Sunday, August 12, 2012

The Banana Man: Sam Zemurray and Leadership

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I just finished Rich Cohen's memorable book, "The Fish That Ate the Whale: The Life and Times of America's Banana King." Ostensibly about the life of Sam Zemurray, pictured above, it's a provocative book about the Cold War, the CIA, American foreign policy under Truman, Eisenhower and Kennedy, Central American dictatorships, and corporate leadership in an entirely different era from today. 

Cohen writes, "If you want to understand the spirit of our nation, you can go to college or you can study the life of the Banana Man."  I know that I could build a great course around this book, which is replete with extensive source materials and people whom Cohen consulted for background information. 

Bananas first made their way into the United States in 1870, when a ship captain named Dan Baker brought Jamaican bananas into Jersey City, where, according to the National University of Ireland, he sold 160 bunches for $2 each.  Baker would become one of the co-founders of the Boston Fruit Company, which became one of the largest banana runners in the port of Mobile, AL where the trade really began to grow.

In 1877, Cohen writes about a 14 year old Russian Jewish immigrant from Moldavia, Sam Zemurray (born Zmurri), who comes to Selma, AL to work for his peddler/shopkeeper uncle. Sam Z's curiosity takes him to Mobile where he learns about the banana trade by talking to stevedores, captains like Baker, and peddlers.

Sam finds the banana crop to be graded into three categories: "ripes" (shipped 50-80 miles away from the docks), "overripes" (sold in Mobile and Selma), and "about to be ripes" (shipped as far as Memphis and Birmingham). 

The Boston Fruit Company graded ripes this way: one freckle, the banana was turning; two freckles, the banana was ripe.  Even though ripes were flavorful and good to eat, they couldn't be sold through the distribution chain before they softened, smelled and contaminated a whole load of fruit.  These ripes routinely became trash.

Young Sam saw opportunity in the industry's discards.  If he could sell the ripes within three days, he could make money.  He invested $150 to buy Boston Fruit's ripes from the docks, and he rented boxcar space on the Illinois Central's trains out of Mobile.  His intention was to hawk the bananas at each stop along the train route. 

In addition to his vision, Sam was able to enlist people's support for his enterprises.  The train conductors suggested sending telegrams ahead to the train stations so that people would know the Banana Man was coming. Customers would be waiting.  Having no cash for the telegrams, Sam cut the conductors in for ten percent. He wound up making a profit of $35 on his investment, and Sam had a vision for a business selling ripes.

After growing his business as a jobber for United Fruit, Sam and his partner Hubbard invested $20,000 and founded Cuyamel Fruit Company in 1910 to buy 100 acres of land near the Cuyamel River in Honduras, along with some ships.  Cohen describes Cuyamel as the "Green Bay Packers" of the banana business. 

One of Sam's first principles was to learn a business "from A to Z," by talking to everyone involved in the business on the ground and by listening and observing. In that way, he felt, any problem that came up could be solved, armed with this foundational knowledge. He loved to drink with the sailors and other rough characters.  He said that if you drank with a man, you got to know what he was thinking. Sam knew the banana business, end to end, better than any other manager, operator or executive in the industry.

Cuyamel introduced the practice of selectively pruning banana stands, a practice which the industry bean counters found wasteful.  He got higher yields, and less waste. Even though much of the crop was grown in well drained, loamy soils, Sam insisted on adding additional drainage and spillways. In lands often hit with torrential rains, he added overhead irrigation for critical times when hot spells affected the health of the bananas. 

In 1917, when Cuyamel was regarded as a dangerous rival to United Fruit, the two companies targeted the acquisition of 5,000 key acres of land claimed by owners in Guatemala and Honduras.  United Fruit took the issue to their lawyers and board of directors for analysis.  Sam, who didn't believe in wasting time on petty issues, just bought the land twice, from both owners.  The key asset was the land in a time of explosive growth in demand and pestilence affecting existing plantings; the additional money paid was small potatoes. 

In 1923, Sam Z incorporated Cuyamel as a Delaware corporation.  According to papers in the Lehman Brothers Collection at Harvard College, Cuyamel had assets of $4 million, liabilities of $691,000 and earnings of $1.2 million at the end of 1924. In that year, the company imported 6.6 million banana stems into the United States, according to the Lehman papers.  By 1927, Cuyamel imported 9 million banana stems or 14% of the total imports to the United States. 

