Hostess Brands bankruptcy lesson in damage done by focus on short-term returns

The November 29th decision to give the Hostess executives who oversaw the company's collapse a $1.8 million bonus illustrates why a company that had sales of $2.5 billion (US) last year is now being shut down.

While Hostess management are trying to blame the union for the company's collapse, it's becoming clear that mismanagement by investment funds was to blame.

Unions made concessions to enable the company to make the investments required for the company to succeed. Instead the funds went to increased executive salaries and paying the equity companies and hedge funds that controlled Hostess.

Then there's the fact the $1 billion in debt that was making Hostess unprofitable was incurred for things like repurchasing it's own shares. Things like that help investment funds in the short term, but now interest from that debt is wiping out almost 19,000 jobs.

There is a long history of companies that would otherwise have been viable failing as asset strippers and others put short-term profits ahead of the well-being of the business. Yet the hands off approach of governments means we are still seeing jobs disappear so a few investment funds can report a short term improvement in returns.

We are now seeing proposals from an American hedge fund to break up the Canadian agricultural products firm, Agrium. There are suggestions that we need regulations that prevent “vulture capitalists” from doing long term damage to the economy. With an industrial strategy we would have the framework to help us determine when restrictions are needed.