What Is A “Small Business” Anyway?
I’m Busy, Why Do I Care? In a crisis, others’ perceptions of our actions is often based on emotional or intuitive factors which are dramatically different than our reading of the situation. How we handle this tension can make the difference between an incident being minor or becoming a major stain on our reputations. Effective response starts with owning your message.
Main section: 1800 words (8-9 minute read) not counting annexes or insert.
This series of three posts will look at examples of how communicating during a crisis or emergency can go right--and very, very wrong--and offer a short framework for how we can prepare for when we find ourselves in the hot seat.
In this post, we’ll consider businesses which stand accused of exploiting the Paycheck Protection Program (PPP) in a legal but wildly unpopular way. Their responses have also been radically different, and speak to the difference that solid leadership and sense of purpose can make in helping us navigate ambiguity.
What Is A Crisis?
Before going further, a quick side trip to Merriam-Webster for some definitions:
A crisis is “a: an unstable or crucial time or state of affairs in which a decisive change is impending, especially: one with the distinct possibility of a highly undesirable outcome;
b: a situation which has reached a critical phase.”
Quiz: Is this a picture of a crisis or an emergency?
This is subtly different than an emergency, which is “an unforeseen combination of circumstances...that calls for immediate action.”
A crisis can also be an emergency, but an emergency does not necessarily entail a crisis. This is important because poor communication can quickly turn what might have been a limited emergency into a wider crisis.
Free (More Or Less) Money
In early April, 2020 the US Congress set up the $349 billion PPP in response to the Covid-19 outbreak. According to the Small Business Administration (here) “The Paycheck Protection Program is a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll. SBA will forgive loans if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities.” (My emphasis.)
The PPP quickly ran out of money, leaving many genuinely tiny businesses unfunded and vocally frustrated. The press started to notice the benefits accruing to larger firms, many with sales running into the hundreds of millions of dollars. (Figures for PPP are in Appendix I.)
Enter The Chains
This has not been a good look for the larger firms.
Fairly typical of the coverage is a Sunday, April 19th CNN Business story (link). This opened by discussing the anguish of a DC-area baker who had failed to get a small PPP loan for her 7 employees. It went on to list vastly larger chains who did well by the program: Potbelly Sandwich Shop, Shake Shack, and the Fiesta Restaurant Group all landed $10 million loans; a large sushi chain got $6 million; and the corporate parents of Ruth’s Chris and J. Alexander’s got $20 and $15.1 million each.
As stories like this multiplied, public resentment began to steadily grow. The political ground began to shift, leaving the larger companies with three broad choices: stand fast, retreat, or shelter in place.
Stand Fast: The Facts Support Us
There were relatively few takers for the “stand fast” approach, typified by Potbelly’s initial response to CNN:
"Like many other restaurants, Potbelly applied for the PPP," [its Chief People Officer] said. "Every penny will be used to financially support the employees in our shops. Congress specifically qualified restaurants for the PPP loan program because restaurant workers are vital to our economy."
Potbelly’s position is based on the CARES Act, which established the PPP. It had an opaquely-written section extending small business benefits to larger hospitality and restaurant chains.
Pros: The objective approach. It is rational, factual and straightforward, takes the CARES Act at face value, and assumes that the legality of actions establishes them as appropriate.
Cons: The battle here is over perceptions and emotions, not facts.
Retreat: Corporate Mea Culpa
By Monday, April 20th, the day after the first wave of articles, the Shake Shack burder chain’s CEO and its founder announced they were returning their $10 million loan. (Link)
“Our teams have been heroic, pivoting our business to a new curbside pickup and delivery model, while keeping our teams and guests at a safe distance,” they wrote. Why they had tapped the PPP: the chain and its parent company, with thousands of employees, were in dire financial straits.
Nonetheless, they had gotten additional funding from the markets so “we’ve decided to immediately return the entire $10 million PPP loan...so that those restaurants who need it most can get it now.”
They acknowledge some obvious context: “Late last week, when it was announced that funding for the PPP had been exhausted, businesses across the country were understandably up in arms. If this act were written for small businesses, how is it possible that so many independent restaurants whose employees needed just as much help were unable to receive funding? We now know that the first phase of the PPP was underfunded, and many who need it most, haven’t gotten any assistance.”
Pros: Clear, straightforward, and balanced language. The response seems to have moderated, but not stopped, public criticism and has even drawn some admiring comments.
Cons: This did not convince hard-core skeptics, and may have caused collateral damage to firms in a sort of anti-Goldilocks zone: those too large to be “small businesses” in the public mind, but too small to tap markets in same way as Shake Shack. (Examples here.)
Shelter Silently In Place: All Sizzle and No Steak?
