THE ENTERPRISE
WHAT ARE WE TO DO NOW?
That seems to be the question on everyone's mind. A new President coming into office. A different makeup of Congress. A raging recession. I have repeatedly answered this question, but here are some additional thoughts. Cut deeper than you ever thought you'd need to--but don't sacrifice your ability to service customers. That is the lifeblood of the business. Act faster than you think you need to, because once the downward spiral starts, you simply can't move fast enough to get ahead of it. Act now. Yesterday. Conserve cash every way possible. Liquidate obsolete, slow-moving and unproductive inventory as fast as you can. It will never be worth more than it is today (which is not much, probably) and it costs you money sitting there taking up space. Turn it into cash.
Quit using premium services: cut off the company credit cards, call in the excess Blackberries, cancel the janitorial services (you can empty your own wastebasket on the way out at night), turn off unnecessary lights, cancel 2/3 of those expensive subscriptions and share them (You are always 3 days behind reading anyway. If you're not, you probably aren't working hard enough.). Finally, stop using expensive next day/premium delivery services like FedEx and UPS NextDay. Plan ahead and send the materials by the US Postal Service for a fraction of the cost, so it arrives in 2-3 days--or better yet--email it which costs almost nothing, (or post it on a secure section of your web site for those with passwords to access and read). None of these hinder customer service. Do it! Now! There are lots more ideas like this. These are just a sampling.
4Q 2008 SUCKS AND 2009 WILL TOO:
BEST BUY WARNS OF DIRE HOLIDAY SALES; MACY'S REPORTS LOSS, BRACES FOR 'NAIL BITER' HOLIDAY SEASON
These are just the tip of the iceberg. Circuit City recently filed Ch. 11, but how it can ever develop a plan of reorganization and get the requisite financing is hard to imagine. Linens 'n Things is being liquidated, and don't bet on Bed Bath & Beyond being all that secure. Mervyn's is being liquidated too. Many others will follow these as the results for this "nail biter" holiday season come in. Industrial companies are similarly suffering, but they are being merged, acquired or shut down. ProLogis, the largest warehouse development company recently admitted that there was no way it's future was secure--too much leverage--too many ill-advised project and properties. The same applies for General Growth Properties, one of America's largest private property companies. It replaced its CEO (a founding family member) and its CFO. A board member is currently the acting CEO. GGP is trying to sell some of its best shopping center properties to raise money to pay down excess debt. GE is reeling due to GE Credit's problems. Boeing is coming off a crippling strike.... and on, and on...
THE BANKS AND INSURANCE COMPANIES GOT ALL THE HEADLINES--BUT THE ILLNESS IS FAR MORE WIDESPREAD--INDUSTRIES AND CONTINENTS
While the government tries to calm the financial markets and keep some kind of credit available, nothing seems secure. "Mark to market" rules make figuring the value of collateral almost impossible. How low is low enough? Mortgages that were given irresponsibly to people who couldn't afford them (and who took them anyway) are nearly worthless--but the houses behind them are worth something. It's just a lot less than before. AIG is sucking up bailout money like a thirsty sponge..and dripping wasteful habits as it goes. Insurance companies can't insure. Banks can't lend--freely enough--because they lent way too freely before. Bonuses and pay increases for "bailed out" banks add up to billions. Cancel them--by law--for anyone receiving bailout money! The government will have to legislate these out of existence--and fast. Chrysler, GMAC and GM are hemorrhaging, and Ford is just hanging on. The problem is that bailing out these enterprises is rewarding failed management, misguided governance and irresponsible unions.
Here are a couple of ideas: How about telling GM (and other failing companies?) to form an ESOP (Employee Stock Ownership Program) and let those highly paid union workers, and recalcitrant execs and managers preserve their jobs by buying shares in the company and owning it--instead of the US government (taxpayers) doing it. United Airlines used this device somewhat successfully a few years back. It might just work. At least it gets everyone in the same boat--even if that boat is sinking. The ESOP would then choose the new top management and appoint new board to watch over their investments.
If that one is not appealing, then instead of a full fledged Chapter 11 filing with all the associated bad connotations--how about a "prepackaged workout plan" devised by a private sector workout specialist firm and ratified by a government lending committee. Firms like Alvarez & Marsal specialize in these workout plans--and while its fee would be hefty, it wouldn't be as much as the cost of Chapter 11 filings. The auto industry will largely need the same kind of "medicine" at all three big US producers, so a single workout plan configuration could be applied to each company, with varying elements depending on how much financing help was needed. The key element of such plans is replacing the most influential top management, and constructing an entirely new board to give true, unbiased oversight. If GM gets relief from onerous union contractual legacy costs, then so would Ford and Chrysler--to level the playing field domestically.
I'm not a big fan of government intervention in private industry, but if it carried with it the "stigma" of a prepackaged bankruptcy instead of a gratuitous bailout...maybe. Many countries subsidize critical industries in times of crisis. Perhaps now is when the US must do so. But be ready for one consequence: the line will form quickly for other industries wanting money and "help." Many of them are tied to autos and still more are failing without that connection. What do we do with them. If the "laws of nature" are not left to apply--where the weakest of the species are eliminated--we might end up with entire industries that cannot compete without subsidies from the government. That is a decidedly bad outcome.
THOUGHTS TO PONDER ABOUT THE US AUTO INDUSTRY--FOR EXAMPLE--BUT APPLICABLE TO MANY OTHER INDUSTRIES
---"We cannot solve today's problems by thinking the way we thought when we created them." —Albert Einstein
---"Insanity: Doing the same thing over and over and expecting a different outcome." —Anonymous
---"The people who created the problems are seldom--or never--the ones to solve them." (Throw out failed management at GM, and don't fill their pockets with money as they leave.)
Replace top management and make major changes in the boards of directors--at a minimum---are necessary steps to any recovery process. The old ones created and/or tolerated the problems. New ones are necessary to repair and rebuild those companies.
AN EXAMPLE--AS LONG AS WE KEEP REWARDING FAILED PERFORMANCE--NOTHING WILL CHANGE (ENOUGH)
Consider the recent Chapter 11 filing of Circuit City and its fairly recent leadership: "The board is excited about Phil [Schoonover] stepping up to the CEO role and leading Circuit City through its next chapter of success. He combines exceptional experience in the consumer electronics industry with strong vision and great leadership skills. Phil has clearly demonstrated those skills over the past year as he led the operational transformation of the company and started our innovation work, which is a critical component of the company's future success." That was how the board of the nation's No. 2 electronics retailer announced Phil Schoonover as CEO in early 2006.
That was also the high point of Schoonover's tenure. After a series of questionable strategic choices, including the layoffs of thousands of experienced employees, that sent Circuit City into a steady slide, Schoonover was finally sent packing by restive investors in late September, leaving him to watch the results of his handiwork from afar. Despite some eleventh-hour thrashing that included plans to close 155 U.S. stores and lay off thousands of employees, this past week, Circuit City filed for protection under Chapter 11 of the bankruptcy code, allowing it to continue operations while it reorganizes. Circuit City is hoping that the reorganization and a fresh $1.1 billion in loans to provide working capital, its creditors -- led by HP, Samsung, Sony, Zenith and Toshiba -- will reopen the supply channel. ......
And Schoonover? His base annual pay was about $900,000, but including stock and options, his compensation was $17.1 million in 2007 and $2.1 million in 2008, and his severance package was $1.8 million; = $21 million for failing. Are you kidding me?? The same happened at Fannie and Freddie.
A FEW MORE OF MY OWN THOUGHTS
1--Where can I get a job like that?
2--"To err is human; to really screw up requires government intervention." (The government intervention--except for the money--won't make things better; it will make things worse.)
3--"The marketplace is a relentless truth-teller. Given a little time, it will sort out the winners and losers." (Meddling with this natural selection process will only delay it and make it messier.)
FINALLY, THINK BROADLY ABOUT CUSTOMERS, SUPPLIERS, PARTNERS OF ALL KINDS
This crisis, the recession and everything that is going on globally affects companies all up and down the supply chain. You may sell the customer you have always coveted, but what if that customer goes bankrupt? You are in trouble. You may extract the deal you want from that important supplier, but what if the aggregate of those deals puts the important supplier under? Now what do you do. I always asked this question in meetings with large retail customers? What will you do if you drive us out of business? Sure, there is excess capacity somewhere for almost everything, but it is not all created equal. At the least, a customer who pressures a supplier so hard that it ruins the supplier, is also ruining its own business' potential. Remind them of that fact when the negotiations get tough.
"HOW DID THIS MESS GET STARTED?" IS ANOTHER COMMON QUESTION
Fortunately, one of the brightest people I know, and a friend, is Dr. Raj Aggarwal, the Dean of the B School at the U. of Akron. Raj recently spoke to the Federal Reserve of Cleveland and also wrote an article for Crain's Cleveland Business. He shared this version of it with me, so I can share it with you. It is posted below.
The only way to get through a time like this is to revert to the basics.
Take care of and keep your best people.
Reduce Complexity, then Innovate, Innovate, Innovate--in products, processes; in everything.
Create and deliver the best value--consistently.
Serve your customers well. Without them, nothing else matters.
Be frugal in all ways, large and small.
Treat every order, every dollar, and indeed, every penny as though it were your last. It might be, if you don't act that way.
And when all else fails: pray. It doesn't solve everything, but it does help. Been there; done that.
Best, John
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The 2008 Financial Mess: Its Origins and the Need to Keep your Cool
by Raj Aggarwal, Dean, College of Business Administration, University of Akron, Akron, OH 44325. 330-972-7442 [email protected]
The 2008 financial crises are fundamentally transforming Wall Street and potentially reshaping our system of capitalism. It has also led to huge declines in personal wealth, leaving many Americans feeling dismayed, disappointed, worried and angry, and has left many unanswered questions. How, did we get here? What do we do next?
A combination of major factors came together to cause the current “perfect storm.” First, there was a strong belief in deregulation and free markets in Washington ever since the Reagan era that has continued for the past two decades including the regime of Presidents Bush, Clinton, and Bush II. Second, there was too long an era of expansionist monetary policy with negative real interest rates especially after 2003, when Greenspan kept interest rates too low for too long. This fueled excessive consumer lending by banks especially in housing.
Third, there was a huge expansion of derivatives that interconnected all major financial firms as “counterparties” into mind-boggling “notional” amounts in the trillions of dollars. Surprisingly there was no disclosure of counter-parties and no real understanding of the often unrealistic valuation models used for these derivatives. Attempts to regulate this proliferation of derivatives were stymied by well-paid lobbyists.
Fourth, were very high levels of upside only executive compensation with no downsides for poor performance. For example, at AIG Financial Products, executive compensation was between 33 and 46% of the unit’s revenue! Similar compensation proportions have existed all over Wall Street. Last year alone, the top fifty money managers earned an average of $558 million each, and total Wall Street bonuses exceeded $33 billion with profits at financial firms making an ever larger share of all US corporate profits.
Fifth, was moral hazard, i.e., we led bank executives to believe that if things go well, they get huge bonuses, if things tank, don’t worry about it – we won’t take any of your money away and we’ll actually bail you out. In effect, Uncle Sam basically offered large banks the following coin toss proposal. Heads you get $10 from me and tails I give you a dollar. How many of these coin tosses would you like? So, Wall Street had huge incentives to use extremely high leverage – other people’s money (OPM) – a phrase that even sounds like “Opium,” with a similar effect of its users. Ironically, by rescuing large banks now, we are creating even more moral hazard for the future.
But, let us not forget that we all contributed to the current mess – those of us who leveraged up excessively to buy assets we could not afford like mansions instead of houses, BMWs instead of Chevys, like banks who bought mortgage assets that were of questionable value to boost their incomes, perhaps to keep up with other banks like we kept up with our neighbors. We all have our fingerprints on this shattering of our financial system.
Also, our financial system is highly interconnected especially due to the rise of what are called over-the-counter derivatives that large financial firms have sold to each other in large quantities. Combined with unprecedented increases in leverage among Wall Street banks, this has meant that if one bank defaults, others must default too as they will no longer have the capital cushion necessary to stay in business. In addition, a wide range of companies hold these bad loans on their balance sheets, many of whom may have had nothing to do with originating questionable loans. In this age of globalization, this interconnectedness and this crises crosses borders into Europe, Asia, and the rest of the world.
To get our economies back on track, governments now must bolster financial confidence among financial firms. Otherwise, ordinary citizens won’t be able to get car loans and mortgages. Car dealerships and other businesses will be forced to close. Small and large companies will not be able to get short term loans to make payroll.
As ordinary citizens, we all feel we have been betrayed by our business and political leadership. I, like many of us, am angry that my money is being used to bail out Wall Street “geniuses and fat-cat bankers,” when they are the ones that caused this mess. However, if our economies are going to be salvaged, we have no choice now. Now is not the time for panic or recriminations. There will be plenty of time to assign blame later.
Capitalism (our golden goose) has always had financial crises and the best system can only strike a prudent balance between the risks of too much regulation (that kills the golden goose) versus too little regulation (the golden goose gets too fat and has a heart attack). We must guard against panic, over-reaction, and knee-jerk over-regulation. Perhaps all we need to do is to restore the willingness and ability to enforce existing regulations more appropriately.
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