Loyalty between a business and its employees is a wonderful thing

Consider this a Labor Day vote for loyalty.

Remember Aaron Feuerstein? He was the 70-year-old owner of Malden Mills Industries, the inventor and manufacturer of sophisticated textile products like Polartec fleece, whose factory mostly burned down in the biggest industrial fire ever in Massachusetts in December 1995.

Feuerstein wound up profiled on "60 Minutes" because, instead of laying off over 3,000 employees right before Christmas, he continued to pay them out of his own pocket for months, perhaps as much as $25 million as it eventually turned out. He also quickly decided to rebuild on the very site of the destroyed facility in Lawrence, in the economically stressed Merrimac Valley. That he chose to stay in the Northeast, instead of moving his three-generation family-owned business to someplace with lower labor costs, perhaps even out of the country, only added to the story and adulation.

"I think [not laying people off] was a wise business decision," Feuerstein told Morley Safer of "60 Minutes," "but that isn't why I did it. I did it because it was the right thing to do." An Orthodox Jew who became known as the "Mensch of Malden Mills," he was quoted frequently about what he saw as his responsibilities to his employees, both blue-collar and white-collar, as well as to the community. "It would have been unconscionable," he told a magazine writer in 1996, "to put 3,000 people on the streets and deliver a deathblow to the cities of Lawrence and Methuen."

Frederick Reichheld is a top-tier consultant who has written extensively about loyalty in business. Early in his 1996 book "The Loyalty Effect," he writes about how he and his colleagues at a strategic consulting firm would come across companies "generating mystifying levels of free cash flow." What separated them from other companies? "Each time we found a performance record that was hard to square with traditional economics taught in business schools, we also found a company with superior loyalty."

Most managers, Reichheld writes, obviously "prefer" to have loyal employees, just as they prefer to have loyal customers, but "few are willing to spend the money and make the effort to earn that loyalty." Citing Oscar Wilde's aphorism about cynics knowing the price of everything but the value of nothing, he argues that knowing what employees cost but not what they're worth is worse than cynical; it is hugely counterproductive. For reinforcement, he also quotes Peter Drucker, who wrote in 1992 that while all organizations now routinely say, "People are our greatest asset," few practice what they claim, much less truly believe it. Organizations, Drucker continued, "have to market membership as much as they market products and services - and perhaps more." They have to "attract people, hold people, recognize and reward people, motivate people, and serve and satisfy people."

Dealing with layoffs specifically, Reichheld writes of how the general trend in business hasn't been a search for ways of keeping employees longer and helping them make more money, but rather the opposite: finding ways of paying employees less and actually getting rid of them, especially men and women with the most experience and highest compensation."Not a day goes by," he notes, "without some newspaper story about new early-retirement schemes and fresh layoffs."

"Loyalty," Reichheld sums up, "is indeed a two-way street, and companies that dump people when earnings are down (much less when earnings are up) are sowing the seeds of their own failure. Every company falls on hard times now and then, and it's the loyal devotion of key employees that pulls most of them through. By showing people that the company won't stick by them in adversity, a firm can almost guarantee that the next time it's in trouble, its most talented employees will jump ship when they are needed most."

Very much in this overall spirit, the Seattle Times reported in 2009 that Expeditors International of Washington state, a major freight and worldwide logistics company, had posted a 24-percent decrease in second quarter profits (to a slim $54.1 million). Revenues, meanwhile, fell even more, by 38 percent, to $895.4 million. Still, the article reported, "CEO Peter Rose looked at the bright side, pointing out in a statement that Expeditors had issued no layoffs and that its strategy 'has never been driven by Wall Street expectations.'"

Moreover, Rose said, Expeditors didn't grow from 20 employees in 1981 to a Fortune 500 company by 2007 "through the efforts of employees living in constant fear of being laid off. It is our people who are responsible for those accomplishments. We need them all, and the leadership culture that permeates this company, at all levels, now more than ever."

Nevertheless, the market, taking its cues from sources other than folks like Feuerstein and Reichheld, responded to Expeditors' numbers and Rose's words by slicing the company's shares by 4.9 percent. At about the same time, a friend in finance told me that while he wasn't thrilled in his role as an analyst to hear about Rose's decision to avoid layoffs, as a religiously serious person, he was.

By no means does all this add up to an argument for businesses never laying anyone off for economic reasons. Of course not, as often there's no choice in the matter. Deploying resources in consistently uneconomic ways is but a guarantee that future losses - and not just of jobs - will be even larger and more devastating.

Returning, for example, to Aaron Feuerstein and his remarkable generosity - and making it clear that I continue to view his effort as gloriously noble and kind - how did his saga wind up, years after the glow of both the fire and most of the salutes burned out? Not well, I'm afraid.

Google his name or "Malden Mills" and very little shows up after 2004. That's when the New York Times reported on Feuerstein's failure to buy back his company from various creditors who had taken control of the firm. They had done so after Malden Mills declared bankruptcy in 2001 due to the $140 million it had taken on in debt -- in largest measure because of the fire.

Inescapable reality had simply, if sadly, caught up and prevailed. Yes, his employees continued getting paid and were able to keep supporting their families longer than if they had worked for just about anyone else. And yes, a smaller but still sizable workforce under the name "Polartec" remains under the new ownership. But in the end, the story and lesson were not pretty.

Still, in less dramatic situations in which lines distinguishing rationally calculated uses of dollars from romantically risky ones are not as starkly drawn, my Labor Day vote is decidedly for the human option - and not just for humane reasons during a continuing siege in which jobs are exceedingly tough to find. Rather, as highlighted by consultants like Reichheld, choosing to retain employees during tough times - if at all possible - is just good and decent business.

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Mitch Pearlstein is founder and president of Center of the American Experiment in Minneapolis.

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