR. https://www.npr.org/2021/07/29/1022355144/johnson-johnson-targeted-black-women-powder-products-cancer-lawsuit
Higgins, T. (2021, June 1). Supreme Court rejects Johnson & Johnson’s appeal of $2 billion penalty in baby powder cancer case. CNBC. https://www.cnbc.com/2021/06/01/supreme-court-rejects-johnson-johnsons-appeal-of-2-billion-baby-powder-penalty.html
Jiménez, J. (2021, October 15). Johnson & johnson subsidiary seeks bankruptcy protection to handle talc product claims. The New York Times. https://www.nytimes.com/2021/10/14/business/johnson-johnson-bankruptcy-talc-claims.html
LTL Management LLC. (n.d.). Homepage. LTL Management LLC. Retrieved November 6, 2021, from https://ltlmanagementinformation.com/
Malhotra, N. K. (2019). Marketing research: An applied orientation (Seventh Edition). Pearson.
Malone, C. (2010, September 15). Why tylenol got a pass and bp didn’t. Harvard Business Review. https://hbr.org/2010/09/why-tylenol-got-a-pass-and-bp
Mann, B. (2021, October 21). J&J is using a bankruptcy maneuver to block lawsuits over baby powder cancer claims. NPR. https://www.npr.org/2021/10/21/1047828535/baby-powder-cancer-johnson-johnson-bankruptcy
Mount Sinai Health System. (n.d.). Talcum powder poisoning information | mount sinai—New york. Mount Sinai Health System. Retrieved November 6, 2021, from https://www.mountsinai.org/health-library/poison/talcum-powder-poisoning
Our credo. (n.d.). Content Lab U.S. Retrieved November 6, 2021, from https://www.jnj.com/credo/
Our heritage. (n.d.). Content Lab U.S. Retrieved November 6, 2021, from https://www.jnj.com/our-heritage
Phillips, D. (2015). The magical science of storytelling. https://www.youtube.com/watch?v=Nj-hdQMa3uA
Rehak, J., & Tribune, I. H. (2002, March 23). Tylenol made a hero of Johnson & Johnson: The recall that started them all. The New York Times. https://www.nytimes.com/2002/03/23/your-money/IHT-tylenol-made-a-hero-of-johnson-johnson-the-recall-that-started.html
Romo, V. (2020, May 19). Johnson & johnson stops selling talc-based baby powder in u. S. And canada. NPR. https://www.npr.org/2020/05/19/859182015/johnson-johnson-stops-selling-talc-based-baby-powder-in-u-s-and-canada
Team, T. (2019, August 26). How much will it cost johnson & johnson to settle most of its lawsuits? Forbes. https://www.forbes.com/sites/greatspeculations/2019/08/26/how-much-will-it-cost-johnson-johnson-to-settle-most-of-its-lawsuits/
Risk Tolerance: WeWork
Malhotra (2019) makes mention of ethics in marketing ten times in our textbook, and talks about the guidelines the American Marketing Association (n.d.) has in place in case someone gets into murky waters. When I think of entities or individuals that have breached those codes of ethics, I think Bernie Madoff and his nearly $65B ponzi scheme (Hayes, 2021), Enron and their fleecing of investors (Segal, 2021), Elizabeth Holmes and her former company Theranos, the lab testing company that promised to revolutionize health care, not only bilking money from investors, but also misdiagnosing ailments of patients (Abelson, 2018), and my favorite, Adam Neumann, Founder and CEO of WeWork, who is the only person not going to prison or being charged with any wrongdoing, other than taking a $1.7B golden parachute to step down from the company (Griffith & Woo, 2021). Neumann took the company to a $47B valuation in roughly 10 years to near bankruptcy in six weeks.
In the documentary, WeWork: Or the Making and Breaking of a $47 Billion Unicorn (Rothstein, 2021) several quotes stuck out to me.
What made WeWork attractive was marketing. - Former WeWork employee
If you tell a 30-year-old man he is Jesus Christ, he is inclined to believe you. Scott Galloway, professor of Marketing, Stern School Of Business, New York University, and my Spirit Animal.
Several times in the documentary, former employees stated that Neumann was manipulative and worked around people’s weaknesses, and told his team that he could fire everyone and run the company himself.
