These posts over the past year have chronicled General Motors’ Enronesque slide toward what is increasingly appearing to be an inevitable reorganization case under chapter 11 of the U.S. Bankruptcy Code. That probable fate was reinforced this past week when GM announced a band-aid restructuring plan that is akin to rearranging the deck chairs on the Titanic.
The newest GM plan really is pitiful under the circumstances. GM lost a staggering $8.6 billion last year, and that doesn’t even count another $12 billion of bankrupt Delphi (a part of GM until 1999) losses that GM might have to make up. In the face of this flood of red ink, GM announced that it will cut dividends by $565 million and cut another $900 million in costs through reducing executive salaries and health benefits. The biggest news was that GM CEO Rick Wagoner will take a 50% pay cut to $1.1 million, but there was precious little word on how the company is planning on bridging the rest of its $6 billion or so in losses. Conan O’Brien characterized the plan pretty well when he commented in a monologue that, since General Motors is cutting the salaries of its top executives, the executives will now be earning so little they will be forced to drive GM cars.
Moreover, it’s not as if GM has been a sterling investment over the years. As this Floyd Norris/NY Times article and accompanying chart notes, an investor who bought a share of GM stock at its price of $40.13 at the end of 1960 would have received $127.58 in dividends and received four distributions of stock worth $20.62 at the time those dividends were issued. If all of that had been reinvested in GM stock, then the investor would now own 11.6 shares, which is worth a bit more than $500. That amounts to a return of less than 6 percent compounded for those 45 years, which would be even less once brokerage fees and taxes are included in calculating a true net return.
So, who’s to blame for the this hulking mess? The Wall Street Journal’s Holman Jenkins thinks that Congress is to blame for the Wagner Act of 1935, which empowered the UAW to become the monopoly supplier of labor to the auto industry, which resulted in today’s unfulfillable pension and health-care promises, and the notorious “jobs bank” security program that carries laid-off workers on the books at full pay and benefits no matter how few cars GM generates.
But in a truly remarkable series of posts (here, here, here and here), Larry Ribstein contends that GM’s problems are a reflection of a far deeper problem — that is, an American culture that encourages resentment toward business, which in turn discourages companies such as GM from taking the bold steps necessary to remain competitive in dynamic markets:
Contrary to popular belief, making failing industries inhospitable to top management talent is really not the way to revive them. Nor is this a useful governance model for the thriving industries. A couple of localities are trying to strangle a leader of the current economy, Wal-Mart, with the kind of employee benefits that are bringing GM down (latest developments here).
Populism is not good business. It’s a destructive myth that everything would be ok if only there werenít these troubling disparities, and if only we could repeal the laws of markets because they make some people unhappy.
Where does this popular belief come from? Of course, it’s ingrained in human nature. But our popular culture contributes to it by legitimizing it. This includes journalists. Another source, as Iíve written, is film. Remember Roger and Me? The film lambasted a GM struggling to cope with the onslaught of world competition. If GM had been able to take even more aggressive steps then it might not be where it is today. . .
. . . [I]tís fundamentally the political forces that inhibit the kind of sweeping changes that would focus firms on value creation rather than risk avoidance. These political forces are stirred up by populism that focuses attention on side issues like compensation, and heats up opposition to necessary structural changes because of the people who are hurt by the necessary destruction of excess capacity.
Itís sad to see these [former GM employees] hurt, and society should minimize their pain to the extent possible. But in our increasingly dynamic world, itís not like we can avoid paying these bills forever, as we are now learning with GM . . .
So if we have to blame somebody for GM, my candidate is Michael Moore.
The flipside of that same populism coin that Professor Ribstein identifies has played a substantial role in the post-Enron criminalization of business, which has been reinforced by a media that is more interested in catering to that destructive populist passion (see also here and here) than presenting a balanced view of the enormous societal cost of discouraging creative risk-taking and destroying lives.
Reading even a few sentences by Larry Ribstein explains why GM is where it is–it has being listening to lawyers like him rather than people with business brains like Gary Hamel or Bill Gates.
You ask, Where does this popular belief [about GM] come from?
Simple, compare and contrast the gilde paths of the personal computer/software business (falling prices, with ever greater quality, variety, etc., etc.) and automobiles (ever rising costs, most all changes gov’t mandated, rather than internally generated).
Most any decent computer ex could straighten out GM in 6 months, applying Gary Hamel’s simple principles of remaking your business model–custom order off the Internet, pick up at the factory (ticket price included in price, as opposed to the extortion dealer delivery charges on top of the sticker price), guaranteed for 200,000 miles, except for TBA, priced under $20,000 with auto and air. Under the hood, it would be “open standards,” easily repaired anywhere in the World.
All cars and parts would be wholly made in the USA–total honestly would be the guiding principle.
The simple truth about GM is that technology has taught most everyone that its cars are designed to fail, pieces of crap. GM could spec parts to last 200,000 miles but deliberately doesn’t. That, bottom line, the GM’s problem.
Beyond that, GM’s problems are entirely with its distribution chain. It spends billions on ads and millions on ad execs, pointlessly. About $4,500 in each GM car is advertising.
It has a useless dealer network. Why? Well, when your car falls apart, they can service it. What a stupid message. We all live without a Microsoft dealership, Dell dealership, etc., etc., Why do we need a GM dealer, except to repair a car not properly built in the first place.
GM’s workers and union contracts are not the source of its problems. The problem with GM is that no senior manager has changed anything or had any insight since Sloan. To really understand how bad the culture is, read the sequel to Sloan about how difficult it was to just get that book published.
Assuming for a moment that your business plan is practical for GM, aren’t you and Professor Ribstein saying the same thing — i.e., that the expectations of American culture and corporate governance won’t allow GM to undertake such a radical restructuring?
Tom,
I don’t think you could have made a much worse comparison then when you characterized the slide of General Motors as being “Enronesque”. The “slide” of General Motors into possible bankruptcy is the exact antithesis of the “7 week collapse” of Enron into bankruptcy.
If it does occur, General Motors slide into bankruptcy will be “normal business behavior” that has gradually taken place over a number of years and it will not be “criminalized” just as there was no criminalization of “normal business behavior” and the resultant bankruptcies of Delta Airlines and United Airlines and most other public companies that have gone into bankruptcy.
General Motors financial problems have been reported to the investing public continually over the years through their 10-K and 10-Q filings with the SEC and they have indicated that GM has substantial financial problems. The stockholders have been put on notice for a long time that GM has some serious problems. Those stockholders who wanted to cut their losses and get out were able to do so, those who wanted to stay on board and maintain their investment in GM were able to do that, and some people probably thought that this would be the perfect time to buy GM stock, it could only go up. The main point is that GM had reported their poor financial condition to the investing public and the investing public was “on alert” that things were not good at GM. On February 7, 2006 Rick Wagoner, the CEO of GM did not stand up and say “General Motors is in solid shape. “Very, very strong performance in all sectors,” The article that you reference in your post stated that “G.M.’s chief executive, Rick Wagoner, declined at a news conference Tuesday to predict when G.M. would return to profitability,”.
This is compared to Thursday’s testimony in the Enron trial where the tapes of a July 12, 2001, conference call with analysts was played for the jury. The Houston Chronicle trial coverage reported “Skilling begins the tape by telling analysts Enron is in solid shape.”Very, very strong performance in all sectors,”.
Five months after Mr. Skilling reported that Enron was in “solid shape” Enron was in bankruptcy and the stockholders lost everything that they had invested in the company.
I think the attempt to try and put the “activities” of the Enron management under the umbrella of “criminalization of normal business behavior” is a disservice to all of the business executives who do actually “play by the rules” and who bite the bullet when things are going bad and they let the investing public know exactly what is going on.
Enron, in my opinion, is far, far beyond normal business activity, and that is the reason there have been criminal charges brought in the Enron downfall. As I mentioned earlier, the great, great majority of business failures of public companies in this country do not result in criminal charges.
I think most people feel that (as they say in politics) “business ain’t bean bag”, it is incredibly challenging and competitive and it requires an enormous amount of hard work and sometimes then some “luck”, but there are certain “ground rules” that have been laid down that people managing public corporations have to follow, and most executives to their credit, follow these ground rules, though at times it may actually cost them their jobs. It’s the one or two percent who, for whatever reasons, don’t follow the ground rules and it ends up costing the investing public billions of dollars, these are the cases where criminal charges are brought, and I think that is exactly the reason that criminal charges have been brought in the Enron case.
Max, I should have linked my “Enronesque” tag to an earlier post about GM’s decline, which would have explained the context in which I used the term. It referred to the process of the market forces turning against GM in a similar way that the market turned against Enron.
However, your assertion is dubious that GM’s management has been any more forthcoming than Enron’s management about its long range financial problems. Sure, it’s easy for management to issue pessimistic reports when the company is losing $8.6 million in a year. But before the past six quarters or so, GM’s disclosure of its long-term financial problems resulting from its spin-off of Delphi to its funding of pensions and health costs to its infamous “job bank” has been anything but clear and straightforward.
This is not to suggest that GM’s lack of disclosure was criminal — it certainly was not. But the point is that criminalizing corporate agency costs amounts to criminalizing judgments upon which reasonable people can differ. Criminalizing such decisions is neither a rational application of criminal law nor a means by which to encourage creative risk-taking that can produce jobs for communities and wealth for shareholders.
aren’t you and Professor Ribstein saying the same thing
No. Ribstein blames the workers fore getting a decent, living wage. Under his line of reasoning, GM’s problems can all be traced to a bad outcome from the Civil War.
I blame management. For example the Internet is over 10 years old, but GM has done really nothing to integrate it with its customers or sales.
Moe Levine, I believe there are many state laws protecting auto dealer franchises that make it difficult or impossible for GM to go towards a factory direct sales model. These laws also put GM (and Ford) at a disadvantage to companies like Toyota which have a newer and more efficient (fewer but higher volume dealers in better locations) dealer network.