Ruth’s Hospitality (RHG), parent of the steak house chain, chose to mostly respond with silence. Finally, late on Thursday--three days after Shake Shack’s announcement--following a barrage of unanswered hostile media coverage and the intervention of the US Treasury Secretary, RHG told the media (here) they would also return their loans :
Something Is Missing Here. (Captured April 24th, 2020.)
“We intended to repay this loan in adherence with government guidelines, but as we learned more about the funding limitations of the program and the unintended impact, we have decided to accelerate that repayment,” the President and CEO Cheryl J. Henry said in a statement.
A person familiar with the matter said the loan was received two weeks ago, but had not yet been used due to payroll schedules. As for future funds or access to liquidity, the source told CNBC that Ruth’s will “carefully weigh all options available to them.”
Even this step seems half-hearted. As of mid-day on April 28th--nearly a week after the climb-down—the company’s website remains silent on this development. The last press release is the one from late March. Their Twitter feed seems to be exclusively a marketing tool, and was last updated on April 16th.
Digging around a little, there is an updated 8K SEC (link) filing by the company announcing the loan return. One sentence long, it sheds no light on the company’s thinking.
Pros: May make sense as a long-term strategy to minimize exposure to liability by reducing the “attack surface” offered to critics.
Cons: May cause long-term damage to reputations and brands. The narrative is firmly in the control of people hostile to what they think Ruth’s represents—which may be distorted. (See Appendix 2.)
A Short Case Study: Unfriendly Narratives
This narrative is under hostile control.
According to a Securities and Exchange Commission disclosure (link) Ruth’s Hospitality Group (RHG) avoided the PPP’s notional $10 million cap by applying through subsidiaries, and critics alleged it leveraging its relationship with one of the nation’s biggest banks to do so.1 (Link) The SEC filing shows it also tapped an existing line of credit from its banks, demonstrating that it had, in fact, other resources.
Making appearances even worse, it got the paycheck protection loan despite having laid off vast numbers of working level staff across the country and arranging it so that many of those left were covering their own costs.
According to an RHG ress release (link) dated March 30th (emphasis added):
Ruth’s Chris has also made significant reductions in ongoing operating expenses, including curtailing operations in 23 restaurants locations where take-out and delivery is not viable, furloughing a significant number of field and home office team members, reducing base salaries of all non-furloughed team members and reevaluating other operating costs as opportunities arise.
Due to the state mandates regarding limited or no in-restaurant dining due to COVID-19, the Company is leveraging its Ruth’s Anywhere program in markets where take-out and delivery sales are sufficient to cover the costs of management staffing those locations.
As noted by the website Popular Information (link) restaurants still open and covering their costs are mostly run by managers and a few cooks. If a “significant number” of the rest of the company has been furloughed, where’s the $20 million going? Whose paychecks are being protected?
Popular Information smells a conspiracy to enrich greedy, overpaid managers. At a time when unemployment has spiked, and the economic future is uncertain and grim for tens of millions, this sort of logic is gasoline on the embers of resentment.
And as of now, it’s uncontested. It’s hard to see how this a good strategic move for RHG.
Leadership Is The Difference
Billionaire entrepreneur Mark Cuban observed on a podcast (link) in mid-April that decisions about treating employees and customers during the current crisis will define brands “forever.” This is an exaggeration, but Cuban’s logic is right.
Robert Wolcott, a Fortune columnist, had a great take on the dilemma. (Link) Noting that RHG managers have a fiduciary responsibility to shareholders and their workers, he continues:
“Even from this generous perspective, Ruth’s Chris leadership’s decision was wrong, both ethically and from a practical business perspective. There will be significant costs to the company for such questionable moves.
In a time of widespread crisis, the public takes keen interest in who steps up, who doesn’t— and especially who takes unfair advantage.”
It’s clear that all of the companies mentioned here had, in absolute terms, a need for more money. That’s also irrelevant to the public reaction, which focused on the relative resources they brought to bear. Shake Shack seized their moment early and ably. Maybe they’ll get off the “X” and maybe not, but at least they put out a plausible, reasonably humble story.
Lessons for Non-CEOs:
1. Own Your Narrative Or Someone Else Will
This is good advice any time. Understand that when you choose silence--which may be for legitimate reasons--others will fill the gap for you. Be prepared to live with what happens next.
If something you’re working on today suddenly became controversial, what would you say about it?
2. Do You Understand The Environment?
No one has suggested that what the big restaurant groups did was illegal. Their lobbyists and pliable legislators covered that. But here’s the key point: That doesn’t matter.
Legal and fair aren’t the same thing.
At what points could your work put you in a situation where you have done something that is factually defensible but which can be interpreted in a highly unfavorable light?
How well do you understand the emotional side of mistakes in your work?
3. Double-Check Your Assumptions
The public, fed by the media, clearly had a different understanding of what “small business” is than Congress and the firms we mentioned. Did any one on Capitol Hill or in the companies work through beforehand how critics or the public at large would see things?