Obviously, greed drove these people to perpetrate these crimes, but I always ask, why did they feel they needed to use smoke and mirrors to fleece the public at large?
Hvide & Panos (2014) found a link between risk-tolerant leaders of start-ups and their overall performance with the company. Alan Goldman’s 2006 study looked at “assess[ing] highly toxic leaders and dysfunctional organizations” and found there were “pre-existing leadership pathologies.” What does that mean?
According to psychologist Kets de Vries in 1995, “some leaders go far beyond the abnormal ways of functioning ...they go off the deep end.” In other words, the leader of a dysfunctional organization possesses a personality disorder. They specifically looked at the possibility of leaders having a narcissistic personality disorder and/or antisocial personality disorder. In a 2004 publication, de Vries stated, “people in mental hospitals are easy to understand because they suffer from extreme conditions. The mental health of senior executives is much more subtle.” Goldman’s research concluded that there was a link to mental illness and dysfunctional organizations (2006).
As an entrepreneur with a BA in Telecommunications and MA in IT Management, whose thesis project for a public cellular telephone network would be approved by a federal loan officer, as well as currently holding an MBA in project management and currently pursuing my social media marketing MBA, I'm going to be broke as a joke. Am I willing to fleece billions of dollars from people in order to fulfill my dream of living on a yacht? Nope. In order to fulfill that dream, I currently only need about $50,000. What will I do with the balance of the $6,999,950,000? Invest it back into the company. Duh.
References
Abelson, R. (2018, June 15). Theranos founder elizabeth holmes indicted on fraud charges. The New York Times. https://www.nytimes.com/2018/06/15/health/theranos-elizabeth-holmes-fraud.html
American Marketing Association. (n.d.). American Marketing Association. Retrieved September 3, 2021, from https://www.ama.org/
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Greed & Guardrails
In a perfect world, as the old Irish saying goes, we’d be able to tell those that conspire against us by their limp (GoodReads.com, n.d.). Short of that, you’d have to trust your gut. If something seems off, then it probably is.
In·teg·ri·ty
noun
- the quality of being honest and having strong moral principles; moral uprightness.
"he is known to be a man of integrity"
- the state of being whole and undivided.
"upholding territorial integrity and national sovereignty"
(Dictionary.com, n.d.)
Personal Excellence
There are many public instances of people rising above and extolling the virtues of humanity. Anjezë Gonxhe Bojaxhiu, better known as Mother Teresa, Diana Frances Spencer, better known as Princess Di, Warren Buffett, and Jimmy Carter are prime examples of people with integrity. Indeed.com (n.d.) says that trusted individuals are gracious, respectful, honest, trustworthy, hard-working, responsible, helpful, and patient. It’s very easy to see that in a human, and we know what to look for there, but what’s the opposite look like if the person has no entity?
Corporate Greed
Corporate personhood is the legal notion that a corporation, separately from its associated human beings, has at least some of the legal rights and responsibilities enjoyed by natural persons (Wikipedia.com, 2020).
So, if a corporation is a person, how did it get there? The 14th Amendment to the Constitution of The United States of America. Ratified in 1868, the 14th Amendment was written, in part, to protect the freedom of the recently freed slaves of the confederate south. It is one of the most cited in courts to determine the positive outcomes for “school desegregation (Brown v. Board of Education), abortion (Roe v. Wade), and same-sex marriage (Obergefell v. Hodges) (History.com, n.d.). This key piece of legislation exponentially expanded the protection of civil rights for all Americans. Under U.S. law, these essential rights belong not only to American citizens but also corporations, thanks to the Southern Pacific Railroad after California imposed a tax on railroad property.
Citing the 14th Amendment, Southern Pacific argued in front of the Supreme Court that “the Constitution prohibited discrimination based on racial identity, so did it bar discrimination against Southern Pacific based on its corporate identity (Winkler, 2018). The controversial legal concept is known as corporate personhood.” In short, a corporation is a person and can be tried in a court of law as such (History.com, n.d.).
The United States first corporations were founded in the 1790s and expanded wildly since. The US has been a leading innovator in technology in the 18 and 1900s. The cotton gin in 1793 and the sewing machine in 1833 increased textile production, refrigeration in 1805 allowed for the transportation of produce to travel further distances, Henry Ford and the introduction of the assembly line, all played crucial roles in shaping the US and the world (Wikipedia, 2020).
