An Unusual Perspective — Leader Who Has Served On Both United And PMA Boards Offers Insights On Merger Failure: HARD TO BELIEVE IT REALLY CAME DOWN TO CEO
Jim Prevor’s Perishable Pundit, July 21, 2012
This letter, in response to our piece, The United/PMA Fiasco: THE SPIN IS JUST HALF THE STORY — Lessons Learned: Open Up To Industry Input And Focus On Big Things First, came from a member of a rarified fraternity — those people who have served on the Board of Directors of both United and PMA:
We followed up this letter by asking our correspondent to define what the issue is and received this response:
We inquired as to why we couldn’t simply let capitalism determine which associations exist and which do not.
This is a most thoughtful letter from a most engaged industry participant. He raises four important questions that explain a great deal:
1) Did PMA want a merger to happen? In other words, was this just an acquisition to them and did they even want that to happen?
This is really the nub of the issue, and we think the answer is unambiguous. PMA saw no strategic purpose, for PMA as an association, to merge with or acquire United.
PMA has a successful business model, so was not looking to acquire one. It saw no likelihood of significant increase in membership should United disappear. There is no distinct sector of the industry that PMA would enter as a result of acquiring or merging with United. It didn’t seem that Fresh Summit would get larger. There are no foreign countries where United has a big membership base where PMA is not represented. United does not have large cash reserves for PMA to get its hands on. And United has no large surplus cash flows that would enable PMA to fulfill its mission better.
Areas where United is focused, say government lobbying, are contentious and expensive and not even obviously a focus for a global trade association. So “acquiring” this function seems unlikely to have been a big win.
So there was no strategic impetus for either a merger or an acquisition. And doubtless this, in the end, explains one reason why PMA didn’t make additional compromises on the CEO issue.
PMA’s board saw no real upside for PMA as an organization to do this and, of course, the downside was substantial. Nobody could be certain that the successful business model that PMA possesses would have survived the merger — maybe all those retailers and foodservice operators that have defined PMA would find the new association boring and not be as engaged. We can’t know.
So with substantial downside risk and no association upside, the directors of PMA were not highly motivated to make this happen.
Still, out of a desire to serve the greater industry — and not just the interests of PMA as an association — and to be responsive to those members who saw a big upside to one association, PMA went through the process. It is fair to say that every compromise was perceived by many on PMA’s board as for naught. If there is no upside in a deal, why compromise to get a deal? Still a lot of compromises were made.
To our way of thinking, the more interesting question is why United wouldn’t bend on this issue? For United, there were lots of strategic reasons to want to combine with PMA, most notably this would be a marriage where PMA brought a big dowry. United, even more so after severance was accounted for, brought much, much less to the table.
And, after all, the new board of directors would have had total authority to fire Bryan at any time if he was such a terrible choice and didn’t work out — so the merger would cost a little more in additional severance. Big deal.
As our correspondent implies, if the deal really fell apart over the CEO issue, that would speak poorly as to the leadership. In reality, it is clear that PMA’s board did not see an upside sufficient to take a risk on an unknown person as CEO, and United’s board did not see the upside as so substantial that it was worth swallowing its pride on the issue of the CEO.
It makes one think that the many people who see great value in there being only one trade association are not the kind of association partisans who volunteer for board service on specific associations.
2) Should there be a vetting process as there was when Bryan was selected to succeed Bob Carey as Chief Executive of PMA?
There is no argument that there should not be a coronation and we don’t think anyone at PMA actually argued this. The agreement made at the start of the process was not that Bryan should be CEO; it is that a CEO would be identified in the merger agreement. There was a search committee set up and both Tom and Bryan had to submit to many interviews.
Despite the committee being charged with finding the CEO whose expertise best met the four key components the new association was supposed to express, and despite committee members pledging to be objective, in the end — and we would say quite predictably – all the United members on the committee said that Tom was best and all the PMA members voted for Bryan.
So there was a vetting process. The interesting question is why the leadership allowed it to be set up this way — where a stalemate was possible.
We would argue that the committee’s choice should not have been limited to Tom and Bryan. It should have been able to look at anyone. Very possibly, the best solution would have been to start fresh. You can try to retain Bryan and Tom as consultants, but it is not insane to think a new association should have new leadership.
What is insane is setting up a committee with an even number of people. You want to get a decision made, so you have to set up a process that will result in a decision. We can discuss who should be added to the committee, after PMA and United board people, in our piece the other day, we suggested adding a university professor with expertise in trade association management.
But there are a lot of other alternatives. One could add Ed McLaughlin from Cornell. He has worked with and done projects for both PMA and United for decades. This Pundit could be on the committee; we’ve known both Bryan and Tom for decades, worked with both on many issues, know their strengths and weaknesses. Put two people from the United board, two people from the PMA board, Ed and the Pundit and have Ed and the Pundit choose a neutral chairman who doesn’t know any of us, such as a trade association management expert or a consultant from McKinsey, and the seven of us would come to a conclusion.
In fact, the dynamic of adding people to the committee without vested interests would probably have led some of the PMA and United board members to abandon the party line.
The vetting process was set up in a way where it was highly predictable it would fail. This tells us that neither side saw the kind of upside to a deal whereby it wanted to make sure that a decision was reached.
