Why kindness is the secret to a successful business (w/ Master Fixer James Rhee) (Transcript)

Please note the following transcript may not exactly match the final audio, as minor edits or adjustments could be made during production.

Anne Morriss: Hi everyone. Welcome back to Fixable. I'm your host, Anne Morriss.

Frances Frei: And I'm your co-host, Frances Frei.

Anne Morriss: Frances, today we're doing another fantastic Master Fixer episode. We'll be talking to James Rhee, a professor of entrepreneurship at Howard University and MIT Sloan. He's also an entrepreneur, an impact investor, an incredibly effective change leader, and he's the author of Red Helicopter, a parable for our times, lead change with kindness, and a little math.

Frances Frei: Change with kindness and math. Thank you.

Anne Morriss: Yeah, your two favorite things. When I saw the title of the book, I knew we needed to have him on the show. He showed up on everyone's radar about a decade ago when he became the improbable turnaround CEO at Ashley Stewart. A company that's primarily serving black, moderate income, plus size women.

Frances Frei: I'm I'm just, I've seen his picture. 

Anne Morriss: Yeah, he wasn’t an obvious fit for the gig. When he took it, he was a slim, well paid, Korean American private equity investor, who by the way, had never been a CEO before. And he pulled off this spectacular turnaround in part by building a culture of kindness at the company and pursuing a strategy based on deep respect for his customers.

Frances Frei: And what I love about it is you don't have to be the customer to have deep respect for the customer. I think we're all going to learn a lot.

Anne Morriss: it, it's such, uh, it's such a cool story. And today we want to talk with James about how he did it, the lesson he's taking from this experience, and his current mission to bring more kindness and more humanity to the rest of the business sector.

Frances Frei: Let's go

Anne Morriss: James Rhee, welcome to Fixable.

James Rhee: Thank you. Thanks for having me. I've been looking forward to this.

Anne Morriss: so have we. I don't think we've ever liked someone so much before we've actually met them. So,

James Rhee: that's, oh, that's, that's, oh no. The expectations are very high. 

Anne Morriss: Nowhere to go but down, James. Don't fuck this

James Rhee: I won't. No, I'm sweating bullets.

Anne Morriss: Uh, in the intro, which you didn't hear, we described your mission as bringing more kindness and humanity to business. Is that how you think about it?

James Rhee: I think I'm trying to bring more kindness and humanity to life and work is such an important part of having fulfillment as a human being.

So why not at work too And so many of the things that we live in, systems we live in, they're so arbitrary, right? So I'm just asking people, what do you think? Like, if there was a way to live more like the way that you want to live in your workplace too, and it was quote, productive and quote, efficient and quote profitable, like, what do you think?

Would, would you try? And so that, that's sort of the nature of the book, but it's mostly focused on a life.

Anne Morriss: Mm. We write books also, uh, and think a lot about words. It seems like, uh, there are kind of a lot of words that we could use to describe what you're getting at. I'm curious about how you settled on the word kindness as a focus.

James Rhee: Yeah, it was not planned 10 years ago. And I mentioned in the book that it came out of my gut. Soul place. I don't know where it came from, but it was in a time of chaos and the most bleak moment. And I hadn't used that word since I don't even remember when. And I said it, I said kindness and math. And I think that in retrospect, I came up with those two words because those were words that they're almost, they're incontrovertible.

Anne Morriss: Mhm.

James Rhee: They are highly intuitive. And they're much more part of the natural order. Like, physics, music. 

And then in Korean, there's another word called cheong, which is, a feeling of connectedness that can be good or bad. And in the TED talk, I talked “goodwill.” That's the closest English word for it. But the way I would describe it is the movie scene.

For those of you who love, it's a wonderful life. It's the end of that movie that Mary was able to show George. Look at all of this goodwill or cheong you've created in your life. And I think it's a concept, um, that's going to be increasingly important over the next 10 to 50 years as we hyper rationalize and we're just in a zero one type game. And I think cheong and kindness, these are twos.

