Aaron Feuerstein and Malden Mills: How Values Guided Actions in a Post-Crisis Situation
Malden Mills: A Burning Crisis On the night of December 11, 1995, Aaron Feuerstein was celebrating his 70th birthday, but would soon face major challenges, both personally and professionally. Late that night, Feuerstein raced from the festivities and socializing to the site of a horrible inferno, where he saw three of four nineteenth-century factory buildings burn to the ground. The buildings housed Malden Mills, a textile business that had been in the Feuerstein family for three generations. Located in Lawrence, Massachusetts, the company was founded by Feuerstein’s grandfather in 1906. The company’s most notable product at the time of the fi re was Polartec, an outerwear fabric manufactured from recycled plastic bottles. Companies like L.L. Bean, Patagonia, and Lands’ End used Polartec in their winter clothing lines. Michael Lavallee, one of many employees who rushed to the site, stood alongside Feuerstein, watching the buildings burn as 60-mile-per-hour winds fanned the flames. Lavallee lamented, “It’s done. It’s done. It’s gone.” Feuerstein saw it differently. “This is not the end,” he declared. The day after the fire, Feuerstein met with many of the company’s 3,000 employees in the local high school gymnasium. “They thought they knew what he was going to say, that he was going to take millions of dollars in insurance payments, retire, and close what was left of the factory . . . or he was going to move his operation to Mexico or Asia.” Feuerstein’s employees were in for a major surprise. The employees listened in stunned silence as Feuerstein “told them that he had every intention of rebuilding his factory right there in Lawrence, and what’s more, everyone would continue to receive full salary and benefi ts during construction.” When he announced his intentions, almost all the workers who were present cheered— and some of them wept. The only building that did not burn to the ground was a warehouse that contained the Polartec fi nishing operation. The warehouse also stored new equipment awaiting installation. Malden Mills’ employees set up the equipment in the warehouse and resumed production within 10 days. After a few weeks, output reached 230,000 yards per week, which was 100,000 more yards per week than before the fire. The increased production was attributed to the employees’ creativity in doing their jobs and their commitment to Feuerstein. Not all employees were back at work immediately, but no one was laid off. Feuerstein kept all 3,000 employees on the payroll “for 90 days at a cost of $1.5 million per week while the factories were being rebuilt.” Feuerstein received widespread acclaim for his decision to rebuild Malden Mills and his commitment to the company’s employees and their communities. Some people viewed Feuerstein as a “saint.” After all, didn’t he act in the best interests of the employees and the community rather than in his own self-interest? Aaron Feuerstein: A Man of Values Feuerstein says that his decision to rebuild was simply about “doing the right thing.” He believes that every decision has to be a good business decision as well as a good ethical decision. “We believe that when you make a business decision, it should not be based exclusively on how to make the bottom line look better so that the shareholders can have an immediate benefi t,” says Feuerstein. “It should be balanced. It should take into consideration what’s right and wrong, as well as profi t.” Feuerstein maintains that “doing the right thing adds to the profi tability of the corporation” in the long term. Feuerstein displayed three sets of interrelated behaviors and associated attitudes in the aftermath of the 1995 fi re that “may be judged as praiseworthy, post-crisis virtues.” These virtues are (a) leader sensitivity and responsiveness to the high levels of uncertainty faced by stakeholders, (b) deep-rooted feelings of support and value for employees, and (c) a commitment to rebuilding and renewal. Feuerstein’s management philosophy, which is based on early experiences with his family and on his religious beliefs, includes being sensitive to people, assuming responsibility for all organization members, and fulfi lling responsibilities to the community. When Feuerstein was growing up, he was frequently exposed to conversations between his father and grandfather about running Malden Mills. Business fairness, openness, loyalty, mutual trust, and cooperation were central to these conversations and to young Aaron’s development. Feuerstein relies on the Torah, the book of Jewish law, for guidance in his managerial decisions and actions. Drawing on the Torah, Feuerstein, a practitioner of Orthodox Judaism, observes, “You are not permitted to oppress the working man, because he’s poor and he’s needy, amongst your brethren and amongst the non-Jew in your community.” Feuerstein often quotes a Jewish proverb that says, “When all is moral chaos, this is the time to be a ‘mensch.’” Mensch is a Yiddish word that describes a righteous man, a man with a heart. Known as the “Mensch of Malden Mills,” Feuerstein is perceived as a businessman who cares more about his workers than about his fi nancial net worth. Feuerstein’s Critics While acknowledging the widespread acclaim Feuerstein received for his post–crisis actions, some observers point out contradictions in his managerial and leadership behavior. Katarzyna Moreno, writing in Forbes magazine, cites investigations by the Occupational Safety and Health Administration, the offi ce of the Massachusetts state fi re marshal, and Malden Mills’ insurance company that assert, “Malden repeatedly put its employees in harm’s way and should have known about unsafe working conditions—which may have contributed to the fire—but didn’t do enough to fix them and, instead, lobbied regulators to back off.” Moreover, some of Feuerstein’s critics say his actions were those of a fool. “They think he should have pocketed the insurance proceeds, closed the business, and walked away. Or else they think he should have grabbed the chance to move the company to some state or country with lower labor costs.” Thomas Teal, a writer for Fortune magazine, however, argued that Feuerstein is neither fool—nor saint. Rather, Teal maintains he is a businessman who “is as tough-minded as he is righteous.” In supporting this assertion, Teal notes that although Feuerstein believes in downsizing, he seeks “to keep growing fast enough to give new jobs to the people that technology displaces, to weed out unnecessary jobs ‘without crushing the spirit of the work force.’” Teal also cites Feuerstein’s belief that simply seeking lower-cost labor by moving the company out of Lawrence, Massachusetts, might compromise Malden Mills’ true competitive advantage—product quality. Pushed into Bankruptcy Protection In the years after rebuilding the factory, Malden Mills fell upon some diffi cult times. For the fi scal year ending October 31, 2001, operating income, projected at the beginning of the year to be $45 million, actually came in at $1.5 million. This resulted from warm weather that produced a drastic drop in sales of Polartec and “a tide of fl eece knockoffs that flooded the market.” Malden Mills became so mired in debt that it filed for Chapter 11 bankruptcy protection on November 29, 2001. At the time of the bankruptcy filing, the company’s annual interest on its debt was $19 million, its liabilities totaled $180 million, and its depreciated assets were valued at $190 million. As the 2001 fiscal year came to a close, Malden Mills’ creditors brought in Frank Budetti and David Orlofsky, turnaround specialists from Kroll Zolfo Cooper Inc., to help run Malden Mills on a day-to-day basis. Feuerstein’s role in running Malden Mills diminished signifi – cantly. GE Capital, Malden Mills’ major creditor and its largest shareholder, along with other creditors, took control of the company following its bankruptcy fi ling. When Malden Mills emerged from bankruptcy in the spring of 2003, Feuerstein retained his positions as president and chairman but only owned a minority stake—about 5%—in the company. Malden Mills’ creditors held the majority interest. Feuerstein was granted the option of buying back the company for $157 million within the following three years, or for $92 million if the cash could be raised by July 31, 2003. Feuerstein obtained commitments for a signifi cant portion of the $92 million repurchase price; some accounts indicate he raised all but about $10 million. The federal bankruptcy court extended the deadline to August 21, but Feuerstein missed it. In June 2004, Feuerstein relinquished his positions as president and chairman of Malden Mills. On July 26, 2004, the major creditors appointed Michael Spillane as president and chief executive of- fi cer. In late October 2004, Feuerstein made another bid to buy back Malden Mills; the company’s board of directors rejected the bid. James Harde, spokesman for Malden Mills’ creditor-installed management team, observed, “Feuerstein is guaranteed the right to buy back control of the company if he can come up with $125 million—an amount that has risen over time.” He added, “Mr. Feuerstein’s offer was nowhere near the contractual option price. If he were to make an offer at the option price, then the company would accept it.” As 2005 began, Feuerstein was still seeking to put together a repurchase deal. In reaction to the board’s rejection of the repurchase bid, Aaron’s son, Daniel Feuerstein, emphasized his father’s commitment to keeping manufacturing jobs in the United States rather than offshoring them, as he suspects will be done if the Feuerstein family does not regain control of Malden Mills. Regarding his father, Daniel Feuerstein says, “He doesn’t make false claims about community responsibility in one sentence and then surreptitiously offshore the jobs to the Pacifi c rim.” A Retrospective Look by a Man of Values In refl ecting on the rebuilding decision, Feuerstein asserted that if he had to do it over, he would still make the same decision. He observed that Malden Mills’ problems were “not a direct result of having acted fairly with workers and having treated them with respect.” Rather, the problems resulted from a lack of adequate insurance to rebuild the factory with state-of-the-art equipment that would have enabled the company to continue producing the best quality in the marketplace. To cover the insurance shortage, Malden Mills borrowed heavily. Feuerstein commented, “Had I replaced the factory exactly as it was before the fi re, I would have had enough insurance. But I wanted everything to be the absolute latest and best. As a result, we spent millions over what we were insured for.” Feuerstein says, “I was proud of the family business and I wanted to keep that alive, and I wanted that to survive. But I also felt the responsibility for all my employees, to take care of them, to give them jobs.” In pondering his own mortality, Feuerstein says that he wants to be remembered for not giving up and for trying to do the right thing.
Questions for Discussion
1. Evaluate Aaron Feuerstein’s decision to rebuild Malden Mills after the fire and to keep all employees on the payroll in terms of being a good business decision as well as an ethical decision. Explain your answer.
2. Describe Feuerstein as a “man of values.”
3. What guidance can Feuerstein’s values provide for your future behavior?
4. What challenges does seeking bankruptcy protection provide for a business owner who seems to care more about his workers than about his financial net worth?