Motley Fool Hidden Gems Investing - Intangible Greatness

Episode Date: April 6, 2024

James Rhee is the former CEO of Ashley Stewart, a professor, entrepreneur, and the author of “red helicopter―a parable for our times: lead change with kindness (plus a little math).” Mary Long caught up with Rhee for a conversation about: - An unlikely turnaround at a retailer serving plus sized, moderate income black women. - Being kind versus being nice. - When liabilities can become assets and vice versa. - Real world goodwill versus the accounting version.  Companies mentioned: NVDA Host: Mary Long Guest: James Rhee Producer: Ricky Mulvey Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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Whatever lies ahead, don't change your morning. Let your morning change you. Discover Coffee Plus on Nespresso.com. What did I have? And so from my stomach, I said, well, I may be the least qualified person to run this company. True. I'm the last thing you all needed. True. I've never done this before. True. And then I said, but maybe if we can be kind and mathematically honest, we can figure out a way to get out of this. I'm Mary Long and that's James Rhee, a professor, entrepreneur, and the former CEO of Ashley Stewart. I caught up with Rhee for a conversation about his new book, Red Helicopter, a parable for our times, lead change with kindness, plus a little math. We had a conversation about leading a company on the verge of liquidation, what corporate leaders often neglect to do when they

make hard decisions, and what goodwill can tell investors. James, you recently wrote a book. It's called Red Helicopter, and it tells a lot of stories. As I was reading, I was trying to categorize it myself, and it's part business story, part memoir, part manifesto, I'd say. And I want to talk about all three of those pieces and the intersection of them all. But maybe we start with the title and use that as a framework for the rest of our conversation and time together. So why a red helicopter? What does that represent to you? For me, it was a story of just absolute clarity. And I've spent most of my life as a human being, investor, teacher, CEO. All you want to do is discover the truth, right? You just want the truth. And the truth is really

hard to find because it's put in all sorts of different frameworks and you learn things and you realize that maybe that's not always true. And so for me, red helicopter is a symbol of truth of wisdom versus being educated. It's lives in the same plane as this, like physics and math and music. Um, these are things that are always true. And so, uh, for your listeners, it's a metaphor. It's a, they could have a different red helicopter story for me. It was literally a red helicopter where, um, when I was five, I got a toy as a gift and unsolicited gift because I'd been sharing my lunch with a boy who came to school without one. And the dad wanted to reward me for it. And he didn't even tell me why he was giving it to me. And I found out later why. And

it's a series of times when you think you're wrong. Did I steal it from school? Did my parents make a mistake and realize that in America that every public school kindergarten kid was supposed get a toy. But in the end, like truth, you have to get through all of the sort of falsehoods and sort of insecurities about being wrong. And you have to find the truth and be determined to find the truth. That's what it's about. Throughout the book, you talk a lot about kind of rethinking what are tangible versus intangible assets. And so let's maybe use that as a segue to talk about the business piece of the story. Red Helicopter, again, is in many ways like a manifesto on how to balance business and life in the modern world. And so the book really tells the story of the

reinvention of a company called Ashley Stewart, which was a clothing retail or is a clothing retailer, primarily catering to plus size, moderate income black women. How did you, James Reed, come to find yourself at the helm of Ashley Stewart? Yeah, for those of you who are picturing me, I'm 53 years old. At the time I did what I What I did, I was 42, 43. I'm a dude. And I am Korean American. And I had zero experience operating anything other than busing tables. And I was a longtime Boston private equity guy wearing a blue blazer and pleated khakis. Can you picture that guy? So, yeah, the most illogical person perhaps to come in and partner with thousands, if not millions, of plus size, moderate income black women to pull off something that I think is people are only beginning to understand what we did now, actually. Yeah, it was something that I believed in the relationship that they had amongst one another. I thought they created a lot of, quote, intangible greatness in their communities.

