A recent report by CNN Business says this holiday season is ‘make or break’ for Sears Holdings, the parent company of the Sears and Kmart retail giants. This report, apparently, filed from their “No Kidding” desk.
But something in that report stuck out that made me think something that hadn’t occurred to me before: The whole ownership and corporate power structure Sears Holdings CEO Eddie Lampert has set up should be 100 percent illegal.
Before I explain, a quick little full disclosure from me.
I used to work for Sears. I started at their (now dead) Coralville, Iowa store, and finished at their (now dead) Bloomington, Illinois store. I wasn’t a manager or anything. I worked the floor there in college, in lawn and garden in Iowa, and electronics in Illinois. It was, without a doubt, the best college job I had. Pay was good (commission), people were (mostly) good, hours weren’t bad. Sure, there were some less-than-optimal things, but on the whole, it was a positive experience. As a matter of fact, the year I started there, Sears was recognized as one of the best places in America to work! Coincidentally, my last couple months at Sears were Lampert’s first months. Lampert-led Kmart announced they would take over Sears in November 2004, and I left in December 2004.
Since then, Lampert, through his role as CEO of hedge fund management company ESL Investments (ESL standing for “Edward Scott Lampert”) announced himself as CEO of the combined company, Sears Holdings, and then proceeded to drive the combined company straight into the ground. Just Google “Sears Eddie Lampert” to be treated to literally hundreds of articles explaining his terrible management strategy, his aloofness, and his short-sighted sale of everything good about Sears ruining the company’s ability to turn itself around.
This article, however, is not about that. It’s about this one, particular line from the first linked CNN Business article:
Lampert is not offering to put up much new cash. Instead, he wants to forgive about $1.8 billion of the debt he holds from Sears.
Since Lampert has started trying to “turn around” Sears Holdings, he has relied on his ESL Investments business to buy up Sears-owned real estate.
Unlike almost any other retailer (big box or otherwise), Sears actually owned a lot of the stores and real estate their stores were located in. This is different than, say, Home Depot or Kohl’s who often have stores purpose-built by third parties, and then lease them. For a lot of Sears stores, this was a significant reduction to overhead which allowed a lot of stores (as an example, the store at Linndale Mall in Cedar Rapids, Iowa) to operate more profitably than the third-party leased stores (like the aforementioned Coralville, Iowa store).
So what Lampert started doing was “selling” the stores to himself (via ESL Investments-owned Seritage Growth Properties), and leasing them back to Sears Holdings. Since Lampert owns a majority stake in both companies, he can do this without anyone saying otherwise.
Further, when that strategy didn’t help the financial health of Sears or Kmart stores (whodathunk literally raising the rent on troubled stores wouldn’t help them?), he started loaning money directly to Sears Holdings from ESL in an effort to hold off bankruptcy.
Here’s where we get to the part that should be illegal.
When you are the CEO of a company, you have a fiduciary duty to the stockholders of your company. This was first, broadly established in the 1919 Supreme Court Case Dodge v. Ford Motor Co., and most recently reinforced in the 2010 case eBay Domestic Holdings Inc. v. Newmark.
However, when you’re the head of a hedge fund (or any institutional investment apparatus, say a mutual fund, or brokerage firm, etc.) you have a fiduciary duty to your investors.
What this means is, as CEO of Sears Holdings, Eddie Lampert is legally bound to make decisions based on what is best for people who own Sears Holdings stock. However, as CEO of ESL Investments, Eddie Lampert is legally bound to make decisions based on what is best for ESL investors (keeping in mind that people other than Lampert himself are invested in ESL accounts).
So what happens when those two duties diverge?
That is, what happens when the best fiduciary decision for the CEO of ESL Investments is to sell off all the profitable elements of Sears Holdings dooming the company? And what happens when the best fiduciary decision for the CEO of Sears Holdings is to hold on to those assets, and default on loans issued by ESL?
When you, as a person, have legally binding duties that are in contradiction to each other, you should be forced to either shed duties or investments. That is to say, Lampert should be forced out of all decision-making roles at Sears (not just as CEO, but chairman of the board, any board position, or any position of authority over the company), or should be required to divest from ESL, or make ESL divest from Sears.
Right now, what Lampert has done at Sears should have white-collar crime investigators at the FBI or SEC raising their eyebrows, and if what Lampert has done is legal, then Congress should change that.
Sears was in trouble before Lampert took over, that’s not in doubt. But the actions Lampert has taken at Sears has made things actively worse, while making Lampert’s personal financial position better. That has jeopardized the livelihoods of nearly 70 thousand Sears Holdings employees, and has already cost tens of thousands their jobs over the past fourteen years.