Nasty and desperate
A scorched-earth approach to management is back in style as CEOs cost-cut their way to higher profits and soaring share prices. But nasty management can't spark growth—it can only manage stagnation
Toughen up, you slackers. A new philosophy is sweeping the executive suite, and it's not for the squeamish. The heroes of this brutal approach to management are two-fisted cost-cutters like Brazilian tough guys 3G Capital and railway hardman Hunter Harrison.
For managers like these, nothing succeeds like nastiness. They specialize in slashing jobs, purging waste and generally inflicting reigns of terror on their corporate empires—a practice that endears them to many money managers. Warren Buffett and Bill Ackman are a couple of the big investors who see tough-minded budget trimmers as a useful check on companies that have grown fat and sloppy.
But is that really all there is to it? Business's recent swivel to nasty management is also a sign of dysfunction, the result of a slowing economy in which executives struggle to find new ways to grow the bottom line. In many ways, nasty management isn't so much an indicator of growing strength as an admission of persistent, fundamental weakness.
The underlying problem is that growth is disappearing. During the sixties, seventies and eighties, North American companies could swell sales by tapping into the continent's enormous, expanding population of baby boomers. Over the next couple of decades, many Western businesses enjoyed an-other surge as huge new markets in China and the former Soviet bloc opened up. But today? Greying populations, fierce competition and saturated markets make it tough for many enterprises to maintain their sales, let alone grow them.
McDonald's, Coca-Cola and Colgate-Palmolive are just some of the shrinking giants that will have smaller sales this year than they did five years ago. Sure, some of that shrivelling reflects strategic divestitures of underperforming assets. But the fundamental problem facing these former superstars is that global gullets can consume only so many burgers and Cokes; people worldwide can brush their collective teeth and wash their collective face only so often. As a result, many consumer products businesses face natural limits to their expansion.
Managers can choose a few ways to grow the bottom line when the top line is stagnating. One is to develop exciting new products. Another is to acquire other companies. But the surest strategy is to crack down on costs by taking a hard line with employees—in other words, by adopting the new religion of nasty management.
Companies are doing so in droves. In a recent feature in The Globe and Mail, reporter Eric Atkins detailed what Harrison's bare-knuckled style meant for employees of Canadian Pacific Railway during the executive's stretch at the company. Firings soared as managers attempted to ditch long-time workers for offences such as urinating outdoors or not immediately reporting a sprained ankle. Arbitrators overturned many of the dismissals, but the signal from CP management was clear. "They treat their employees as if they're the enemy," according to a union official.
Other managers are joining in similar fights against their own workers. In a recent feature in this magazine, Marina Strauss told the tale of how 3G Capital set up an assembly-line process for firing hundreds of people at Tim Hortons after acquiring the iconic Canadian chain in 2014. The flinty-eyed folks at 3G have also teamed up with Buffett to gut costs at Kraft Heinz, the sprawling manufacturer of lunch-bag staples. Meanwhile, Anheuser-Busch InBev (another 3G holding) is using the same cost-chopping, ruthlessly meritocratic style to consolidate a huge swath of the global beer industry.
Truth be told, the immediate result of this war on expenses is nearly always impressive. Nasty management reliably roots out pockets of inefficiency. At CP Rail, to cite one example, profit soared and shareholders nearly tripled their money between Harrison's arrival and his departure earlier this year.
However, the drawbacks to this approach are just as real. Nasty management has alienated workers at CP Rail and sparked a franchisee revolt at Tim Hortons. At businesses like Kraft Heinz and Anheuser-Busch, the bottom-line fixation appears to have discouraged innovation—no one has time to develop the new when everyone is devoted to purging the old.
In some cases, nastiness has backfired more spectacularly. Valeant Pharmaceuticals International saw its stock price soar thanks to its strategy of acquiring drug makers, boosting prices and slashing costs and employees. But as last issue's cover story documented, it then caved under the weight of massive debt and allegations of accounting misconduct. Now it's struggling to re-establish itself as a kinder, gentler—and much less valuable—company.
It's no surprise that nastiness has a stale date. Once you've sold the corporate jet, ditched the defined-benefit pension plan, downsized offices, and laid down draconian new rules on travel and overtime, it's tough to locate a continuing flow of further savings. Even the bloodiest-minded CEOs find it difficult to keep the cost-cutting momentum going, which may be why some, like Harrison, show a tendency to move on after a few years at the top.
Others turn into acquisition junkies. This, too, makes sense: If your core competency is purging inefficiency, you need a constant stream of new inefficiencies to feed into your cost-cutting machine. But a backlash appears to be developing. In February, consumer goods colossus Unilever walked away from a $143-billion (U.S.) takeover offer from Kraft Heinz. Unilever figures its emphasis on sustainable, socially conscious profits will enjoy better results in the long run than 3G's short-term war on costs. For now, the jury is still out.
Some conclusions, though, should already be clear. Nasty leadership, despite its considerable strengths, is really a formula for managing stagnation rather than sparking expansion. Those who now worship it should consider its limitations. Unless governments and businesses find a way to restore growth, the future will be a depressing place, not just for employees, but for investors and managers as well.
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