Another key issue is timing. By law, no board could pass a binding resolution to hire a new CEO until it was constituted. The whole vetting process Bryan underwent years ago happened while Bob Carey was firmly in control at PMA. To set up this new association and then undergo a process is quite risky — maybe the board will reject all the candidates and want to start over. What assures that the new board will come to a decision? If we were going to do a business partnership, and we were going to put millions of dollars into it, we wouldn’t think ourselves crazy if we said our participation was contingent on finding a satisfactory CEO.
3) With all the issues settled except the CEO, how could the deal be allowed to fail?
We see four answers:
A) There are a lot of objections to doing a deal that no agreement can overcome. For example, one PMA board member has for a year-and-a-half been telling us he is opposed to the whole thing because he thinks a merger will be highly disruptive and distracting to the important work he believes PMA is doing.
B) The compromises may have been sufficient to get a handshake, but they didn’t really resolve the fundamental issues. For example, there is a group that clearly believes a majority of the board of directors should be from the buying community because they believe that a buyer-driven community will both most likely help the industry because it will drive solutions through the supply chain and because the buyer presence will make the association successful because the buyer presence will attract attendees and members.
There is another contingent that says the association should be driven by production agriculture and its core purpose is to help fruit and vegetable producers. You can sit down to create board allocations and if everyone wants a deal, you can make a deal – but you are just papering over this kind of fundamental difference.
C) The upside wasn’t there. All these compromises can produce an agreement, but if the whole process isn’t driven by a conviction that achieving the deal has a big upside, then compromise after compromise adds up, and people start to wonder what is the point of the compromise? They start to look for reasons to walk away.
D) The leadership is the key question. In choosing between Bryan and Tom, few people were choosing between total strangers. There is history… maybe someone wanted to advance in one association or another and felt the CEO held them back, so fled to the other association. That can be dangerous in trying to get an agreement.
If a headhunter brought in two totally new CEO candidates, they would surely have human flaws, but nobody on the board would know them. There would be less emotion. This particular letter-writer has served on both the PMA and United boards, so he has seen both Bryan and Tom up close and personal — few board members have that experience.
What if you are a PMA board member and — correctly or incorrectly — do not believe Tom Stenzel could run the new association? What if you believe his skill set is great for a Washington DC-based lobbying group, but would be a total failure for a global trade association? How do you justify turning over millions of dollars to achieve an abstractly beneficial goal — one trade association — when you think the concrete result will be blowing up of the business model and losing the money?
We should emphasize that we are not saying any of these things about Tom. He has, we believe, done a terrific job with United. We didn’t interview him to see what his plans for the combined association would be, so we don’t know — but he might well have done a great job running it. The question is how should a board member vote who thought differently? Is it incoherent to say that, with the proper leadership, we can make this work? With the wrong leadership, it could be a disaster. We are not prepared to say that.
4) What do we, as an industry want to accomplish with a single trade association, and how will we pay for it?
It is embarrassing if the leadership made the decision to form one association and then allowed the CEO issue to interfere.
We would agree with asking the above question as a rational approach to the issue, but we are reminded of something Ronald Reagan used to do that annoyed us: He loved to quote Thomas Paine, saying, “We have it in our power to begin the world over again.” It is a beautiful thought, but not true, and certainly not much of a conservative idea. There is something enormously arrogant about thinking we are smart enough to whip out a clean sheet of paper and wipe out everything previous generations have built and start anew.
We have spoken to a fair percentage of the players, and we are not convinced that there was a strong consensus that one association would provide an enormous upside for the industry. And it is that consensus that typically provides the surplus that enables us to smooth over the differences.
So if all the board members really thought that our government-relations efforts would become so much more effective with one association, that regulatory costs for the industry would drop by a hundred million dollars a year, then it is no big deal to pension off both Bryan and Tom and bring in some unifying neutral party — and, in fact, that is what would have happened if such a consensus existed. But it doesn’t.
In fact, we could do it right now. The suggestion we made about two people from PMA, two people from United, Ed McLaughlin, the Pundit and an independent professor or consultant from, say, Harvard or McKinsey chosen by Ed and the Pundit … we could have that set up in two days and we would have a decision in 30 days max.
Is there a consensus that the upside of getting a deal is sufficient to warrant trying to revive the deal? We have our doubts.
Our letter-writer was very flattering and asked us not to soft-pedal our analysis. So here it goes: If the boards of both associations strongly believe that there is a substantial upside to the industry in having one national trade association, and if, in fact, all the prerequisites of that have been fully agreed to and the only obstacle is who should be the CEO, then it would be an enormous failure of leadership to allow that one issue to block a merger.
But actions speak louder than words. Forget PMA for a moment as we agree with our letter-writer that PMA’s interest has always been tepid — yet PMA came to an agreement. United could have had its merger exactly in accordance with that agreement, by either acquiescing to Bryan as the first CEO or by offering an acceptable methodology for selecting a CEO right now.
That United chose to walk rather than accept Bryan or come up with an acceptable alternative tells us that even on the United side, the motivation was not all that strong. If the Gates Foundation had studied the produce industry and offered a hundred million dollars in order to incent both associations to merge for greater efficiency, the boards would have merged. They would have selected Bryan or Tom or someone else. They would have seen the upside and gotten past any concerns.
The real problem here is that not enough people see the upsides as substantial enough to compromise enough to actually get there.
Many thanks to our letter-writer for sharing his insights.