Anne Morriss: Yeah. You sometimes use the word “freedom” too as the goal here. Where does freedom fit into your story? 

James Rhee: I think freedom is not what we are portraying it to be in media that it's this hyper solo activity where you can do anything you want. I think freedom properly defined really comes hand in hand with mutualism and accountability, uh, in a circuitous way. I think freedom is really an understanding of your basic concept of self agency. Yeah. You know, that it's internal motivation, it's intrinsic motivation, that you really are on a path where you understand who you are, who you want to be, who makes that path better for you, easier for you, that you sort of like, Come up with your own life, money, joy equation, and you do your best to do that.

Anne Morriss: That to me is freedom. Yeah. It feels like a very powerful theme in your story. 

Frances Frei: so we would love to get into what you did at Ashley Stewart. To change this company's destiny in really record time. Just to set the scene here, can you give us a sense of the before and after? Sure.

James Rhee: yeah, I was, um, I was 40s, early 40s, private equity, Boston guy. and there was a company called Ashley Stewart. It's, uh, on the surface, diametrically opposite of, me,and, you know, and the company had sort of been bereft of funds for 20 something years.

So I had a lot of operating losses. 

 there was a lot of like weird stuff going on in the company. Couldn't attract the best talent, money getting siphoned away. Heading to its second bankruptcy in three years. No goodwill, six weeks from liquidation. 

And that's the status. No Wi Fi. There was no connections on Wall Street. It was going and it was going to die a quiet death because they also didn't have a lot of clout with the media. There weren't going to be any like uproar about save the company, 

 and that's the before, right?

and it didn't sit well with me. Metaphorically, you can imagine they were servicing and employing plus size black women, moderate income. So when you gather them in an entity, you can imagine how the systems treated the entity.

 and I was a sort of like reflective law school, public defender, private equity guy who used to teach high school, who cared very deeply about people looking at these women and seeing my mother And so I went for six months.

It was supposed to be six months.It ended up being seven years 

 And then the after is that 

 a company went from being worth. its inventory, which was like 10, 12 million bucks to, a solid nine figure valuation, realized cash company never made money.

We made more money in our first year than, uh, I paid for the assets. I mean, it was, shocking, but I think as you all, you both are experts at this for the people in the car doing it with me, there was no shock.

Anne Morriss: Mm hmm.

James Rhee: that's the before and after. And I think these, most people didn't know what we had done for a long time because we didn't really want to talk about it. Like we were really happy, like just being and enjoying each other's company. 

 but now it's coming out because people are like, Oh, the world is starting to hit what I was loneliness and, you know, different convergence of alliances of people and sort of combining Eastern and Western philosophies.

And like, I think that's why there's interest now in the story.

Anne Morriss: Yeah, I, I see it as a very positive indicator that the world is very interested in what happened here. So in the beginning, you started out going more slowly than your private equity colleagues would have advised you to go. What did you learn, from the choices you made in those early weeks and

James Rhee: I was creating situations that were cognitively dissonant for people where I had no office, you know, and I kept explaining and some people give it lip service, but it was really just operationally made this way that the people on the front lines were much more important than anyone in the home office.

And so I spent most of my time actually out in the field. I was hanging jewelry. 

Anne Morriss: In stores.

James Rhee: Yeah. Learning about peplum and like shark bites and just talking to the customers and getting to know the women who had been there for so long.

Um, and I asked them, I sort of pleaded with them. I was like, just teach me, like, tell me what's wrong. And you have to picture a group of frontline workers in retail, and then you add gender and race. were nervous at first to really tell me the truth. Even though they trusted me, it took time for them to feel it, right?

And I kept coming

Anne Morriss: And test it,

James Rhee: Yeah, and then I got very, you know, personal.

