Underwriting Corporate Mismanagement

The latest chapter of our economic collapse now centers on what to do with our Big Three US automakers. Cries of impending doom fill the air. Chants of “it’s not our fault” are spoken daily by both the corporate CEOs and the autoworker union leadership; all blame is elsewhere. So the three well-dressed CEOs flew into Washington in their luxury jets to jointly ask for $25B in a “bridge loan” to keep them afloat as they continue to spend their way into zero-cash poverty.

They sat together smugly as they tried to virtually blackmail Congress into giving them the money “because you cannot put 2 million people out of work.” Yet there was no contrition expressed; there was no sense expressed that “we’re in tough times so we have to operate differently”; most importantly, there was no PLAN for corporate survival. There was no knowledge about whether $25B was even enough to achieve the interim funding goal, or was just a down-payment on future installments. No arrangement was even determined for how much of the $25B each corporation would get. It was simply “pay us something so that we can operate business-as-usual.” Chrysler’s CEO acknowledged some measure of personal commitment and responsibility to all of this by announcing that he had gone to a “dollar-a-year” compensation; GM’s head had cut his compensation by 50%; but Ford’s CEO stubbornly expressed that his compensation level was “just fine at this time, no change is needed” (@$7-9M). It was as embarrassing and frustrating a public relations debacle as I have seen in a long time, and a sad testament as to how low the bar has now been set for corporate executive capability.

What these people, and their union counterparts, seem to fail to understand is basic investing and lending principles. The American people do not lend or invest in companies, whether directly or through financial institutions or the US government, because we like you or not. We do not do it, and should not, because nice people need jobs if they are jobs that contribute unmeaningful work at an excessive price. We do not financially prop up companies who produce and/or overprice unneeded or shoddy goods, or provide poor customer service and follow-up to the sale. No thank you, we look to find other providers instead. And the past business/financial plans of these companies have simply been continually out of sync with America’s greater needs.

When we invest or loan, we do so not in a company or individuals; we invest in a PLAN. A plan that takes us into the FUTURE. A Future with an above-average chance to SUCCEED. To date, these 3 companies and their CEOs and union leaders are offering none of these ingredients. There is no Plan whatsoever; $25B is being requested to maintain an antiquated Past way of doing business; hence the probability of long-term Successful Viability is highly limited. Why would we go for this unacceptable high-jacking scheme?

It is fairly easy to be successful when times are good; hard times require people of special talents. There are many good CEOs and small business owners out there whose good reputations are being besmirched and overshadowed by the visible incompetents. There are CEOs and business owners who are smart and capable enough to see the current shape of things, figure out the handwriting on the wall, and react smartly and adroitly to guide their companies through this current storm. Probably arriving in better long-term shape than they are in now. We need to recognize these business leaders and support them in those intelligent ways that we can.

So what to do with GM, Ford and Chrysler? The probability is that Congress will ultimately blink and fork over some operating cash for these companies. The extreme economic and political realities will demand it. In and of itself, I am not necessarily opposed to government loans/investments in private businesses if done for specific objectives under tight conditions for a limited timeframe. So it should be in this instance. But this funding should come with heavy strings attached. Specifically: a) replace the current management team in each company, along with at least 51% of their Boards; b) renegotiate the union contacts and executive pay to be competitive with industry rivals, i.e. challenge the union to choose either the losing battle to protect wages and benefits at the expense of jobs, or adjust to winning a battle to define and support new competitively-sustaining jobs, and further require executive compensation to set a new model for corporate responsibility; c) submit a clear strategic plan with detailed tactical plans for how these companies will realign themselves to the realities of the US auto buying marketplace. Not a plan of tokenism and public relations, but a long-term plan reflecting serious deep change in thinking, costs, entitlement, and marketplace.

Absent this, then I say let them go into Chapter 11 bankruptcy, as recommended recently in an OpEd article that a friend forwarded to me, written by Mitt Romney in the New York Times reflecting upon his father George’s successful turnaround of American Motors back in the 1950s. (See http://www.nytimes.com/2008/11/19/opinion/19romney.html?_r=1&scp=1&sq=Let+Detroit+Go+Bankrupt&st=nyt). Chapter 11 will de facto force these changes onto these companies, though it will also cause much unwarranted investor chaos. With Chapter 11, the sky will not fall, and doomsday will not arrive, and cars will still be sold; the airline industry and others have already demonstrated a successful life after Chapter 11.

But most importantly, get new people behind the automotive desks. As these CEOs now return to Congress with a whole new skin-deep public relations program to try to make up for their last performance, we need to remember that their problems are NOT new. These companies have been in trouble for a generation. The current economic conditions did not cause their failure, they only clearly exposed it and made us say “no more.” It is clear that only external forces move these current leaders, not innate talent. The last time I looked, there was not a George Romney or Lee Iacocca bold corporate leader to be found among them.