The Case of Market Basket - When the intangibles become tangible

Here in New England, a corporate drama is unfolding that illustrates so many of the core ideas that we hold in the ICounting/IC community.

The drama involves a family-owned supermarket chain called Market Basket. There’s a long story of conflict between two sides of the family: one that controls 51% of the company and the other that controls 49%. The long-time CEO Arthur T. Demoulas is from the minority shareholder group and was forced out by the majority group. There are primers on the situation at  BostonGlobe.com and News for Shoppers (the photo is from their post).

What happened then? There was a stakeholder revolt that is showing the direct connection between intangible capital and financial results. Here’s the play-by-play using an IC scorecard.

Human Capital – The company had a reputation of taking care of its people and there was a general feeling that this would end with the departure of Arthur T. Many of the employees took a stand and said they wouldn’t work for the company if he was fired. They walked off the job and picketed in front of the stores. They called for suppliers and customers to do the same. The fact that key personnel in the distribution centers walked off the job ensured that the shelves were empty anyway.

Relationship Capital – Market Basket customers have a reputation of being very loyal to the company as well. It manages to have low prices and provides selection (especially of ethnic foods) not to be found elsewhere. With empty shelves and all the bad publicity, the customers are staying away. Volume is next to non-existent in the stores. Customers have taken their business elsewhere. Suppliers are getting hurt too.

Strategic Capital - The culture, the vision and the business model were apparent to all the stakeholders, except maybe the majority shareholders. Their position was a clear message to the market that values and practices were going to change.

The fourth category of IC is Structural Capital. It’s unclear if/how this is affected by the battle. In theory, the systems and the data are intact. That’s because this is the one kind of intangible that is clearly owned and controlled by the company. But, of course, it and the stores themselves are no guarantee of success.

Only Structural Capital is owned by the company. The other three forms of capital are volunteered and co-created by the employees, customers and suppliers. What attracts these stakeholders? Yes, there’s money involved but there is also a sense of shared values, shared knowledge and purpose.

Because companies have a certain amount of control and power in these relationships, many managers and shareholders take them for granted. In interviews, it’s clear that the employees feel that they are fighting against a style of management that would devalue their contribution going forward. In one interview I heard on the radio yesterday, a 40-year veteran of the company said that it was time to stand up to the kind of short-term management encouraged by Wall St.

And that’s where the story stands today. The company has given employees until Monday to return to work. No matter what happens, it’s clear that an enormous amount of financial, tangible and intangible value has been lost. The intangibles are directly connected to the ability of the company to produce revenues and profits going forward.

In and a wonderful editorial by MIT Prof Thomas Kochan at WBUR Cognoscenti, he puts out the call:

It is time to teach the next generation of managers how to lead companies in ways that better balance and integrate the interests of all stakeholders — owners and executives, middle managers who might someday lead the organization, front line employees who are the face of the company to customers, and customers and communities that support the business

Short term profits and long term value are generated through the will of the stakeholders, including employees, customers, suppliers and the community. These relationships are the most significant asset any company owns today. And failure to steward these assets destroys profits and value. That's why smarter companies pay attention to their intangibles.

Would the majority shareholders have made a different decision if their Accountants were also ICountants and were showing them the full capital picture of Market Basket? Hard to say. But I share Dr. Kochan's view. There's a lot to learn here. And it’s time to use measures that matter.

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