The New York Times International - 30.07.2019

.. T HE NEW YORK TIMES INTERNATIONAL EDITION TUESDAY, JULY 30, 2019 | 7

Business

Jamie Gamble spent most of his career as a partner at the law firm Simpson Thacher & Bartlett, which counts virtually every major company in the United States — including Facebook, General Motors, Google and JPMorgan Chase — among its clients. A longtime lawyer for the insurance giant American International Group, Mr. Gamble worked alongside Richard Beattie, Simpson Thacher’s chairman at the time, to advise A.I.G. during the financial crisis of 2008 and in the years of litigation that followed. Mr. Gamble has had an epiphany since retiring nearly a decade ago that is so damning of his former life that it is likely to give his ex-partners a case of agita. He has concluded that corporate executives — the people who hired him and that his firm sought to protect — “are legally obligated to act like sociopaths.” He made that determination about five years ago when he started to work on a novel that recently inspired him to compose a provocative essay elucidat- ing what he calls, based on his first- hand experience, a “complex network of horribles” in corporate America. He recently shared a draft with a small number of colleagues, seeking their comments. “The corporate entity is obligated to care only about itself and to define what is good as what makes it more money,” he writes in the essay. “Pretty close to a textbook case of antisocial personality disorder. And corporate persons are the most powerful people in our world.” Mr. Gamble’s change of heart will not exactly come as a revelation to the increasingly vocal group of investors, politicians and even chief executives who are pushing companies to be more responsible and to focus on metrics like environmental sustainability and corporate governance, rather than on simply maximizing profits. But in the world of corporate law- yers — and the board governance experts among whom it is quietly getting attention — Mr. Gamble’s essay may be a watershed. He doesn’t blame his former clients, exactly. He blames the law. Perhaps most significantly, he has devised a provocative new governance rule that he believes will fix what ails corporate America, although he ac- knowledges in his essay that his idea “is likely to seem insane to senior corporate executives and boards of directors.” Still, he says, “To everyone else it’s likely to seem far too small a change to make a big difference.” Mr. Gamble’s proposal is this: that every company devise a set of ethical rules to be part of their bylaws, a move that could open them up to shareholder lawsuits, should they fail to stick to those rules. Companies, he suggests, should “adopt a binding set of ethical rules, approved by stockholders and address- ing the key ethical dimensions of corporate life” including:

THEIR“relationships with employees.” THEIR“relationships with the communi- ties in which they produce and sell.” THEIR“relationships with customers.” THEIR“effects on the environment.” AND THEIR“effects on future genera- tions.”

Once the rules are in place, he writes, “any shareholder could sue the board of directors for violating the ethical rules — just as any shareholder can today sue the board of directors for violating the maximize rule.” There is something rather elegant about Mr. Gamble’s concept. Today, corporate directors’ decisions are measured — at least from a legal perspective — on whether they maximize shareholder value. When they stray from doing that in the short term, they are protected by the “business judgment rule” if they can show that whatever decisions they have made are geared toward maximizing value in the long term. It may be an oversimpli- fication, but if they veer from seeking profits in the name of other stakeholders, shareholders may have a legal case against them. Nowhere in their responsibilities are they expected to consider any stake-

Reining in

boardroom

‘sociopaths’

Andrew Ross Sorkin

D EALBOOK

S ORKIN,PAG E 8

Aformer corporate lawyer wants all companies to devise ethical rules to be part of their bylaws.

In early 2017, a memo circulated inside Amazon that imagined an ambitious new grocery chain. The document was written like a news release, a common practice for ideas being weighed inside the company, with the title “Grocery Shopping for Everyone.” The new stores, the document envi- sioned, would have robust produce, fresh food and prepared meals sections. Nonperishable products, like paper towels or canned beans, would be stored on a separate floor, away from customers. Shoppers could order those items with an app, and while they shopped for fresh food, the other products would be brought down in time for checkout. There would also be an area to pick up groceries ordered online and to manage packages for delivery drivers. The faux news release, which has not previously been reported, cited a fic- tional grocery expert named Hal Apenyo, as in the chili pepper, declaring success in just six months. “The conver- sion from offline grocery shopping to mixed format shopping has been mas- sive,” the character was quoted as saying. A few months later, in June 2017, Ama- zon barged into the grocery business in a different way, by announcing a block- buster deal to buy Whole Foods for $13. billion. The purchase catapulted Ama- zon near the top of the $700 billion grocery industry and sank stocks of tradi- tional grocers on fears that they would be outmaneuvered into oblivion. The memo and other big grocery proposals stopped circulating inside Amazon, as Whole Foods demanded everyone’s attention. But two years later, Whole Foods seems not to have been the answer to Amazon’s grocery ambitions; it seems to have only whetted executives’ appetite. The acquisition has made clear the difficulties of selling fresh food inexpen- sively, either in a physical store or through delivery. Bananas are not the same as books. But the combination has also shown glimmers of success, particularly in delivery. And that has provided some fuel to Amazon executives’ efforts to add another food-selling option — one built from the ground up. The company is now quietly exploring an ambitious new chain, probably separate from Whole Foods, that is not far re- moved from the one outlined in the old memo. It would be built for in-store shopping, as well as pickup and delivery. As the discussions heated up this year, employees passed around a slightly up- dated version of the memo. The details of Amazon’s challenges and ambitions in the grocery business are based on interviews with more than 15 people who have worked at or with the company. Most spoke on the condi- tion of anonymity because they have nondisclosure agreements or were not authorized to speak publicly. “People really need to understand — Whole Foods is the beginning, it’s not the end,” said Brittain Ladd, who worked on Amazon’s grocery operations until 2017. “It’s not everything.” An Amazon spokeswoman, Rachel Hass, said the company “doesn’t com- ment on rumors or speculation.” Before it bought Whole Foods, Ama- zon was an afterthought as a grocer, well behind chains like Publix and ShopRite. The food it sold was limited to mostly

canned and dry goods, and its decade- long effort to sell perishables through a pickup and delivery program called Am- azonFresh never caught on. Whole Foods had struggles of its own. The company was fending off activist investors and had stopped expanding. While its base remained loyal, grocers like Krogers and Walmart had started selling many of the products that once set Whole Foods apart, like organic kale and kombucha. “Whole Foods was broken — we shouldn’t forget that, which is why they could buy it,” said Phil Lempert, a food marketing analyst. It was clear from the start that the two companies differed culturally. John Mackey, Whole Foods’ co-founder and longtime chief executive, had written a best seller about how companies should have a social conscience and consider all stakeholders in their decisions. Ama- zon corporate principles say good lead- ers “do not compromise for the sake of social cohesion.” But Amazon pushed changes in things that were once points of pride for the grocer. In an effort to shed Whole Foods’ “whole paycheck” reputation, Amazon bought more from national food distrib- utors and cut back on the local farms. United Natural Foods, a leading organic distributor, has increased its sales to Whole Foods by 38 percent over the past two years. And inside stores, employees stopped making signs on chalkboards by hand. Now, Whole Foods prints signs in a font that resembles handwriting but requires less labor. Other price-cutting efforts failed. The former head of a major produce company said Amazon had told him it wanted to sell marquee fresh items at low prices every day. The executive said he had to explain that certain products, like berries or lettuce, may be available all year, thanks to global supply chains,

but that they cost more in the off-season. Forcing flat, low prices would put too much risk on growers. Amazon executives, the person said, were caught off guard by the response. It didn’t seem as if they had fully appre- ciated how seasonality made predict- able pricing far harder than pricing of cereal or paper towels. The mixed results are reflected in prices at Whole Foods today. A standard basket of goods has fallen about 2.5 percent since the acquisition, according to Gordon Haskett Research Advisors. Amazon has said its Prime members, who get charged $119 for an annual sub- scription, have saved hundreds of mil- lions of dollars in discounts at Whole Foods. But over all, Whole Foods is still more expensive than other major grocers, particularly for items like meat. Amazon has also run into some trou- ble integrating Whole Foods into its delivery machine. Amazon never saw delivering cold

milk and fragile fruit to doorsteps as something for the masses, according to former employees. Instead, executives thought of it as an option for people who wanted high-quality foods and could af- ford a premium price to have fragile and fresh items arrive at their doorstep. In theory, that was a good fit for Whole Foods and its affluent shoppers. Within six months, Amazon began making two- hour deliveries from Whole Foods in four cities for Prime members. Six months later, that had expanded to more than two dozen cities. It’s now available in 90. But Whole Foods stores are not like Amazon’s delivery warehouses. Be- cause Whole Foods sells so many fresh items, its stores have smaller back-of- house areas than a standard supermarket. That means employees who pick products for online orders must gather more items from the same shelves as shoppers. They roam aisles with scan- ners in hand, asking associates on the

