Who Killed Hostess?

It wasn’t labor.

But at least the executives believed in shared sacrifice to save the company, right?

That overlooks the years of union givebacks and management bad faith. Example: Just before declaring bankruptcy for the second time in eight years Jan. 11, Hostess trebled the compensation of then-Chief Executive Brian Driscoll and raised other executives’ pay up to twofold. At the same time, the company was demanding lower wages from workers and stiffing employee pension funds of $8 million a month in payment obligations.

Shared sacrifice in the Althouse sense, at least.

75 comments on this post.
  1. James E. Powell:

    The belief that union workers force businesses to close is widely held and deeply embedded. But I can’t think of a single, notable example.

    Is it like the family farms sold to pay estate taxes?

  2. tonycpsu:

    I’m wondering if this is just market conditions being bad for the snack cake sector as a whole. As a born and raised Philadelphian I loves me some Tastykakes, but they were also in financial trouble a couple years back until a Mexican company scooped them up on the cheap.

    It also seems like every rinky-dink grocery store has their own bakery with a wide assortment of fresh baked goods, much more than I remember from my time working at a supermarket.

    Once the executives are looting, it’s probably too late to bother paying the workers what they’re asking for. Perhaps the first sign of trouble in any company isn’t a decline in sales, but a suspicious jump in executive pay.

  3. ironic irony:

    But but but!! Class warfare is perpetrated only by the lower classes on the upper class! Right? Right?!

  4. LeeEsq:

    I blame the foodies and their erstwhile allies, the hipsters, with their demands for quality ingredients and recipes.

  5. Manju:

    Yes! A NeoTwinkie-Defense for my Plutocrat friends. Only this time, no Milk involved.

  6. Malaclypse:

    Example: Just before declaring bankruptcy for the second time in eight years Jan. 11, Hostess trebled the compensation of then-Chief Executive Brian Driscoll

    And the current CEO was hired in February.

    Curiously, nobody I know has ever gotten a 200% raise, let alone a 200% raise days before getting fired.

  7. Anderson:

    Don’t forget Michelle Obama.

  8. BigHank53:

    Remind me again: what’s the definition of the word “looter”?

  9. c u n d gulag:

    I wonder if they teach this at business schools?

    ‘Disaster Capitalism IV – Master’s Level:”
    In this final series, you’ll learn how to be hired as CEO’s, and for other Upper-upper Management positions, at companies that are just about to go under, loot redirect pension funds, and get massive salary increases and bonuses, lower employee pay, and bust unions, before the shit hits the fan and subpeona’s start to fly company has to shut down operations, declare bunkruptcy, and sell off any remaining assetts (of which you get a percentage).
    Repeat.

  10. bradP:

    Two things:

    1. The raise wasn’t so much of a raise. It was a switch away from performance based incentives to a base salary in an attempt to get around bankruptcy laws. It was a result of the bankruptcy not a cause.

    2. Its product distribution lines were hampered by a union, even if the baker’s union wasn’t in any way responsible. The baker’s brinkmanship can be looked at as pushing out owners that were obligated to the teamsters that handled trucking.

  11. snarkout:

    He was fired basically because of this — the Fortune article I mention upthread said that the union officials who were negotiating to Hostess (rightly) flipped their lid about it.

  12. snarkout:

    There was a good article in Fortune from immediately before the second Chapter 11 filing — a good part of it is consolidation, as something like eight national bakery bands have been reduced to (I believe) three — Grupo Bimbo, the owner of Thomas’s and Entenmann’s, recently bought Sarah Lee’s bakery business, e.g. This leads to some issues with Hostess’s participation in multi-employer pensions, where Hostess’s pension burden has gone up as other companies have folded, and a general sense in the industry that they have too many bakeries.

    http://management.fortune.cnn.com/2012/07/26/hostess-twinkies-bankrupt/

  13. David Mathias:

    That overlooks the years of union givebacks and management bad faith. Example: Just before declaring bankruptcy for the second time in eight years Jan. 11, Hostess trebled the compensation of then-Chief Executive Brian Driscoll and raised other executives’ pay up to twofold. At the same time, the company was demanding lower wages from workers and stiffing employee pension funds of $8 million a month in payment obligations.

    The executives probably just decided that it was not worth it for them to make the improvements that the linked article points out that they could have made, for whatever reasons.
    A less plausible explanation is that the executives have been acting out the plot of Atlas Shrugged, which would be more ideological and moralistic than deciding that an investment is not worthwhile.

  14. Malaclypse:

    It was a switch away from performance based incentives to a base salary in an attempt to get around bankruptcy laws.

