What Mitt Romney Learned From Killing Jobs

A capitalist who knows how to exploit weak companies also knows how to make them strong.

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Let's say Mitt Romney's toughest critics are right.

While running Bain Capital from 1984 to 1999, Romney clearly spearheaded investments in a number of companies that earned handsome returns for wealthy clients, but left the companies themselves damaged or defunct. Romney can legitimately claim to have helped some companies grow from small startups into powerhouses, but other Bain deals cost many workers their jobs. "His mission: To reap massive rewards for himself and his investors," the narrator of a new anti-Romney documentary darkly declares, while bemoaning "the thousands of American workers he left in the dust."

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Romney now claims, of course, that his deep involvement in the private sector gives him better credentials for energizing a stalled economy than President Obama has—including the kind of know-how needed to create jobs. But as Romney comes closer to locking up the GOP presidential nomination, his private-sector record has become an irresistible target to rivals in both parties. Republican foe Newt Gingrich—whose supporters produced the grim Romney-bashing documentary—says Romney "looted companies and left people unemployed." Democrats in Congress, cleverly tweaking a Republican buzzphrase, call Romney a "job cremator."

The logic behind such attacks is that somebody who killed jobs in the private sector has no business running the government at a time when America desperately needs more jobs. But the opposite might be true, and Romney's experience as a cutthroat capitalist may have generated exactly the kind of insight needed to stimulate hiring and make American businesses more competitive. If Romney's critics are right, and he really was a job-killing opportunist, here are three vital things those corporate raids would have taught him.

What makes companies vulnerable. Bain Capital practiced two main types of investing when Romney ran it: venture capital, in which financial firms provide funding to young, growing companies, and private-equity buyouts, in which investing firms buy an established but struggling company, hoping to turn it around and sell it for a handsome profit. Bain's venture-capital investments produced some notable breakouts, such as Staples and Sports Authority. The private-equity deals are more controversial. A Wall Street Journal analysis of 77 Bain private-equity deals, for instance, found that in 22 percent of the cases, the bought-out company folded or reorganized through bankruptcy following Bain's involvement.

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Few would complain if Bain had lost its investments in those companies, alongside workers who lost their jobs. But private-equity deals are usually structured as a win-win for the buyers, because they extract fees from the company's cash flow that end up covering much or all of their initial investment. So even in Bain deals where the target company ultimately failed, Bain and its investors usually recouped their up-front costs, if not more.

Private-equity deals, however, aren't designed merely to raid the company, since investors earn more still if the company flourishes and they're able to sell it for multiples of what they paid. The catch is that most buyout targets are damaged merchandise when private-equity firms swoop in. Such investors rarely buy healthy firms, because the price is too high and the upside gain is limited. Instead, they buy weak firms hamstrung by myopic management, strategic missteps, or intense competitive pressure, then try to fix the problems and capitalize on their investment. If private-equity buyers didn't materialize, many of the target companies would probably fail anyway, a la Blockbuster, Borders, Circuit City, and many others.

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Workers displaced after a buyout obviously don't see it that way. In the anti-Romney documentary, one worker who lost his job at a Florida appliance manufacturer says that "if he had just left us alone as Unimac, I think Unimac would still be around as Unimac." Actually, probably not. Even industry leaders such as Whirlpool and Maytag have struggled mightily to keep jobs in the United States and fend off cheaper competition from low-cost countries like China. Small U.S. manufacturers are far more susceptible to cheap foreign competitors than to corporate raiders. Another failed Bain target, the office-products supplier Ampad, probably would have met the same fate if it had remained independent, since it didn't have the scale usually required to offer the low prices that consumers demand these days. It's common, in fact, for smaller companies to get bought up or driven out of business as industries consolidate and a few big players come to dominate.

[See why President Obama may be a "job creator."]

Romney had a ringside seat as dozens of companies under his control struggled to survive, with some of them losing the battle. That must have given him an acute understanding of the pressures companies face at a time when foreign competition is ruthless and a technology revolution makes investing in machines more profitable than investing in people. Sure, he may have used that knowledge to exploit some companies and enrich himself. But the same insights could also be invaluable in crafting policies to make American businesses tough and enduring. If you know what makes companies weak, then you know how to make them strong.

How to fix the "skills gap." Romney would never say this publicly, but many of the people thrown out of work in Bain-backed deals were assembly-line workers who lacked specific skills and probably faced a troubling future no matter what. In the '80s and '90s, when Romney was at Bain, the U.S. economy was still relatively strong, so workers laid off from one company could often find work elsewhere. But even then, some towns that had long relied on a thriving blue-collar economy were starting to fade, with good jobs becoming scarce. Today, the problem is far more acute, with millions of lower-skilled jobs heading overseas or simply disappearing, and no comparable jobs likely to replace them.

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Fixing the mismatch between the outdated skills many workers have and the modern skills companies need is one of America's biggest challenges. As somebody who fired thousands of workers—or presided over companies while others did the firing—Romney knows intuitively how to spot obsolete workers or even whole departments, and sweep them out of the way. That means he also knows what makes workers valuable to their companies, and what in turn makes companies valuable to their shareholders. President Obama has proposed his own worker training programs, often linked to industries of the future, such as green energy. But the nation's workforce probably needs even more intensive schooling on how workers themselves can stay relevant, whether they get a government assist or not. A hardened capitalist at the bully pulpit might be able to send a useful and powerful message.

The cost of layoffs. While doing deals at Bain and racking up a personal fortune of $200 million or more, Romney may have given little thought to the human cost of decisions driven by number-crunching and the cold pursuit of profit. But the scrutiny he's getting now is forcing him to face the consequences of those decisions. On the campaign trail, Romney justifies those outcomes as "creative destruction," as if layoffs are inevitable and not even the CEO can prevent them. But there are many ways to make companies better with a more humane touch than Bain seems to have had: Make continuous improvement a core ethos of the company, so worker skills don't stagnate. Give advance notice if layoffs are coming, so workers aren't blindsided. Help soften the blow for people who suffer the destructive part of creative destruction.

[See 11 companies on the edge in 2012.]

The attacks on Romney's private-sector record may now make him wish Bain had been more delicate with some of its companies. He can't change the past, but he could certainly improve on past behavior and become more compassionate in the future. The next president will face many tough decisions about reining in government spending, with less money available to subsidize programs for the elderly, the needy, and the disabled. Revamping those programs will require technocratic and financial expertise, but also a genuine sense of empathy toward those directly affected. Romney has long possessed one of those skill sets. He'll have to persuade voters he has acquired the other.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success , to be published in May. Follow him on Twitter: @rickjnewman

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