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posted: Novemer 5, 2022
tl;dr: The company owners can burn the place to the ground if they want to...
The reaction to Elon Musk’s acquisition of Twitter, with some people predicting doom for the social media service, triggered this remembrance of when I truly learned the difference between being an employee and being an owner.
A common management practice is to get employees to “think like owners,” i.e. treat the business as though they owned it, their own money was at risk, and they received the profits from the business. This is supposed to foster better decisions that ultimately benefit the real owners of the business and the employees themselves. To encourage this mentality, companies will sometimes award employees, especially top management, a share of ownership in the business, in the form of either stock options or restricted stock grants, typically with a multi-year vesting period. Another method is to implement a profit-sharing program, which gives employees a share of the profits, encouraging both thriftiness in spending and revenue growth. I am a big fan of this practice: while the interests of employees and owners can never align 100%, in general everyone is better off with employees acting as owners and also receiving some of the rewards for doing so.
But what happens when the owners themselves do not do what is best for the business? I got to experience this situation firsthand, when I was a general manager at ADC Kentrox in the late 1990s.
I became a general manager after my boss, the president of ADC Kentrox, left in a political battle. Kentrox, which had previously been operated as a standalone business based in Portland, Oregon within ADC Telecommunications, was put under the management of the president of another division in the Dallas, Texas area. At the time, Kentrox was ADC’s second most profitable division, aside from ADC’s core business, and was also the corporation’s leader in developing products utilizing Asynchronous Transfer Mode (ATM) technology, which was the hot new thing at the time in the telecommunications industry.
I soon realized that this president had other ideas for Kentrox. Instead of allowing the company to continue to grow and expand its product line, he wanted to suck the company dry and divert the money to fund his own nascent ATM product line which was under development in the Dallas-area office. I knew that this would be very bad for the division I was, in theory, running as general manager, and bad for the people in the Portland office.
I can remember the setting for the phone call that triggered me, but not exactly what was said. I was alone in my office, which had a large interior window, with the door closed. The conversation was about something pretty drastic: I think I was told to prepare a list of people to be laid off. I slammed the phone down, threw something against the wall, and overturned a chair or two. I’m not exactly proud of what I did, although I did receive kudos later from people when they learned what had happened. No person was in harm’s way, because I was alone in my office. One or two people did see what happened, and word quickly spread.
I knew right then and there that ADC Kentrox was going to be wound down, and that the owners were effectively going to shutter the second most profitable division in the corporation. That’s when I realized that ownership has ultimate control, and it doesn’t matter what employees and managers think. Our role is to offer advice to the owners on how best to run the business. If the owners want to ignore that advice, and have a big bonfire and burn down the building and everything in it, that is their right as owners. They own the business, and can do whatever they want with it.
I left very soon after that phone call and founded a startup, Oresis Communications. ADC did wind down the Kentrox division, and profits were transferred to the Dallas-area division. The Dallas-area division was not successful with their big new ATM product line, and the president of that division left to also do a start-up company. Eventually Kentrox was sold off to a private equity firm, and years later I was part of the team at Westell that acquired Kentrox. In a sense Kentrox came full circle for me, although not much was left of it by then other than the name.
What is my prediction for the future of Twitter? Certainly Elon overpaid, mainly because he locked in the price before the recent downfall in the price of social media companies such as Meta/Facebook, which is down 73% from its all-time high. Twitter has definitely been a poorly run company, losing money in all but two of the years since 2010. It’s shocking to me that a social media service as popular as Twitter could lose so much money; clearly, they have not been doing a good job monetizing their service. The payroll seems bloated, and the golden parachutes seem excessive. Certainly there’s a lot of fat that can be cut.
I don’t worry much about Twitter losing a large portion of its audience, which is its single largest asset: the network effect works to the advantage of incumbents such as Twitter. If Elon can improve the bottom line by spending money more judiciously, grow revenue by inventing new sources of revenue, and there’s a bounce back in the stock market for social media companies, I do think he can ultimately make money, at least in nominal terms. He’ll probably bring in some new minority owners over time as he makes progress, to reduce his exposure. This is not a situation of an owner running a profitable company into the ground, as was done at ADC Kentrox, but rather the reverse: taking an unprofitable company and trying to make it sustainably profitable.