These are pivotal points that changed corporate growth and are the main reasons why the government needs to play parent to these corporate kids. As I’ve asked for years, would you leave your teenagers in the house alone, with the car keys and an open bank account?
The following are all guardrails for keeping Corporations in check, in order to maintain balance
- The Sherman Antitrust Act of 1890 limited the size of companies to help ensure competition and reduce price fixing and gouging (FTC, n.d.).
- The Glass Steagall Act of 1933 separated commercial banking from consumer baking
- Sarbanes-Oxley (SOX) Act in 2002 and the Dodd-Frank Wall Street Reform
- Consumer Protection Act in 2010 was put in place after Clinton signed the
- Gramm-Leach-Bliley Act in 1999, rolling back parts of the Glass Steagall Act of 1933 (Kenton, n.d.).
Putting it all together
In 1933, Democratic senators Carter Glass and Henry Steagall passed legislation that separated Wall Street (investment banking) from Main Street (commercial banking) which was said to have caused the Great Depression in the ‘30s. The Act stemmed from congressional investigations led by chief counsel to the U.S. Senate’s Committee on Banking and Currency, Ferdinand Pecora. It was found that there was “rampant reckless behavior, corruption and cronyism” between top banking executives.
Part of the problem, as Pecora and his investigative team revealed, was that banks could lend money to a company and then issue stock in that same company without revealing to shareholders the bank’s underlying conflict of interest. If that company then failed, the bank suffered no losses while its investors were left holding the bag.
In a series of sensational hearings, Pecora exposed the deeds of people like Charles Mitchell, head of the largest bank in America, National City Bank (now Citibank), who made more than $1 million in bonuses in 1929 but paid zero taxes. National City Bank testimony uncovered it had taken on bundles of bad loans, packaged them as securities, and unloaded them on unsuspecting customers.
Meanwhile, a top executive of Chase National Bank (a precursor of today’s JPMorgan Chase) had gotten rich by short-selling his company’s shares during the 1929 stock market crash. In testimony from financier J.P. Morgan, the public learned that Morgan had issued stocks at discounted rates to a small circle of privileged clients, including former President Calvin Coolidge.” (Editors, n.d.)
The Glass-Steagall Act (GSA) created the FDIC, which came into play in the 2008 Financial Crisis. It was found that commercial banks had taken-on risky investments with depositors money to the tune of $400M in losses between 4000 banks across the US (Editors, n.d.). In short, banks got greedy, took on excessive risk, and when they failed, they took down their investors (individual accounts) and the rest of the economy with them. GSA created a barrier between investment banks, being able to take on greater risks with inverters money and commercial banks, which were encouraged to lend to their patrons and collect reasonable interest rates in return.
In 1956, as a precautionary measure, the Bank Holding Company Act created another barrier between banks and underwriting insurance investments. This will also be a factor in the 2008 Financial Crisis (Heakal, 2020). That still didn’t stop banks in the 1970s to exploit loopholes in the Glass-Steagall Act, particularly one that stipulated that while a Federal Reserve member bank could not deal in securities, a bank could affiliate with a company that did as long as that company that was not “engaged principally” in such activities (Heakal, 2020). The largest exploitation was in 1998 when Citicorp Bank merged with Travelers Insurance.
In 1999, Congress passed the Gramm-Leach-Bliley Act (GLB), repealing parts of the Glass-Steagall Act of 1933, effectively allowing banks and investment firms to operate independently (Heakal, 2020).
President Clinton said the legislation would “enhance the stability of our financial services system” by permitting financial firms to “diversify their product offerings and thus their sources of revenue” and make financial firms “better equipped to compete in global financial markets (Heakal, 2020).
The limitations imposed on the banking sector by the Glass-Steagall Act sparked a debate over how much restriction can be considered healthy for the industry. Many argued that allowing banks to diversify their activities offers the banking industry the potential to reduce risk. They argued that the restrictions of the Glass-Steagall Act could have an adverse effect, making the banking industry riskier rather than safer. Furthermore, the transparency measures of big banks lessen the possibility that they will assume too much risk or that they will be able to cover up unsound investment decisions. After the passing of the Gramm-Leach-Bliley bill, commercial banks resumed taking on risky investments to boost their profits. Many economists believe that this increase in speculative and risky activities, including the rise in subprime lending, led to the 2008 financial crisis. (Heakal, 2020).