I just said, you know, you do remind me of my, my mom. I told the story about the Korean grocery store to them where my mom acted so differently outside of our house other than when she was in a comfortable place like the Korean grocery store once a year. And I could see it in her face.

Anne Morriss: her whole comportment. And I said, I see the same thing that happens to women when they, you interact with them. How beautiful. You defined it as a safe place and that you were fundamentally in the business of safety.

James Rhee: Safety and fellowship. and I was a beneficiary of that safe place too. They had every right to sort of laugh at me and to like, not trust me, but they really gave me a chance. but that's the basis of real friendship

Anne Morriss: Mm hmm.

James Rhee: And so they, they gifted me that. 

Anne Morriss: It's beautiful. You mentioned your TED talk, which everyone should watch,and in it you lay out a few pillars of your turnaround strategy and I'd love to just go through those one by one. Um you talked about creating this culture of kindness and in our experience. cultures,

It's such a big part of change leadership and it can be. It's also hard for people to get their heads around what are the actual levers of culture change. So what did you do to change the culture of this organization that you think was most impactful?

James Rhee: Some of the things we talked about were, it was those things, but it was really getting to the heart of it, was defining kindness correctly, but not just through PowerPoint, it was through words and ultimately through organizational realignment. Fundamentally, people were taught that to be successful here and in life, they had to learn the definition of how kindness relates to agency.

That kindness, to me, is really an investment in someone else's agency. The ability to sort of be self informed about decisions. Informed, right, but not

Anne Morriss: Mm hmm.

James Rhee: Try to find, help someone find their freedom without asking for a payment. It's not transactional, but it is an investment in them. It's an investment in a system.

It is an investment. So it was really sort of getting people to understand kindness. Ultimate investment in agency. 

so from a physical standpoint, all the trappings of hierarchy were eliminated. like fancy offices, pecking order on offices. I think I joke in the book, I was driving a beat up, like Nissan Altima. And like, they kept saying, drive a nicer car. I'm like, no, that's like, Why would I need that?

Like, um, 

 they were not laptops, like people in the meetings. They were very few meetings you would see. There was a Monday morning meeting that, uh, I think Bezos, you know, I, I didn't do this, but remember he, he has this thing where he set up meetings and no one had computers, you had to write an essay.

So it was like almost like running it like a humanities class where people were asked, like, have done all their work and to be able to speak to it. So people used to laugh and say, we feel like we're at school.

And I'm like, you are, I'm learning. And so these are the things people laughed. There was so much self deprecation. There were ridiculous things like, uh, spontaneous karaoke where the worst people would sing and people would be like, oh, interesting.

Like it was, we filmed ourselves and then put it out into marketing to save money, but also to show people that this was So people felt very safe in that way too, like self deprecation, laughter, laughter. Tears were part of the mix. I did not ask people to be humanoids. 

Anne Morriss: And in, in kind of one example of a mindset shift, you started to think about payroll as an investment. Which was not very private equity of you, James.

James Rhee: No, well, it's, I think The way that numbers are organized on a spreadsheet is how you categorize them. So sales first is the first thing you see. Costs of goods sold. Got it. Gross margin. You know, and then expenses, marketing, rent, labor, 

And so I kept saying to people, pull labor out of that spreadsheet because this labor, it's you, it's the people sitting next to you.

Anne Morriss: a I it's a beautiful example of math versus accounting. 

James Rhee: so like, can you solve for net income before labor? Okay.

Anne Morriss: Mm hmm.

James Rhee: And so you solve for that. Then you're like, Oh, and so people who are less accounting or finance oriented, I would sort of say it this way.

I'd say, check this out. When I was growing up, little James wanted to play little league, but Jennifer, my little sister, she wants to do ballet. And I, there was enough money for a new baseball glove or Jennifer's ballet shoes. Jennifer got her ballet shoes. James didn't play baseball. And as a family, we made that decision.

