Churn, Baby, Churn

Kudos for Creative Destruction

Economist Art Rolnick, senior vice president and director of research at the Federal Reserve Bank of Minneapolis, salutes the tumult. “This is one of the best economies in the country,” he says. “We wouldn’t have this kind of growth, this kind of standard of living, without a dynamic economy.”

Rolnick attributes the weak performance of static economies—Detroit’s, for example, or Japan’s—to a lack of “creative destruction.” That’s a term economist Joseph Schumpeter popularized in 1942 to describe the way vibrant capitalist economies create and destroy jobs rapidly. Schumpeter saw capitalism as a fundamentally disruptive system, in which new technologies, products, services, processes, sources of supply, and organizational structures create new competition. In the resulting upheaval, the market reallocates resources to the companies and sectors where demand is strong and production costs are low, weeding out the ones where demand is weak and production costs are high.

That kind of churn is distinct from other types of change. Thomas Holmes, a University of Minnesota economics professor who also works at the Minneapolis Fed, notes that in the barber industry, businesses come and go often, yet it’s not a dynamic sector. On the other hand, “Certainly the auto industry in Japan has been very vibrant, and we don’t find much churn there.”

So churn alone isn’t synonymous with a vibrant economy or sufficient to create one. Rolnick notes that an educated and skilled work force, also regarded as a significant asset in the Twin Cities area, does much to strengthen the region’s vitality. Others cite moves, starting in the 1990s, that eased Minnesota’s tax and regulatory burdens on business. All that said, “in healthy, vibrant economies, there generally is significant churn,” Holmes says. And Rolnick argues that the ferment on the Pioneer Press 100 list says much about the ability of the Twin Cities–area economy to renew itself.

At times, the churning can seem like no more than meaningless shuffling around. In the summer of 2000, publicly held Building One Services moved its headquarters from Washington, D.C., to Minnetonka because its CFO had ties to the area, and good support services were available to the company here. Just a few months later, Texas-based Group Maintenance America acquired Building One. Whoosh! Just like that, the Minnetonka headquarters went to Houston.

One-time superstars can quickly dim, then vanish. Case in point: Green Tree Financial, which muscled its way up to 10th place on the list in 1997. I remember going to a meeting in St. Paul where securities analysts practically glowed in the dark after hearing an upbeat presentation from Larry Coss, Green Tree’s CEO. Coss was then one of the highest-paid executives in America, but not one question came from the audience about his hefty pay package. This amazed me, but I should have known better. The company’s stock was skyrocketing and in such heavenly settings, satisfied investors typically let the good times roll no matter what the CEO is making. Soon, though, the stock fell amid accounting irregularities, the company was sold to Indiana-based Conseco, and eventually Conseco showed up in bankruptcy court.

Early on, the list demonstrated that churn can also be a result of fraud. Eden Prairie–based Flight Transportation, a rising star on the 1982 list, vanished in 1983. It turned out that the company was reporting sales and earnings it didn’t have. Its principals went to prison.

Initial public offerings are what give the list its most invigorating and chaotic attributes, however. Of the 100 companies on the 2006 list, 53 got there via IPOs since 1983. These include UnitedHealth (number one, public since 1984); C. H. Robinson (12, public since 1997); Fastenal (14, public since 1987); Patterson (16, public since 1992); TCF Financial (21, public since 1986); and Digital River (34, public since 1998). On the other hand, of the 114 Minnesota companies that went public during the state’s five-year IPO binge (1992 through 1996), only 13 managed to survive and hold a spot in the Pioneer Press 100 in 2006.