I was really long as an investor in my relationship with them, no matter what the world said and said, you all can't possibly get along, right? And ultimately, we had to devise a set of mathematical and operational schema that made that intangible, those unbelievable intangible things believable and tangible to the rest of the world. And so before you became CEO, right, you were attached to the private equity company that owned Ashley Stewart. And so how did you see all that, those relationships? Like, how did you see all that from your position before you became CEO? Maybe what I'm getting at is, can you kind of walk us through that process, that in-between period where you're seeing where this company is headed and kind of the distress it's in, and you're thinking, I can do something here, to actually stepping in and saying, no, no,

no, I'm going to do something here. Yeah. I'm an activist investor. Always have been, right? So as a private equity guy, I own the companies that I invested in, majority owned. And even as a passive investor, when I'm investing in public stocks, like I take a pretty active position as well. I make phone calls.

I talk to people like it's constant due diligence. And so I had been into the stores before we made the investment. I'd seen things and said, OK, this is really what is happening here. There's real relationships, very sticky relationships, women coming in two, three times a week, talking nothing about clothes, talking about other things, very tied to church, very tied to parenthood, motherhood. These are things, these are third rail spaces, right? You can't make this up. You can't buy things like this. It takes a lot of time. And as Jensen Huang just talked about in the NVIDIA interview, it takes actually a lot of suffering, actually,

and a lot of just things you go through. And when they're suffering and something can provide joy and relief, there's a lot of value to that. So I saw these things and it brought me back to a place long time ago when I saw, frankly, my mother would suffer in this country. And it reminded me of times when she didn't feel that great. And she'd walk into a Korean grocery store and I could immediately see the change in body language. And these very nuanced things, as much as I'm a quant guy, I went to Harvard Law School, like these are things that will never appear in a spreadsheet. And so as an investor, I've always proactively went out and I went to the room. I would go to the place and see for my own eyes.

I don't want to dwell too much on the time before you became CEO, but I do kind of want to paint a picture of what that looks like to really underscore the amazing transformation that Ashley Stewart did undergo. When you became CEO of the company, the business was a nightmare. It was unprofitable. It had already been through one bankruptcy. Vendors, as you describe, are like hanging in the lobbies of headquarters demanding to be paid. There's a surplus of camisoles.

Things are bad. Again, before you stepped in, how did things get so bad there? Maybe there's a business lesson to be mined from the early mistakes of Ashley Stewart. I think it goes back to the truth, right? And in this case, it was not just the sort of, I think, poor operations, but let's face it. This was a female-focused, not size two-focused, Black women-focused business. And I think it's fair to say that those are three things that are not as celebrated or as visible on Wall Street.

I've lived on Wall Street. I can speak firsthand that that's the case. So if you think about this as a metaphor, which is why the book is written as a parable, This was a enterprise slash community slash business that was not going to get the benefit of the doubt in terms of access to capital markets, financing, any of these things. And I look at those opportunities as an investor as opportunity to make a lot of money too, because if no one's looking at them for artificial biases, I'll put my money in there all day long.

So that's what the positioning was. So when you first came to Ashley Stewart, it's supposed to be a six-month stint. right? Your primary task is to help avoid the second bankruptcy that the company is facing. So take us back to day one on that job. What's the business plan? What's the plan of attack? What are you doing? Day one of the job is me showing up with my big dimple showing and weirdly feeling completely free of a lot of these, the conventional investing paradigms or living paradigms, I was able to be a junior high school person again in mindset. I had no credentials. Everything that I had credentialed up until that time were worthless. If you think

about it, I was like the last thing that this company needed and they got me. If you think about truth finding as a theme here, I saw things very clearly. I had no lenses on. It was much more of a, okay, I know that this company is about to liquidate. I know the hurricane that's about to hit this company because I'm part of that regime, by the way. So what do we have here? And by the way, gender, race, everything. And it was so bad, as you mentioned before, I ended up having to hire a police officer to protect the employees in the parking lot when they went home. So amidst all this chaos, which, by the way, a lot of people sort of feel that chaos now in the real world today. What did I have? And so from my stomach, I said, well, I may be the least qualified person

to run this company. True. I'm the last thing you all needed. True. I've never done this before. True. And then I said, but maybe if we can be kind and mathematically honest, We can figure out a way to get out of this. And so that's what I said. So how do you face that hurricane of bankruptcy that was facing Ashley Stewart? Like, practically, what are the processes that you're going through day to day? You're talking to bankers, and then you're having to come back and communicate with the actual employees of this company what the future looks like?