Sam Z had gone from a young peddler, to the "Banana Man," to a full fledged corporate executive of a very profitable and well funded corporation.  It did, however, carry a substantial debt load, required to buy more Central American land, build additional rail lines, and more towns for Cuyamel workers and staff.  Cuyamel's 1925 offering of $5 million of first mortgage, fifteen year sinking fund gold bonds was underwritten by Lehman Brothers, Goldman, Sachs, A.G. Becker and Ames, Emerich.

Sam Z was now a wealthy, powerful man, who still lived in New Orleans, though his company was incorporated in Delaware and his financiers located on Wall Street.  He loved the allure of the docks, the company of stevedores and captains, and the jungles of Honduras, where he grew his bananas.  He cleared out his first stake of land by himself, wielding a machete side-by-side with the best of his men. He and his crews had to deal with snakes, scorpions, and mosquito-borne malaria in creating land that could be planted. 

Meanwhile, United Fruit the Boston-based industry Goliath was run by Boston Brahmins, professional management types who viewed the business from reports and accounts.  This cultural difference would come into play later in the story, as the global banana business continued to grow.

In 1929, Sam Zemurray sold the assets of Cuyamel Fruit to United Fruit Company. Cuyamel owned 35,000 cultivated acres in Honduras, Nicaragua and Mexico, fifteen top of the line refrigerated banana boats, and the capacity to produce more than six million stems a year.  United's shares were selling at $100 per share, and after the deal, Sam Z became the largest shareholder of United Fruit. 

Sam knew that the way to succeed in the business was to get bigger, work more efficiently, and diversify the crops.  He had done all of these things, since Cuyamel's assets included things like the Sula Sugar Company.  A penny a pound tariff, such as the one contemplated in 1913 by Underwood-Simmons bill, would have been devastating to a leveraged business with high fixed costs.

Sam sold out, became the largest shareholder of United Fruit, and was freed from the constant worries about being extended too far with his creditors. United Fruit, which reported 1928 profits of $45 million, was happy to have taken out its strongest competitor, who they still regarded as a Jewish peddler with a thick Russian accent.

With the Great Depression and its aftermath, United Fruit's 1932 profits fell to $6 million, and its share price plummeted to $10.25, according to Cohen's book.  As the largest shareholder, seeing his wealth depleted, Sam took action in the way he new best.  He went to "see for himself."  Unlike the Brahmin professional managers at United Fruit, he didn't rely on reports.

Sam went to the warehouses and talked to the peddlers and sea captains about the banana business. The Boston boat captains mentioned that corporate policy had ordered captains to slow steam their ships to save fuel on the voyage from Central America,  Sam quickly did the calculations and found that the company lost more in spoilage than they saved on fuel. 

After countless unwelcome phone calls into United executives, he wrote a letter to the board of directors with a detailed plan to improve the company financials.  This included repurposing the underutilized fleet to carry additional cargo, fallowing some of the fields, and otherwise controlling the supply in order to firm up prices. His letter was ignored. 

In 1932, at a board meeting which Sam attended, a manager in Guatemala wanted $10,000 from the capital budget to put in an irrigation ditch.  His request was denied by the bean counting executives without any first hand research.  Sam Z was outraged. He said to them, "We are here. He (the manager) is there."  In other words, he has better data. Sam had actually garnered enough shareholder proxies in his hand to replace the board, but he had been reluctant to pull a power play.

He gave a long, impassioned review of the business, its problems, and his solutions.  About the manager's request, he said, "If you trust him, trust him.  If you don't trust him, fire him and get a man you trust to do the job."   Of course, the board didn't know if they trusted the manager, since none of them had ever met him. 

After Sam had completed his presentation to the board, as the company's largest shareholder and as the "Banana Man," he awaited a response.  The board Chair smugly replied that he hadn't understood a single word because of Sam's thick, Russian accent. Sam flashed his proxies and announced that he was firing the board Chair.  United Fruit named Sam as its new General Manager. 

Sam began his GM's tenure with a six week tour of United's banana lands. "Go see for yourself," and "Don't believe the report" were again his guiding principles. The stock doubled in the first two weeks on the announcement of his new position.  The price ended 1933 at $26 a share.  His energy and commitment alone made a strong impression on the company's far flung managers who never met the Boston executives who sent all those memoranda about how to run their businesses. He replaced about 25 percent of the managers with people he trusted to move quickly and decisively to fix the business. 