And there was a little bit of pouting on my part, but I got over it because that was best for the family. And so when you pull labor out like this, I kept saying to everyone, I was like, why are you treating the landlords or our social media consultants or whatever? The same as your colleague, like, shouldn't we create a system where we maximize like a country would like our inflows, let's keep as much of the inflows for us.

a lot of the things we did, they were so simple.

Frances Frei: but what does that practically mean? Like if I wanted to leave and I wanted to run my business there because I need to know how much money I'm going to have at the end of the day. And I did have to spend money on labor. So by highlighting that net income before labor, you’re essentially saying let’s look at our profit and let’s not concern ourselves with the labor cost. It seems symbolic. but I'd love to just hear pragmatically, what am I, if I adopt that mindset, guide me

James Rhee: Yeah. So number one, you are right. Uh, much of the book and how I wrote it and what happened at Ashley and a lot of the brands I'm a part of, it is a, it's a mindset first, right?

It's like a mental model saying. Oh, it's possible to do it a different way. 

So doing a little bit of that type of manipulation of spreadsheets and pulling things out, it reminds people to just think differently, right? To say, okay, I'm being primed to think a certain way. I should not be so hasty in this, So the second thing is that I watched and I expected people to want to know how the company actually made money. 

I'm like, you're opining on things in your quote department, but you don't know the impact this has on these four other parts of the general ledger. Do you want to know? And so that was number two. And so that people were. compelled to learn about about how to build a business

Frances Frei: about the physics of the organization.

Anne Morriss: Um, on this on this tactical. But I think the third pillar of your strategy that I think was really just you change the way you worked with your customers and the role they played in the business.

James Rhee: Yes. So it dovetails nicely with, with, um, Frances statement. It's like with labor, I said, okay, our customers, If they are huge net advocates for us, I think our NPS score, I think McKinsey did the study. I think it went from like 37 to 90 in like two years. It's the highest NPS, uh, So they've ever seen. Like, but I just said, well, why do you look at the customer?

Aren't, don't we want them effectively synthetically to be working for us? So it's, it's basically creating leverage in your quote labor account. It's zero expense. It's actually contra expense. Like, don't treat them like just customers. Like, what happens if they were, quote, colleagues? Like, what would you do?

And so it's expanding that definition. And then, I think the other thing we did well, once, so people understood the business, sort of laughed and said, Oh, labor is us. I actually had very detailed conversations with them about the meaning of words. Like what does compensation mean?

And I was honest with them and I said, I can't quote compensate you. In hard dollars narrowly defined as much as I want to. It's just I can't. And by the way, I also understand if at some point you want to leave and.

 go in a better industry based on the teachings that I'm doing every Friday, I will be the first one to do that. I'm like, that's good. So the compensation on things like this was like it's cash. It's also like I focus so much on like the health plan, which was one of the worst. We had a gold standard health plan.

We made it a point to afford it. It was really important to them. The flexibility, the leave policies we changed, we tried to incentivize if you wanted to start a family. I counted babies.

Anne Morriss: Mm hmm.

James Rhee: the whole, get back to the

Anne Morriss: I love that as an indicator of a healthy organization.

James Rhee: like, I mean like,

Anne Morriss: The number of babies,

James Rhee: And people laughed, and I was at J. P. Morgan's, they laughed. It was like 50, 000, and I just said, well, and then they got very serious about it. They're like, you're right. Because think about, you have to do 20, 30 changes at the same time to solve for that problem.

so it gets back to the compensation. Here's some more practical things. One, people worked like more joyfully. You can imagine we had very little, expense in terms of recruiting and retention. People stayed. I taught them, which was a free investment from James's time that they got better. Like they were, uh, had better agency.

They were more informed. It was an investment in that public good. The workers compensation expenses, uh, insurance went down so much that I, and I labeled this, I said, this savings and insurance is not mana from the heavens. This is our collective asset. And I paid it out in the form of synthetic dividends because when I gave raises, I said, it's coming from this pool of money. That we earn together. 