Yeah. I mean, in this case, it was a second bankruptcy in three years. And I think the better word is even it was facing liquidation, right? there was no chance there would be an organized bankruptcy. Money had accompanied no money and no track record and no goodwill in the deal community. In my role, and I do this often in life, I was a translator, right? I mean, I speak a lot of, quote, different languages, not just like languages of countries, but language of finance, law, music, you name it. I speak those type of languages. And I'm like, oh, here's what the bankruptcy code is. This is what's practically

going to happen. The restructuring advisor is technically working for the company, but let's face it, plays golf with the lawyers and the restructuring advisors, the other ones. Like, so we have, the deck is stacked against us. I read the employee base there, the WARN Act, slowly, and we sent out letters, but I wanted them to hear it and to understand what it meant. it frankly stands in stark contrast to a lot of the behavior I see on, you know, in our corporate environment today where employees, they don't get, they're blindsided, right? They're not, they don't get the quote truth. And I've always had a lot more confidence and respect in people. When you tell people the truth, they generally don't panic,

right? They rise to the occasion and they address things calmly. And I think that always leads to better decisions. Yeah. You started your career as a high school teacher and you're a professor are now like the being a teacher seems to be a through line throughout your life. And I, you see that a lot in this, this book, as you're having these really honest, candid conversations with the employees of Ashley Stewart, you know, your, your whole thesis is to lead with kindness. And that's definitely apparent that that's what you did throughout this time. But also, especially at the beginning, you had to make some really tough decisions. Like you mentioned, you read the employees, the warn act, you had to take tough actions when faced with this hurricane of

liquidation. I think you ultimately closed about 100 stores, had to decrease payroll. Today, we hear lots of stories about layoffs, especially in the tech industry and things that are happening there. Based on your experience, what advice would you give to companies that are carrying out layoffs in maybe, let's say, less humane ways? What advice would you give to those companies about leading with kindness and doing hard things in a kind and effective way? Yeah, I think that to answer that question, I just want to quickly define kindness here. I think most of your listeners know that it's very different from niceness. And I spent a lot of time in this book defining kindness directly and indirectly.

Kindness is incredibly direct. Kindness maximizes someone else's agency. It's an investment in a person or an org, right? It's an investment in human capital. I just want to repeat, kindness is not weak. it's like relentless water. It's honest. And so that would be my advice. I mean, yes, it is humane to do it. It is, quote, considerate to do it. I also think the math part of the equation of what I always bring to the table is that when you are indirect with people, mealy mouth, not telling

the whole narrative, it creates an incredible amount of resentment, lack of trust. People start not focusing on their work. And we've all been there. We've all worked in places where you start spending half your time gossiping, right? Or wringing your hands, preparing a resume. Again, I have much more hope, respect for people that when you tell them the truth and you tell them things are not great, or we have to pivot, we will be making these decisions. We're going to solicit your feedback about what is the best way to pivot. It's not just, and it's a group buy-in, people have much more understanding that companies do have to make difficult decisions sometimes. And frankly, it is kind rather than letting someone linger for a year to two in an

unproductive dead-end job. If you're able to work with them in advance and say, your skill sets, we can't utilize it fully here. Let's find you a better place. Why wouldn't you do that? So you lead with kindness and you have these tough conversations. And eventually what was originally a six-month stint turns into seven years at Ashley Stewart. When did your time at this company go from being a short-term turnaround to a long-term reinvention? I mean, I want to sort of impress upon your listeners, this was not some sort of preordained manifest destiny thing. After six months, I wanted to go home. And the sole goal was to find money so that someone would buy the stores and I could go back to my private equity life.