Inside Look
In a May 9, 2008, National Public Radio broadcast, “This American Life” addressed the back-story, beginning with “The Giant Pool Of Money” (Glass et al, 2008): some $70T of Fixed Income Securities in 2008 money, representing all of the world’s savings; from banks, insurance companies and federal governments, etc. The Investment Managers watching over that money don’t want to lose it, they want to make it grow by investing. That Giant Pool Of Money was only $36T in 2000, but doubled by 2006, thanks to globalization; China being the leader, having more than $1T in its central bank. This was also the time that the Gramm-Leach-Bliley Act had passed. Keep in mind, it took hundreds of years to amass $36T in savings, and only six years to double that number. Where did these Investment Managers go to get a quick ROI? Residential Mortgages.
Before investing in mortgages, companies would invest in Treasury Bonds (T Bonds) from the US Federal government or other such investments. In 2000, Alan Greenspan froze the federal return rate to 1% to help the US economy grow, which was the lowest the Feds had offered in years. With Investment Managers looking for anything more than a 1% ROI, mortgages seemed like a solid investment. The flow of money from the buyer to a mortgage broker to a bank and the bank sells the mortgage to Investment Managers, which in turn, package them together to form mortgage-backed securities, which the world gobbled up like Pez, as they were thought to be safe, high-yield, long-term investments. Until they weren’t. Investment bankers couldn’t put together mortgage-backed securities fast enough to sell to the world, so brokers started playing fast and loose with lending requirements. Here’s what ensued after the Gramm-Leach-Bliley Act effectively eliminated the safeguards that were in place for more than six decades:
For a couple of years, brokers had relaxed the lending rules to the point that by 2004, brokers were starting to offer NINA loans (No Income No Assets) where lenders didn’t verify income or related assets. Essentially you could write down any number as your income and/or savings or other assets, and you’d get a loan.
As the money flowed through the system set in place, brokers sold the loans to the banks, who sold the loans to Investment Managers who sold it to the world as mortgage-backed securities (Glass et al., 2017). Keep in mind, not all mortgages were written as NINA loans, most of them were traditional loans from traditional banks and were traditionally safe bets. Those mortgages were bundled together with the less stable NINA loans, or Adjustable Rate Mortgages (ARM) where the interest rate would fluctuate for a few years before settling into a locked rate at the end of the ARM, usually a few months to a couple of years. Another risky type of loan being written was that of a Convertible Loan, where the interest rate remains low for a few months or years, then jumps to ungodly rates, where it’s locked until the term of the loan. Mortgage brokers were making $75-100,000 per month.
These Investment Brokers were looking at historical data on mortgage loans, comparing the 1.5-3% foreclosure rate to the types of mortgages they were packaging as mortgage-backed securities to the rest of the world. NINA loans and others like them were never part of that historical data. Credit rating agencies, like Moody’s or Standard & Poor, rated these mortgage-backed securities as AAA, the highest rating that’s offered to investment bonds. Those same bonds can be rated as low as BBB, known in the industry as toxic waste. These mortgage-backed securities were part of an investment called a collateralized debt obligation (CDO). Holders of these types of loans would slice them up with other AAA-rated bonds and sell them as whole packages, still referred to in the business as toxic waste, but were presented as AAA bonds.
Homeowners were buying and selling houses between 2002-2005 and making double their money, that’s how fast housing prices were going up because loans were getting more lenient. Around October 2006 is when lenders started noticing that the mortgage holders were defaulting on their very first payment. In turn, Investment Managers were starting to see their securities under-perform. Property values were plummeting, mortgage holders were defaulting on their loans, banks were foreclosing on said properties, thus collapsing the housing boom into the bubble it was. But it wasn’t just those mortgages that were in trouble, it was the homeowner that had taken out home improvement loans on investments before the housing boom that were hit hard, too.