In his latest position with United Fruit, Sam started to come across things which would transform him emotionally and the company.  Sigatoka disease initially threatened the entire banana crop, which was entirely one species Gros Michel (Big Mike).  Using techniques adapted from Sam's Cuyamel Company, United warehoused fallow land, diversified the cash crops, and tried their best to research solutions to Sigatoka.

Company scientists soon came up with something called the "Bordeaux mixture," a mix of copper sulfate and lime which was found to combat the Sigatoka disease.  Men were enlisted to go into the fields and apply the mixture to all United Fruit fields.  Unfortunately, the men, called "Los Pericos," lost all their sense of smell and began to glow like parakeets, hence their nicknames.  These men sacrificed their health for a bit of hazard pay.  Pragmatism took precedence over humanity for the Banana Man.  This episode seemed to mark a turning point in Cohen's narrative about the history of United Fruit. 

Of course, bribery had always been a feature of doing business in the banana trade.  Every player from Boston Fruit to Cuyamel to United Fruit built their businesses on buying deputies, customs men, and politicians in every country of operation.  Sam is reported to have said, "A mule costs more than a deputy."

The book's narrative soon turns away from the story of Sam Zemurray and towards the narrative of "The Ugly American." The banana companies were allies of convenience for American foreign policy dating back to the 1900's when London bankers wanted to collect on $100 million of Honduran debt used to build the boondoggle national railway.  President Taft and Secretary of State Knox were fearful of British marines landing in the Americas to collect Honduran debts to their London bankers. Knox used J. Pierpont Morgan to refinance the Honduran debt and to forestall foreign military action in the Americas. The banana companies were allies in this effort, and now U.S. foreign policy and the interests of these companies became inextricably entwined.

Fast forward to the 1950's and the administrations of Truman, Eisenhower and Kennedy.  The Cold War was in full swing.  United Fruit only planted 15% of the land it owned in Guatemala, using this as a hedge against Panama disease which threatened to finally eradicate cultivation of bananas in Central America. Eventually, disease wiped out Big Mike as a viable crop for the Americas, and today the Central American countries export the Cavendish banana.  In 1952, President Arbenz of Guatemala passed Decree 900 which confiscated foreign land holdings for redistribution to native landholders ostensible for the creation of indigenous banana growers.  With the full, active cooperation of United Fruit and the leadership of the CIA, President Arbenz was overthrown in the guise of a sham popular uprising. 

Unlike the story of the rise of a 14 year old banana peddler to an innovator, corporate philanthropist, and hugely successful corporate CEO, this story has little to recommend it.  It has also been told in great detail elsewhere. 

Revolution was spawned in Central America by Che Guevara as a lightning rod.  It found a home in Cuba, and the story in Cohen's book ends with the Bay of Pigs invasion.  In the history of United Fruit, Sam Zemurray appears to be just one of many actors.  To be fair, Sam Z had left the business by the time the ugliest acts took place. 

I enjoyed reading about Sam Z and his rise.  I also admire his optimism, work ethic, loyalty to the workers who got results for the company, and for his philanthropy to Tulane University, and to education and health in Central America.  Solving problems at some point became an amoral exercise, as Los Pericos showed.  Many other corporate actions were as bad or worse.  Author Rich Cohen doesn't pretend to know what was in Sam's mind, and the reader can't guess either. 

Unfortunately, from studying Latin American history, I know that things are rarely what they seem.  The military have always played an outsized role in economic life, business and politics.  Before United Fruit, the military aligned themselves with the caudillos. United Fruit displaced the ruling families or caudillos for a time.  When United Fruit was declawed and left, it's very hard to evaluate if what was left has been more democratic and egalitarian than what had existed for generations.  That's another book, though.

Sam's picture reminds me of some gentlemen who lived in our old neighborhood in New York growing up.  I think that I would have enjoyed talking to the Banana Man.  Reading Rich Cohen's book is like the next best thing, and it makes a less than exemplary period in American foreign policy come alive.

Additional resource materials for article;

  1. Lehman Brothers Collection--Contemporary Business Archive
  2. Maria-Alejandra Gonzalez-Perez and Terence McDonough, "Chiquita Brands and the Banana Business: brands and labour relations transformations," CISC Working Paper 23, January 2006. National University of Ireland.
  3. United Fruit Historical Society.

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