But no one came and I begged a lot and no one came and I was disheartened and I had a choice to make. And this is about agency. The book is a lot about choice. I knew I was right about the business plan, about where the world was going, about my relationship with the women that we had developed. and I called in some favors and it was like the movie it's a wonderful life that I had quote a lot of goodwill on my balance sheet too and people trusted me as a fiduciary and they're like we know you would never do this unless you felt you were right and part of that equation was I had to be the one to execute on the plan as CEO it wasn't just oh here's a business plan I wrote here's the math here's the duration theory for the inventory it's like running it like a hedge fund I had to do it and so I did and in retrospect and some people you know identify with this it's like it felt like to me because it came out around the same time as we did this Hamilton that it was a

new score it sounded different the protagonists were a little bit upside down and I had to act in it. It wasn't just about creating the score, but I had to actually be in the play. And my role in that play was, quote, CEO. But in reality, it was not. The real CEO of that business, the reason why it worked so well was that I have never been clearer about why I was doing what I was doing. I wanted my friends, these women, I wanted them to win. I wanted them to win on their terms. And it was a seven-year period where I had not thought this clearly in so long. And that's why it's also called Red Helicopter is that clarity of thinking. A large part of this business plan that you develop and execute on as CEO is like rewriting

and rethinking basic accounting principles. In the book, you kind of refer to this as lemonade stand economics. Like it's truly going back to basics of what it is to like build something as a child, think about something as a child. And as a part of this, you basically recategorize some of the company's assets and liabilities. So can you give us an example of an asset that was actually a liability or a liability that was actually an asset and that rethinking process? Yeah, sure. First of all, just start off and remind everyone that accounting is completely made up. Okay. It's not physics. It's not gravity. It's just made up. It's a convention. So it's nice to compare companies using accounting, but to do that empirically as the only way to value a company, I think it's limited.

So, yeah. So like here's one thing. So accounting 101, short term asset inventory is an asset. Yeah. OK. It's it produces future value from an operations perspective. I encourage all my companies, particularly at Ashley Stewart, we did this. It's a liability. I don't want it. You made the investment. I'll get it off your books. When you start teaching people this, it changes the entire behavior apparatus and schema of your company. People are like, oh, it's an asset. We want to keep it. I'm like, no, it's a liability. What do you want to do with liabilities? Oh, get rid of them. So our inventory turns just went crazy. Our asset productivity went crazy. Here's another example. Accounts payable. Let's just start with keep it

short term. These are liabilities. No, they are. I get it. We have to pay people back. But for me, our accounts payable, I measure that as a surrogate for vendor trust. And our terms went from like zero to like 60 days. A lot of our growth was purely on float. And so we never had to issue capital to dilute our ownership base. And we treated our vendors like they were part of a cooperative, like it felt like a mutual system. And I think we're experiencing that a lot in, you know, if I can go on a little bit of a tangent, just in current day, you're seeing that in terms of like this sort of declination and mutualism, it gets very expensive. It's very difficult to get insurance now. When you have decline in mutualism, and you want to sort of

have a go-it-alone economic model, it's very expensive. And you're seeing that in auto rates, property rates right now. A big focus of this red helicopter philosophy is not just kindness and math, but also agency. How did you get creative with equity and ownership to develop this culture where agency was really celebrated? So first of all, it was to define what agency is and to make sure that people understood that kindness helps create agency. You're creating decision makers. A lot of cultures think that they encourage people to make decisions, but they don't. A culture of fear, no one wants to take accountability and risk and be creative, to take a position that no one else takes. It's a lot of group think. And so that was the first

thing. What is agency? And it's certainly not monomaniacal control, like manifest destiny where you know the results. So that was the first thing. Second thing, after you do that, you start rewarding those type of behaviors, right? You start, you don't get mad when people make wrong decisions, but they did it through the correct processes, right? You start really looking sharply at people who make lucky decisions and use flawed processes that are not repeatable over and over again. So that's number one. Number two, from a compensation standpoint, we did not compensate and reward just revenue generators which is very easy to do because sales go up you reward you it's very it's much more difficult to take the second step and say

sales went up but based on which capital how much invested capital sales went up but really was it your your value add i think maybe it was more product design so when it tends to happen you start rewarding people who actually do the root cause improvements in the business. It tends to reward people who create more longitudinal value add, like product, or it's UX, user experience people who rarely get the sunshine because they're not directly generating sales, but they're doing everything that's creating the sales. So I think that's a true meritocracy. That's how teams win the long run. I want to talk a little bit about goodwill too. This is also an accounting term. It shows up on the balance sheet as an intangible asset, but we think of goodwill as the, in the