floor when they can’t find something. In addition, items in grocery stores are grouped together. Walk into a Whole Foods, and a picker for an online order might be standing there trying to see if the identical tubs of Parmesan she’s grabbed are grated or shaved. In a ware- house, similar items are kept far apart to avoid confusion. Still, deliveries have shown big poten- tial, making up almost all of Whole Foods’ growth. The promise of serving customers, but doing so more efficiently, has Ama- zon thinking again about aggressive in- vestment in groceries. Rather than drastically expand Whole Foods, several former employees said, Amazon is considering designing stores specifically with pickup and delivery in mind and with a smaller area dedicated to fresh shopping — as the old memo imagined. While it is unclear what hybrid design Amazon has in the works, a recent job posting for a store designer on “an excit- ing new team” was looking for someone interested in “creating multiple customer experiences under one roof.” And Amazon has been looking for spaces close to Whole Foods locations, indicating a hub-and-spoke approach in which one store serves as the ware- house and commissary for others. Ex- perts say it could take more than a decade to build a new chain. To be a major grocery player, Amazon would need a little more than 2, stores, the old memo estimated. That’s far fewer than the 5,000 run by Walmart, the country’s top grocery seller, but more than the roughly 1,200 operated by Publix. Whole Foods got Amazon about a quarter of the way there. A store designed with different shopping options, “Mr. Apenyo” predicted in the old memo, would be “highly scal- able.”

Amazon’s insatiable grocery appetite

SEATTLE

Buying Whole Foods seems to have encouraged the tech giant to pursue other ideas

BY KAREN WEISE

Above, a Whole Foods supermarket in New York. Below, in Austin, Tex., Whole Foods groceries being prepared for a delivery by Amazon, which bought the chain in 2017.

DOLLY FAIBYSHEV FOR THE NEW YORK TIMES

DREW ANTHONY SMITH FOR THE NEW YORK TIMES

A report last week on second-quarter gross domestic product showed that the United States economy had slowed last spring. The latest report came exactly 10 years after the Great Recession ended, making this officially the longest expan- sion in American history. So perhaps it’s no surprise that forecasters, investors and ordinary people are increasingly asking when the next downturn will arrive. Economists often say that “expan- sions don’t die of old age.” That is, recessions are like coin flips: Just because you get heads five times in a row doesn’t mean your next flip is more likely to come up tails. Still, another recession will come eventually. Fortunately, economic ex- pansions, unlike coin-flip streaks, usu- ally provide some hints about when they are nearing their end — if you know where to look. Below is a guide to some of the indicators that have historically done the best job of sounding the alarm. One caveat: Economists are notori- ously terrible at forecasting recessions, especially more than a few months in advance.

In fact, it’s possible (though unlikely) that a recession has already begun, and we just don’t know it yet. “Historically, the best that forecasters have been able to do consistently is rec- ognize that we’re in a recession once we’re in one,” said Tara Sinclair, an economist at George Washington University.

“The dream of an early warning system is still a dream that we’re working on.”

INDICATOR 1: UNEMPLOYMENT RATE

WHAT TO WATCH FOR:Rapid increases, even from a low level. WHAT IT’S SAYING:All clear.

DISCUSSION: The unemployment rate is near a 50-year low, but that isn’t what matters for recession forecasting. What matters is the change: When the unemployment rate rises quickly, a recession is almost certainly on its way or has already arrived. Even small increases are significant. Claudia Sahm, an economist at the Fed- eral Reserve, recently developed a rule of thumb that compares the current unemployment rate with its low point over the previous 12 months. (Both are measured using a three-month average, to smooth out short-term blips.) When that gap hits 0.3 percentage point, the risks of a recession are elevated. At half a percentage point, the downturn has probably already begun. Unemployment is considered a “lag- ging” indicator, and it is unlikely to be the first place to pick up on signs of trou- ble. But what it lacks in timeliness, it makes up for in reliability: The unemployment rate pretty much always spikes in a recession, and it rarely rises much without one. Which is why right now the unemployment rate should be a source of comfort: Not only is it low, it’s trending down. When that has been the case historically, there has been less than a one

in 10 chance of a recession within a year, according to a Brookings Institution analysis that worked off Ms. Sahm’s measure. RELATED INDICATORS: Initial claims for unemployment insurance; payroll job growth.

INDICATOR 2: THE YIELD CURVE

WHAT TO WATCH FOR:Interest rates on 10- year Treasury bonds falling below those on three-month bonds. (It has already happened.) WHAT IT’S SAYING:Storm warning.

DISCUSSION: The yield curve is less intu- itive than the unemployment rate, but it has historically been among the best predictors of recessions. The fundamentals are straightfor- ward: The curve essentially shows the difference between the interest rate on short-term and long-term government bonds. When long-term interest rates fall below short-term ones, the yield curve is said to have “inverted.” Think of the yield curve as a measure of how confident investors are in the economy. In normal times, they demand higher interest rates in return for tying up their money for longer periods. When

Some signs a recession will come. Sometime.

BY BEN CASSELMAN

SOURCE: BUREAU OF LABOR STATISTICS VIA BROOKINGS INSTITUTION THE NEW YORK TIMES RECESSION, PAGE 8

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The New York Times International - 30.07.2019

Business

Amazon’s insatiable grocery appetite

Some signs a recession will come. Sometime.

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