    Because clearly, given bankruptcy, the dude deserved those performance bonuses. So this was just making him whole, as it were.

  15. Observer:

    Oh, Brad….

    Get on board. You’re not being a team player.

  16. bradP:

    Poor management was the reason behind Hostess’ failing. I was just providing a little detail.

  17. J.W. Hamner:

    Yeah, Yglesias made the same mistake about this story. While it’s certainly true that Driscoll tried to triple his compensation right as the company was going into bankruptcy… the union was able to stop him and force him out. Or at least that’s what I gather from the Fortune article.

  18. witless chum:

    Sara Lee apparently owned Egevist, makers of the best boxed donuts in existence. I’ve only seen them in stores in the U.P. of Michigan, we don’t seem to get them downstate.

  19. BigHank53:

    You’ll note that management demands were not the simplification and streamlining of distribution, but rather savage wage and pension cuts.

  20. DrDick:

    It is exactly like that. Also unicorns, leprechauns, the confidence fairy, and bond vigilantes.

  21. DrDick:

    A number of snack food companies have effectively responded to the increased health consciousness of consumers, modifying their recipes and coming out with at least apparently healthier alternative lines. Hostess has failed to adapt. Again this is a failure of management.

  22. DrDick:

    I think that this is another example of the law of competitive exclusion in action. There is a natural trend in unregulated markets, much as as in natural ecologies, toward fewer, larger companies.

  23. DrDick:

    Don’t go confusing Brad with facts and logic, it makes his brain hurt.

  24. Malaclypse:

    To say nothing of the virtues of “get[ting] around bankruptcy laws.”

  25. bradP:

    Can’t avoid taking a shot, even when you feel like calling snarky sarcasm dealing with what management deserved “facts and logic”.

    Just to make this completely clear:

    I stated two details about the situation without comment or opinion. Mal then replied with a sarcastic comment implying that management didn’t deserve their compensation.

  26. bradP:

    I never implied getting around bankruptcy laws was virtuous.

  27. Malaclypse:

    I replied that a CEO that managed to drive a long-lived company into bankruptcy did not actually earn performance incentives, in any reasonable universe. You really want to argue that he did?

  28. DrDick:

    Which was my take on the exchange and the reason for my comment.

  29. Left_Wing_Fox:

    Bimbo seems to be doing well. The article speculates that Bimbo is the likely buyer of Hostess brands.

    That said, “Bimbo Hostess” is probably a marketing faux pas.

  30. JKTHs:

    I blame the foodies and their erstwhile allies, the hipsters, with their demands for quality ingredients and recipes.

    I think you mean the pretense that quality ingredients are used. Hostess could have survived if they had just made “Artisan Twinkies” and marked up the price 50%.

  31. bradP:

    You really want to argue that he did?

    No, but I’m also not gonna treat what I think Driscoll deserved as a fact.

  32. Malaclypse:

    Brad, if you do not think that stating that “The raise wasn’t so much of a raise. It was a switch away from performance based incentives to a base salary in an attempt to get around bankruptcy laws.” is, in fact, taking a position on what Driscoll deserved, then I just don’t know what to say.

  33. Kurzleg:

    It’s nice to have a ready-made scapegoat when you screw the pooch management-wise.

  34. bradP:

    I replied that a CEO that managed to drive a long-lived company into bankruptcy did not actually earn performance incentives, in any reasonable universe.

    I should also point out that Driscoll actually seemed to be an extremely qualified candidate for the job, he was Hostess’s sixth(!) CEO in a decade, likely jumped ship when he realized that restructuring Hostess was a fool’s errand, and was promptly hired by Diamond Foods with this compensation:

    In connection with his appointment as Diamond’s President and Chief Executive Officer, Diamond entered into an employment agreement with Mr. Driscoll, with an initial term of three years, pursuant to which it agreed to pay him a base salary of $825,000. Mr. Driscoll will be eligible to receive an annual cash bonus with a target amount equal to 100% of his base salary based on performance objectives being satisfied, with 100% of his target bonus, pro-rated for the number of days employed by Diamond, for fiscal 2012 guaranteed and 75% of his target bonus for fiscal 2013 guaranteed. Starting in fiscal 2013 a maximum bonus of up to 200% of the target bonus could be paid based on performance objectives being satisfied. Diamond also agreed to pay Mr. Driscoll a relocation payment of $250,000, and to grant Mr. Driscoll a nonqualified stock option and a restricted stock award on the third business day after the date on which Diamond files with the SEC its restated financial statements for fiscal 2010 and fiscal 2011 (“Grant Date”). The stock option will be granted at an exercise price equal to the closing price of Diamond common stock on The NASDAQ Stock Market on the Grant Date and will be for a number of shares with an aggregate value of $1,500,000 divided by the fair value of Diamond common stock using the assumptions of ASC 718 and the closing price of Diamond common stock on the Grant Date. The restricted stock award will be granted on the Grant Date and will be for a number of shares equal to $1,500,000 divided by the closing price of Diamond common stock on The NASDAQ Stock Market on the Grant Date. Both the stock option and the restricted stock award will vest over four years. The option will vest 25% on the one-year anniversary of the date Mr. Driscoll commences employment with Diamond and the balance in equal quarterly installments thereafter until fully vested. The restricted stock award will vest 25% on each one-year anniversary of the date Mr. Driscoll commenced employment with Diamond. Additionally, in Fall of 2012, Diamond will grant Mr. Driscoll a long-term incentive award equal to an aggregate $2,000,000, comprised of cash, restricted stock, options, or other types of equity awards, or any combination of the foregoing, in the form determined by the Compensation Committee, in its sole discretion.