In 1996 I bought a 1916 Craftsman-style bungalow for $37,000. By 2004, that house was appraised at $60,000 and I decided to consolidate the original loan and to finish my home improvement project: gutting the house and rewiring, replumbing, and moving walls around to make the 800 sq. ft. house into a livable space.
By 2008, my home value had plummeted to $25,000.
Back to our story: Around the same time as homeowners were defaulting on loans, banks were foreclosing on homes and Investment Managers were starting to see their mortgage-backed securities performing badly (November 2006), mortgage brokers were borrowing money at 20:1 ratios, ($5M in cash = $100M in loans), and were having a difficult time selling these toxic loans to Wall Street investors (Investment Managers). By February 2007, the lending spree was over. So was the income that these brokers and Investment Managers had bought. They, too, were casualties of a system they created, defaulting on homes they bought with the income they made off of toxic loans they sold to the rest of the world.
Those AAA mortgage-backed securities that the CDO’s were selling were now worth less than half of their original value, some were close to zero.
The Flip-Side of CDO’s
In 2011, NPR’s Fresh Air broadcast an episode called, “How Some Made Millions Betting Against The Market” (Gross et al., 2011). In that broadcast, it was revealed that in 2006 and 2007, hedge-fund managers put together collateralized debt obligations, or CDO’s and sold them to the world as risk-rated bonds. These hedge-fund managers, knowing that the CDO’s were toxic, placed insurance on these loans, called a credit default swap, essentially ensuring that if any of the loans failed, the hedge-fund managers would get paid, in spades. Who was backing these credit default swaps? Merrill Lynch, Citibank, UBS, and JPMorgan Chase. Who works at places like that? Investment Managers. How could something like this happen? Zero regulation. CDO sellers knew that was in the bonds they were selling, but the Securities and Exchange Commission (SEC) and investors had no idea. The CDO sellers knew they were selling toxic assets, but they were planning on making their money on the back-end; through credit default swaps.
At the time, Alan Greenspan gave it his blessing, saying that it was a great idea to spread the risk around.
“There are people who are willing to write this insurance, these financial arrangements, and if they're wrong and the deals collapse, then they pay and the balance is restored. Why was this destabilizing rather than helpful?”
These CDOs were worth hundreds of billions of dollars, and credit default swaps had to be paid out. These insurance firms were the same banks buying the toxic assets, which put pressure on the banks that were lending money to the insurance firms, and then the banks needed to be bailed out after all was said and done.
Full Circle
Let's go back to 1933:
“Part of the problem, as Pecora and his investigative team revealed, was that banks could lend money to a company and then issue stock in that same company without revealing to shareholders the bank’s underlying conflict of interest. If that company then failed, the bank suffered no losses while its investors were left holding the bag. In a series of sensational hearings, Pecora exposed the deeds of people like Charles Mitchell, head of the largest bank in America, National City Bank (now Citibank), who made more than $1 million in bonuses in 1929 but paid zero taxes. National City Bank, testimony uncovered, had taken on bundles of bad loans, packaged them as securities, and unloaded them on unsuspecting customers. Meanwhile, a top executive of Chase National Bank (a precursor of today’s JPMorgan Chase) had gotten rich by short-selling his company’s shares during the 1929 stock market crash. In testimony from financier J.P. Morgan, the public learned that Morgan had issued stocks at discounted rates to a small circle of privileged clients, including former President Calvin Coolidge.” (Editors, n.d.)
In 2018, Trump signed into law a bipartisan bill that essentially targeted the Dodd-Frank Act. The bill relaxed regulations on smaller banks, allowed more wiggle room for larger banks to take on more risk, and allowed “too big to fail” banks to duck federal regulations, essentially setting the US and the world to face another crisis that happened in 2008 (Wener, n.d.).
It’s important to remember that corporations can’t think and act on their own; they’re run by human beings, and as such, those human beings should be held responsible for their lack of integrity.
References
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Glass, I., Davidson, A., & Bloomberg, A. (2017, December 14). 355: The giant pool of money. This American Life. https://www.thisamericanlife.org/355/transcript
Gross, T., Bernstein, J., Eisenger, J., & Davies, D. (2011, May 2). How some made millions betting against the market. Fresh Air; NPR.org. https://www.npr.org/2011/05/02/135846486/how-some-made-millions-betting-against-the-market
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