Anne Morriss: Beautiful. 

Frances Frei: That's really nice. 

James Rhee: Right? And so everyone was a quote, equity owner in the company. And everyone in that business felt and then economically were treated in certain ways as an owner.

Like they owned their mutual behavior. And this is how they, That reward, behavioral reward, it was linked to mutualism. So that was, that was one example. And then, I mean, the other example in terms of just the math, in terms of math being kind, after I got more familiar with fashion and things like this, and then you have basics that are slower turning, and then fashion items get more complicated. higher margin, um, higher risk.

And so after I understood the product flow, I ran the inventory. We created algorithms like a hedge fund. 

Like ultimately we can sell the bra or the basic turtleneck, the basic cami, the basic gene, like the regular cut, Hey, one day it will sell, so it's like a lower risk financial instrument, like a bond, little upside, but you get your money back and you get a quote coupon.

And in this case, the coupon is called the gross profit on the bra or gross profit on the jeans. And then I said, wait, that's kind of boring. You can't have a diversified portfolio with just bonds. So we need some equity. And so there would be certain fashion pieces that were fashionable that would go out of style and Six weeks, right?

And so I just said, Oh, like, let's have this. it's higher risk. That means we have to turn, we have to sell it faster. The margin should be higher. The dollars for the amount of risk we're taking. And then there were certain fashion items. They were super risky. Like the, that's the equivalent of like buying e liquid real estate in like Argentina.

Just like venture, a venture investment that could be zero. And you, and you expect a lot of them to be zero. So this would be like the, like leather pencil skirt that you're buying like late October.

Yeah 

Anne Morriss: Yeah, it could be a meme stock.

James Rhee: be really ugly and no one buys it. Right. And so the whole inventory flow, I set it up as if it were a set of financial instruments instead of it being fashion. And then

Anne Morriss: Oh, it's so good.

James Rhee: then I explained it, though. Here's the fun part. I, you have to picture the buyers and the merchants, you know, the first time I said it, I was like, well, this is what it's going to be like. And they're looking at me like, oh, geez. But, you know, I think I'm a decent teacher. Like I think in my nature, I'm a teacher.

So I find ridiculous ways to teach things. //And I just said at the end, do you see what this is? It is kind. I want you to have so much freedom and agency. Go do your job. No one's gonna be mad at you. You can't blow up the company. If you buy the ugly prom dress that no one buys.

Mathematically, you cannot blow up this company. Go do it. 

Anne Morriss: It's such a beautiful way to empower people.

James Rhee: Right, but then they understood it, and they laughed. I think a lot of times leaders or companies, particularly in finance or like esoteric things, make people feel small or stupid. 

I think knowledge is, should be democratic. And if you can't teach it in a way that people can understand, then you're not a very good leader or you're just arrogant. And I think ultimately it hurts your, um, your enterprise.

But two of the things I was most proud of when people talked to me about kindness and about math were those two examples was workers comp.

actuarial, leading that to compensation, creating even better behavior. And the second thing was this hedge fund inventory, like turtlenecks. So cool. It mathematically creates an environment that is kind.

Anne Morriss: uh, it's such a cool example. Well, James, we could talk to you forever, and I know we're running up against time. Um, fast forward to now, and you want to make these ideas contagious. What's one or two things you hope that people take away from this conversation?

James Rhee: It's a social compact. What I'm writing about and saying, can we be kind? Can we be mathematically honest? And those are table stakes. 

And I hope that your listeners realize that like it's like unlikely this company was dead and it was a Korean guy with no experience doing this, predominantly all black women, ultimately, um, a lot of white women came and Asian women came too.

And it like the third or fourth form of capital we had to use. It wasn't money. Capital is not just money, right? 

Anne Morriss: That was the lesson. Yeah.

James Rhee: money amplifies

Anne Morriss: Beautiful. Beautiful.

James Rhee: And so we started it was starting off with humanity, civics, science and then bringing in business know how to amplify those things. And I think that's what we need.

