In the mid-eighties, a European retail outfit called Makro, a kind of continental Costco, was looking for an executive to help run its U.S. business, and it called a Boston supermarket executive named Tom Stemberg, inviting him to tour a pilot store outside of Philadelphia. The store didn’t impress him much, but he noticed that the office-supply aisle was absolutely packed with shoppers. He told the Makro executives to abandon their model and concentrate solely on office supplies; when they declined, he decided to give it a try himself. Boston business is a small world, and when he went looking for a venture-capital partner, he eventually found his way to Mitt Romney and his new $37 million fund. “Most V.C.’s thought it was ridiculous,” Stemberg says. “Mitt was highly unusual in that he went to the research level to study it.”
The trouble with the idea, to Romney’s subordinates at Bain Capital, was that the small businesses Stemberg needed to draw weren’t accustomed to visiting a store for office supplies; they got them from separate vendors, some who delivered—one supplier for pens and paper, one for printer cartridges, and so on. “Some of us were worried that we needed to change consumer behavior,” recalls Robert F. White, one of the firm’s managing directors. Romney persisted. As members of the group surveyed more and more small businesses in suburban Massachusetts, they discovered that if you asked a small-business manager how much he spent on office supplies, he would give you a low estimate and tell you it wasn’t worth it to send someone in a car to buy them. But if you asked the bookkeepers, you got a far higher number, about five times as much—high enough, Romney and Stemberg thought, to get them to come to the store. The idea became Staples. Romney’s Bain Capital colleagues were soon helping to select a cheaper, more efficient computer system for the first store; they were helping stock the shelves themselves. As Staples succeeded, and began to expand, they looked at analytics for everything—the small-business population around a proposed store site, traffic flow—and gamed out exactly how big a customer would need to be before it demanded delivery. Romney sat on the Staples board for years, and his company made nearly seven times what it invested in the start-up.
“These Bain Capital guys were agents of the shareholder-value revolution.”
Romney and his team did this sort of thing again and again, sometimes in venture-capital deals but more often through buyouts—Brookstone, Domino’s, Sealy, Duane Reade. In their more complex deals, they couldn’t rely on their own team to seek out every inefficiency. They needed a more powerful lever, and they turned to the solution Jensen and Meckling had begun to explore a decade earlier: offering CEOs large equity stakes in the company in the form of stock or stock options. This was a relatively new idea, mostly untried in American business. At the same time, a board formed in part of Bain Capital appointees who had put up their own money in the deal would be more engaged in management details. “You have the total alignment of incentives of ownership, board, and management—everyone’s incentives are aligned around building shareholder value,” Dominik says. “It really is that simple.”
In 1986, Bain Capital bought a struggling division of Firestone that made truck wheels and rims and renamed it Accuride. Bain took a group of managers whose previous average income had been below $100,000 and gave them performance incentives. This type and degree of management compensation was also unusual, but here it led to startling results: According to an account written by a Bain & Company fellow, the managers quickly helped to reorganize two plants, consolidating operations—which meant, inevitably, the shedding of unproductive labor—and when the company grew in efficiency, these managers made $18 million in shared earnings. The equation was simple: The men who increased the worth of the corporation deserved a bigger and bigger percentage of its spoils. In less than two years, when Bain Capital sold the company, it had turned an initial $5 million investment into a $121 million return.
Even by the standards of the times, Bain Capital grew tremendously fast: from $37 million under management in 1984 to $500 million in 1994 (and $65 billion today). To other businesses, the buyout industry both presented a model for better profits and posed a take-over threat. “Having the private-equity guys out there disciplined other companies,” says Nick Bloom, a Stanford economist. Some techniques developed in the buyout laboratory spread. Productive workers and managers were rewarded, while unproductive ones were cut loose. Corporations realigned themselves to deliver more value to their shareholders, increasing dividend payments and stock buybacks. Within a decade, ordinary businesses were giving large stock and option packages to CEOs. Executive compensation soared. “These Bain Capital guys,” says Neil Fligstein, an economics-sociology professor at the University of California, Berkeley, “were agents of the shareholder value revolution.” By the mid-nineties, The Business Roundtable had changed its definition of the role of a company, winnowing a broad set of responsibilities down to a single one: increasing shareholder value.