I suspect few or none did, but more than a few now wish they had.
When was the last time you talked through your plans or assumptions about work with someone who disagreed with your views?
If you have, how did you respond to that challenge?
4. If You’re Wrong, Consider Owning It
People notice when someone takes responsibility for their mistakes, and when they don’t. We are accustomed to finely crafted deflections and non-apologies, so it’s refreshing--even striking--when someone is up front.
Yes, there is reputation at stake and possibly liability. But making errors of judgment is not on the level of being wrongly accused of murder. Evading responsibility for the first like they were the second only undermines trust in you.
What is the point for you, personally, at which you would start to be uncomfortable taking responsibility for the consequences of your work? How willing would you be to take public ownership of an error just over that line?
5. Are You Following Your Principles?
To me, RHG defined their purpose as beginning and ending with financial survival. Concern for their employees in a time of pandemic is expressed in one sentence of their March 30th press release. The rest of their website is financial.
Shake Shack, meanwhile, reconsidered the entire thing in light of both negative publicity and something that looks remarkably like they might be an actual set of principles. I suspect this will age considerably better than their competitors’ approach.
What are your core principles? How easy would it be for a complete stranger to recognize your principles if they watched you at work or in life?
Appendix 1: Why The PPP Looks So Feckless
According to the SBA (link), the PPP lent $342 billion, net of fees to the commercial banks who processed applications and disbursed funds, to 1.66 million borrowers. This is an average of $206,000 per loan.
Borrowers in the accommodation and food service sector, which has been particularly hard hit by closure orders, got less than the average: $30.5 billion in loans divided by 161,876 loans = $188,418 each.
Beyond traditional small businesses, Congress included a “heavily-lobbied” (link) provision in the PPP legislation allowing “accommodation and food services” business with more than one location and less than 500 employees per site to benefit from it. This definition let a number of large restaurant chains draw on the relief fund, mirroring what happened in other business sectors.
SBA broke out loans by size, which produces some interesting numbers:
The smallest category of loans, those under $150,000, amounted to a shade under three-quarters of the total loans but only 17% of the funding--that’s $47,420 on average.
Loans over $5 million (that is those which are at least 24 times larger than the overall average), were around one quarter of one percent (0.27%) of the total, but were 9% of the total funds.
No wonder there was lots of lobbying.
To preserve a pretense of fairness, the drafters of the PPP included a provision to limit individual companies to $10 million in loans. To a very small entrepreneur this must still have stung. The economic reality is that employment follows a power law: most firms are very small and employing few people, while a relatively small number account for a disproportionate share (link):
Businesses with fewer than 500 employees now account for 99.7% of American firms, Prisinzano said, citing US Bureau of Economic Analysis data. The remaining 0.3% of companies with 500 or more employees — which include the nation's largest businesses such as Walmart (WMT) and Amazon (AMZN) — account for more than half of US employment.
Appendix 2: Ruth’s Fine Print
The 8Ks and the stock price provide some clues as to why Ruth’s management may be tone deaf but not actively evil.
The April 13th 8K filing has two critical pieces of information:
Referring to an existing credit line, Ruth’s notes: The Credit Agreement provides for a revolving credit facility of $150.0 million (the “Revolving Credit Facility”) and permits the Company to incur up to $20.0 million of other indebtedness. Coincidence or not, this is all their existing borrowers would let them tap. So the $20 million figure may not have been totally arbitrary.
The company’s not flush: As of April 10, 2020, the Company had approximately $86.6 million of cash on hand and $169.8 million of outstanding indebtedness, which includes $145.0 million of borrowings under the Revolving Credit Facility, $20.0 million of borrowings under the SBA Loans and $4.8 million in letters of credit.
There is another 8K (link) from March 27th, mostly about an amendment to an existing credit facility. But buried in there are points media attention hasn’t caught:
The CEO and two other senior executives are taking voluntary 50% reductions in pay, a fourth executive gets a 25% reduction, and the outside directors suspend their retainer fees.
Dividend payments are suspended to help the company “better manage its cash position and enhance financial flexibility in light of uncertainty.”
Remaining employees take “pay reductions...by graduated amounts between 10% and 30%. ”
And: For the furloughed team members who are enrolled in the Company’s healthcare benefits plan, the Company will pay both the employee and employer share of healthcare premiums for the next sixty (60) days.
I have no idea what percentage of the company’s pre-Covid-19 headcount the last bullet applies to, but it suggests there might be more to the chain’s leadership team than “heartless and money-grubbing”.
I also understand that most of the C-suite’s compensation comes from stock and other long-term measures, when said stock is down 70% from a high--and that’s an improvement--taking a 50% cut in base salary is still at least highly symbolic.