Toys ‘R’ Us compensation falls way short
‘Hardship fund’ for jobless workers reflects moral culpability
“I think any story that sort of forces business executives to look at the moral consequences of their decisions is important.” — Susan Faludi
Why is it that news of a “hardship fund” for Toys ‘R’ Us workers puts us in a sour mood?
Perhaps because it has been more than a quarter-century since Susan Faludi, then at the Wall Street Journal, autopsied the leveraged buyout of Safeway Stores Inc. by Kohlberg Kravis Roberts (KKR), meticulously digging deep beneath the layers of the financial machinations of that deal to tell the stories of the retail workers cut loose.
The story of James White stood out. White had been a Safeway trucker for close to 30 years and was among the 60 per cent of workers who hadn’t found full-time employment more than a year after the layoff of 63,000 employees.
“In 1988, he marked the one-year anniversary of his last shift at Safeway this way,” Faludi wrote. “First he told his wife he loved her, then he locked the bathroom door, loaded his .22-caliber hunting rifle and blew his brains out.”
Faludi’s “moral consequences” quote is taken from her acceptance speech when she was awarded the Pulitzer Prize for her two-month-long investigation. The leveraged buyout (LBO) was not a new trick, but it had been taken to new heights by KKR. (Recall the $25-billion (U.S.) buyout of RJR Nabisco and the rollicking account, in the form of Barbarians at the Gate, that came after.)
As Faludi pointed out in her Safeway exposé, while much was being written about what she called “the putative benefits” of LBOs, precious little had been written about the enormous human costs, the workers who had devoted a lifetime to one employer. With not a small amount of irony, Faludi pointed out that Safeway changed its long-time motto from “Safeway Offers Security” to “Targeted Returns on Current Investment.”
So we turn to Toys ‘R’ Us and the announcement Tuesday that KKR and leveraged buyout partner Bain Capital are belatedly stepping forward with an inadequate $20 million for Toys ‘R’ Us employees left not only jobless, but without severance. (Toys ‘R’ Us Canada, acquired by Fairfax Financial Holdings Ltd., is not affected.)
A timeline reminder: In July 2005, KKR, Bain Capital and Vornado Realty Trust concluded their $6.6-billion debtleveraged buyout of the world- wide operations of the toy giant. In the fall of 2017, Toys ‘R’ Us, crushed by its servicing costs on its $5 billion in debt, sought bankruptcy protection. In March of this year, it announced the liquidation of its entire U.S. operation, closing all stores, waving goodbye to 33,000 workers. Or rather, kicking them in the pants. Severance would not be paid.
Rise Up Retail, the campaign for worker rights protections, took up the cause. “We call on Congress to take bold policy action to regulate Wall Street to stop them from killing jobs and hurting our families,” the campaign says.
“Predatory Wall Street firms pushed hundreds of thousands of retail workers from their jobs when they bankrupted employers like Sports Authority, Payless, Gymboree, and now Toys ‘R’ Us.”
Senator Bernie Sanders joined in. “So 30 years and then you’re let go without a penny,” Sanders said, commiserating with a small gathering of former workers, an encoun- ter that was videotaped and posted to Sanders’ Twitter feed in May. The employee rights advocates say they are entitled to $70 million in compensation. Six months later, KKR and Bain are inching toward doing the right thing. In announcing the fund, each has committed $10 million. The fund, the companies say, “has the flexibility to allow other interested parties to contribute.” That certainly looks like a poke at Vornado Realty.
Some employees are reported to be cautiously pleased by what one former worker smartly called a “first step.” And the LBO players are winning plaudits for making what may be an unprecedented move that they were not compelled to take by law.
In the absence of legal culpability, there was a deep moral culpability. Was this what moved the LBO boys?
In June, Bloomberg reported that the Minnesota State Board of Investment had decided to halt, at least temporarily, future commitments to KKR as it reviewed its investment. Bloomberg also reported that the Washington State Investment Board spent more than an hour asking the private-equity firm to account for its actions. Bloomberg, after hearing a recording of that meeting, quoted a Washington State Investment Board member: “Did anyone at KKR lose their job over the failure of Toys ‘R’ Us? Did anyone have their bonuses cut, did anyone have their compensation cut significantly? Because that’s one of the consequences of free-market capitalism.”
There’s no recognition in the KKR/Bain release of the evident moral consequences. “After being a part of the community and supporting Toys ‘R’ Us for 12 years, and advocating for a very different outcome than what occurred, we are establishing this Fund in response to an extraordinary set of circumstances for both of our firms,” the companies stated in a joint press release, laying the blame at the disruption in the retail sector and liquidation pressure from secured creditors. A distribution methodology has been established and a draft eligibility that will guide the payouts.
Eligible employees must have at least one year’s tenure, with annual income not less than $5,000 and not more that $110,000. The claims process is expected to launch Dec. 15, with payouts concluded by the end of April. Ken Feinberg has been put in charge of the distribution. He spent three years guiding the September 11th Victim Compensation Fund, he handled the GM ignition switch tragedy, he has worked on asbestos compensation and Agent Orange. If there was one right thing KKR and Bain have done in the Toys ‘R’ Us debacle, it is this appointment.
Feinberg once said his job has him working “in the shadow of great emotions.” Those emotions won’t cease with the creation of a $20-million fund, but only raise the chorus of voices for proper compensation for workers.