Anne Morriss: Beautiful. It's such a privilege to meet you and we're so grateful, for your time and energy and example in the world. You're, you're awesome.

James Rhee: I feel the same way. Thank you so much for having me. 

Anne Morriss: Frances, what do you hope listeners take away from this conversation?

Frances Frei: So I'll, a couple of things. One is, this was a, you know, how do you lead change through culture? And what we know about culture is that there are the physical artifacts in an organization. There are the shared behaviors in an organization and then there are the mental models. And the great teaching of culture is that if you want to change behavior, you have to change how people think.

That is exactly what James Rhee is on the planet to do. He showed you can do it in an organization. You can do it in an organization under tough times with six weeks to go. If you influence how people think, they will reliably behave differently. And if he went in and commanded people to behave differently, it would never have worked.

Anne Morriss: And this was one of, um, the great Edgar Schein’s insight.

Frances Frei: And so this to me was, I get. Why it worked. if you want to get people to change their behaviors, don't command them to behave differently. Influence how they think so that they will reliably behave differently.

That's the first thing I have. And the second thing I have is that kindness and math. I mean, that net income after labor. That is such a beautiful mental model because we have like net income before depreciation. Like we have it before all of these, like, uh, all of these other things, but to do it from a human centered approach, bringing kindness and math together.

I really loved it. And my third thought is, kindness isn't lowering the bar. Kindness is actually raising the bar, but giving you the agency to reach it. And I loved that as well.

Anne Morriss: Yeah.it's such a powerful example. You know, we talked about language in this conversation and it's almost as if you can't really find the words, you know, like mindset seems like it doesn't do it justice, even culture doesn't- It's like the core basic assumptions we make as human beings. when you shift those, anything is possible 

Frances Frei: you get what? 

Anne Morriss: it, and it's possible to shift them to on a systems level, and I think that's the core assumption of the work we've always done. But it was, it was, I don't know, there was something so humbling about it being brought to life in such a powerful example.

Frances Frei: And you know you get why Edgar Schein originally talked about the shared basic assumptions.

I think he would have said the shared core basic assumptions um

Anne Morriss: No, you're right. It's like that word, the word basic, uh, really, I really lands with this story. I also think that the piece that I, I really think about with this example is the power of respect, the respect that he brought. To his employees, their potential, his customers, I mean, the- um, again, it's a word that doesn't really, really do it justice, but when that becomes part, one of the shared basic assumptions that that's what we're all doing here. It's just, it's part of that emotional foundation.

Frances Frei: and and dignity came to mind for me because there's so much Dignity and being useful like I bet the employees were wildly more useful to the organization Three days after he started than they were for years before because they didn't know how to be useful and there is so much dignity in being able to contribute um, and so I'm so in for all of it and I can't rate wait to read more I'm the next book I read is going to be the red helicopter

Anne Morriss: Yes, hear hear! That is everybody's homework.

Frances Frei:  everybody’s homework, uh, is to read The Red Helicopter and let's go and bring kindness and math to the world.

Anne Morriss: All right, let's do it. 

Thanks everyone for listening to this conversation. We want to hear from you too. If you want to figure out a workplace problem together in the collective as part of our shared humanity, send us a message, email us, call us, text us. You can email us at fixable at ted. com or call or text at two three four fixable. That's two three four three four nine two two five three.

Anne Morriss: Fixable is brought to you by the TED Audio Collective and Pushkin Industries. It's hosted by me, Anne Morris.

Frances Frei: me, Frances Frei.

Anne Morriss: Our team includes Izzy Carter, Constanza Gallardo, Banban Cheng, Michelle Quint, Corey Hajim, Alejandra Salazar, and Roxanne Hai Lash. episode was mixed by Louis at Story Yard.

Frances Frei: Yard. enjoying the show, make sure to subscribe wherever you get your podcasts and tell a friend to check us out.