  35. bradP:

    What? Really?

    Where did I make the slightest comment towards what Driscoll deserved?

    I’m not even sure what he was offered, asked, for or got from Hostess cause its all a mess of court applications and suits.

  36. Lee:

    I was being tounge in cheeck yes but your idea of artisan twinkies is fascinating in a unplesant sort of way.

  37. bradP:

    Suppose I had said:

    “The raise wasn’t so much of a raise. It was a switch away from performance based incentives to a base salary in an attempt to get around bankruptcy laws. But he certainly didn’t deserve his compensation”

    Does that contradict itself?

  38. Lee:

    This is actually very funny.

  39. Malaclypse:

    Does that contradict itself?

    Yes.

    You said, and I quote, “the raise wasn’t so much of a raise.” Algebraically, Bonus + Old Base = New Base. So either New Base is simply an increase, which you ruled out, or New Base is a way to give him performance bonuses. While in bankruptcy. So yes, the moment you say that this was not a raise, you took a position on the merits of his performance bonuses.

  40. Left_Wing_Fox:

    Yay, another CEO fails upwards.

  41. brewmn:

    You did, Brad. You did.

  42. bradP:

    You said, and I quote, “the raise wasn’t so much of a raise.” Algebraically, Bonus + Old Base = New Base. So either New Base is simply an increase, which you ruled out, or New Base is a way to give him performance bonuses. While in bankruptcy. So yes, the moment you say that this was not a raise, you took a position on the merits of his performance bonuses.

    What makes you think he wouldn’t have gotten the performance bonuses otherwise?

    You should realize your argument has a major flaw when you say I “took a position on the merits of his performance bonuses” when we haven’t even come close to describing what those performance bonuses were.

    I am betting that Driscoll’s – as well as most CEOs with similar deals – performance bonuses were about as sure a deal as could be imagined.

    There is a very good chance that compensation after the restructuring was extremely consistent with compensation before, just different in accounting and method of payout.

  43. JKTHs:

    Job-killing tax hikes/regulations/unions/environmentalists. Take your pick!

  44. bradP:

    Prove it, brewmn

  45. Malaclypse:

    I am betting that Driscoll’s – as well as most CEOs with similar deals – performance bonuses were about as sure a deal as could be imagined.

    Once again, you are taking a position without admitting that this is a position.

  46. Cody:

    Prime example of class warfare.

    Dirty unions!

  47. bradP:

    Yay, another CEO fails upwards.

    Driscoll didn’t fail in the corporate management sense of the word.

    He went to Hostess, continued his predecessors path of taking on too much debt in attempts to restructure.

    Hostess then could not afford to pay him what he wanted, so he went to another company that would.

    Ironically, Diamond Foods is going through a painful restructuring with government investigations into wrongdoing as well.

  48. Cody:

    I’m 99% confident Hostess went out of business because you people elected Obama.

    If Romney had been elected, they would have been so much confidence in the market no company would ever go bankrupt again.

  49. Malaclypse:

    Ironically

    You keep using that word. I do not think it means what you think it means.

  50. SatanicPanic:

    The makers of PBR don’t seem to be suffering

  51. bradP:

    Once again, you are taking a position without admitting that this is a position.

    I was implying that the performance objectives were a joke that allowed the company to account for Driscoll’s compensation in their preferred manner.

    As clearly as possible: Driscoll would have achieved his performance objectives because they were likely almost impossible not to achieve, not because Driscoll performed well.

  52. dfinc:

    To be fair, i know people who will co-own a farm when a parent/grandparent pass away. Because the operating overhead is so large for farm work and they don’t have too much savings, if they want to keep the farm, they’d have to either take out a loan or incorporate it. It’s just not horribly sympathetic since the alternative is for them to sell the farm and equipment for a couple of million dollars and do something else as millionaires.

  53. bradP:

    You keep using that word. I do not think it means what you think it means.

    I thought it was ironic that a CEO that just went through an extremely messy restructuring that ultimately got his name publicly dragged through the mud would choose to work for a company going through a messy restructuring.

  54. NonyNony:

    Or a more plausible explanation is that the executives actually gave fuck-all for the health of the company and were concerned only with maximizing their own bottom line in every way possible while sucking as much money out of the company as quickly as possible.

    The incentives for corporate pirates to swoop in and actually save a failing company are terrible – there are much stronger incentives for them to ride it into the grave and extract as much lucre out as possible while they do it. That is exactly what the Hostess situation looks like (and it’s all perfectly legal – which is the worst thing about it).

  55. Alex:

    Union workers can force businesses to close. That is the goal of a strike, which sometimes is successful. Lousy union leadership, just like lousy managment, can damage a business badly enough to make it unviable.

    But trebling executive salaries before asking for union employees to make concessions is a great big fuck you and anyone with a whit of common sense or any experience in labor negotiation at all knows this. One of the first responses when you ask a union for wage concessions is “what about executive pay?”

    Bumping front office pay before asking for hourly pay cuts is either sheer incompetence or an attempt to undermine the union. Either way, it shows a serious lack of acumen in labor relations.

  56. Erik Loomis:

    Is there any actual evidence that a labor union has intended to shut down a business permanently? Is there any actual evidence that a labor union has damaged a business badly enough to make it unviable? I’m talking concrete examples here.

  57. tonycpsu:

    Ironically, pedantry regarding misuse of the word “ironic” has become more bothersome than actual misuse of the word “ironic.”

    It’s like a black fly in your exterminator’s chardonnay.

  58. Holden Pattern:

    Driscoll didn’t fail in the corporate management sense of the word.

    This actually states a key structural problem in our society.

  59. Holden Pattern:

    It helps if you think of the executives as real-life versions of Bialystock and Bloom.

  60. DrDick:

    There is currently a $5 million dollar exemption in the estate tax, which drops to $1 million next year. There is also a special farm exemption. In consequence, only small minority of farms each year are affected by it. That includes less than 5% of commercial farms (revenues in excess of $250,000/year).

  61. DrDick:

    Driscoll didn’t fail in the corporate management sense of the word.

    He was in charge when the company was forced into bankruptcy. That is pretty much the definition of failure in the corporate management sense.

  62. Johnny Sack:

    Even after three mind-warping years as a law student, I still couldn’t tell you why they call it treble damages instead of just plain triple. I submit that many law professors: want to be called professor but don’t want to get an actual research degree like a Ph.D. (Though there are some PhDs on law faculties, to be fair), and think peer review is overrated, and in their insecurity they perpetuate old, stupid, outdated terms coined by the crotchety old white fucks hundreds of years ago.

  63. N__B:

    Or genius. We are talking about the American public.

  64. JKTHs:

    Job creators would have been so confident they would have bought Twinkies by the truckload and put them to work.

  65. Manju:

    Thanks.

    But “Who Killed Hostess” has “Twinkie Defense” written all over it. So credit to Scott, since the most critical part of an alleyoop is the original pass.

    He’s Ray Allen.

  66. Sherm:

    But better than “Bimbo Hostess Sara Lee.”

  67. Sherm:

    Good point, but wrong target. Treble damages are awarded by statute. Statutes are not written by law professors, but by legislators.

  68. James E. Powell:

    Not to mention a president turning the country into a socialist police state.

  69. James E. Powell:

    And consider too, that if the next similar statute enacted provides for “triple damages” instead of “treble damages” there will be lawyers who will argue that the legislature must have meant something different or it would have said “treble damages.”

  70. rea:

    They are, of course, called “treble damages” due to the high pitched screams that follow when they are awarded

  71. Johnny Sack:

    Why can’t I respond to a thread on my phone. You guys/gals are right. I guess what I was really getting at was professors love to say “term of art”. Gotta love their love of technical terms.

    Re the legislators-I thought it was just some common law thing that became codified but whatever. And couldn’t you do a restyling like with the FRE, saying that treble = triple, we just want the layperson and young lawyer to not roll their eyes.

  72. Hogan:

    Goddamn hipsters and their irony.

  73. brewmn:

    OK, you did not imply that it was “virtuous.” You implied that it was “justified.” And, if you are incapable of understanding the plain implications of the things that you write, you should probably just shut up.

  74. RedSquareBear:

    Will you please stop appealing to our bass instincts with your ceaseless puns?

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