accounting world is very different than like the goodwill in the real world. How does real world goodwill translate into accounting goodwill? All right. So let's start with the real world goodwill. We all know what that is because we all cry at the end of it's a wonderful life. that's goodwill, right? That's something that he did over a long period of time, created a lot of goodwill. He made money while doing it, by the way, right? He issued originated mortgages and ran a savings and loan. He created a lot of communal goodwill in his time of need. His wife, Mary, was able to make it manifest to him and he sought. And it's a very literal example where goodwill was monetized. I'm pretty sure that the money that they stuffed in

his hat, those were non-recourse loans. They didn't ask for the money back. So that's real goodwill. And that's why we cry. We say, okay. In the business world, anyone who's ever been in a cubicle at midnight at an investment bank or a buy-side shop, you have built a model where the balance sheet did not plug, did not balance. And you basically created a plug called goodwill and the assets all of a sudden married up with the liabilities and equity. It's a completely made up accounting term. And I write in the book that I tend to love to short companies that have a lot of goodwill in their balance sheet because it meant that they overpaid, right? They're showing artificial income statement growth, but their balance sheet's a mess. They probably

over levered. So it's been an investment strategy of mine to look at that. So that's the irony that I write in my, I said in my Ted talk, I said, how ridiculous that accounting uses the definition of goodwill in this way? And there's so many other things like, is accounting accountable? I don't know. And then I play on the word balance and balance. Is that true? Do you have real balance at work or balance at home? And so what the book also sort of guides people is to say, if you take that practical, it's like radical common sense view that businesses are comprised of people and people generally don't do well when they have cognitive dissonance and they have a certain set of values at home and a certain set of values at work, could you create a system

where the best types of behavior that you see at home or in your friendships were rewarded at work? Could you do that? And that's what I think we did very well. And as we discovered that and rolled it out longitudinally, it required a rethinking of some basic accounting principles and sort of, you know, Kahneman just passed away recently. It's one of the reasons why he was so depressed, actually, and said, I'm not sure systems one, systems two will ever be implemented in corporate America. And I think we did for the seven years.

We didn't, it wasn't perfect, but we made tremendous strides in sort of rewarding systems two thinking, not systems one. Our co-founder, David Gardner, talks a lot about investing in the world you want to see. I think that it's fair to say that you're a living embodiment of that. The course of actions that you took at Ashley Stewart really speak to that idea of investing in the world you want to

see. What kind of a world do you want to see? And are there any companies out there that you're excited about right now that are building that kind of a world? Yeah. I am a proud second generation American citizen. My parents were both caregivers, doctor and nurse, who immigrated from Korea after the Korean War. I think I'm obviously slightly biased. I think that the United States of America is the greatest startup that's ever existed. I really believe it. And that founders sort of principles and it's about agency, right? Like it's about liberty and free markets. So I'm living that life. Like this is something that I have three children that I would like for this country to be reminded of the fact that civics and capital, they're hand in hand

and you can't have an effective capital system without a accompanying civic system. And I think that's a lot of the debate that we're having right now. So yeah, like I think it's imperative on all of us, not just CEOs, but all of us. And this is why I spend a lot of time with small businesses, like with the government as well, that you are accountable to your community with the actions you take. Just because you're working in a C-corp does not give you permission to act in an unaccountable way for your fellow humans. And I found that over the long term, that has created a lot more financial wealth as well, not to mention the emotional health of like when the women came to my dad's funeral, like I'll never be able to repay them for that.

In terms of what I'm doing now, what Red Helicopter is, it literally is a branded statement of the statement i just made and so i'm working with a lot of companies to help them achieve this and a lot of my focus tends to be on the smaller middle market companies these days because you have more of an ability to impact behavior in that way and by the way not not unironically other than the big seven a lot of there have been some very healthy returns with small mid-caps, right? You have the ability to create outsized returns because there's just less attention being placed on these companies. James Reid, the book is called Red Helicopter. Thank you so much for your time, for the book, for the work that you've done in business and

academia. Your resume is long and your success has been really wonderful to see unfold. So thank you so much for your time and we're glad to have had you on Motley Fool Money. Thank you so much. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow.