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http://www.chicagotribune.com/news/opinion/chi-oped0811autoaug11,0,2972247.story
Hello, Prius. Goodbye, Buick
By Sanford M. Jacoby
August 11, 2008
The news out of Detroit is grim, especially for General Motors Corp. A $15.5 billion quarterly loss. Toyota on track to beat it in global sales. The end to its three-quarter-century dominance of the world auto market.
Much contributed to GM's woes: overreliance on gas-guzzlers, mediocre product quality and unimpressive design. In the late 1990s, the company could have done something about these problems. It had lots of cash, but failed to use it. The result: It fell behind its Japanese competitors in hybrids, research and development expenditures and patent filings.
Some want to blame GM's health and pension burdens, negotiated with the union. And in truth, these are hurting the company in its match with Toyota. Toyota has younger employees in the U.S., hence lower benefit costs. In Japan, Toyota can spread these costs across the entire economy via social insurance and so need not bear them alone.
But here, too, GM could have acted. Its employee pension plan was fully funded in the late 1990s and GM had stopped putting money into it. Yet everyone knew that this was a temporary respite. Faced with a demographic reckoning, a prudent employer would have put aside something extra. But not GM.
So what in the world did the company do with all its money? The answer is that it caved into the siren call of the era: Satisfy the shareholder.
First, a bit of history. Wall Street and institutional investors' pension funds, mutual funds and trusts began insisting in the 1990s that companies return more cash to shareholders. They claimed that managers were squandering resources on lavish perks and misguided acquisitions.
To be sure, the charges rang true at more than a few companies. GM, for example, made a mistake when it spent $5 billion to acquire Hughes Aircraft Co. in the 1980s. But there also were situations when the shoe was on the other foot—when owners took more money out of a company than was good for its long-term health.
In the early years of the revolution, managers of U.S. corporations occasionally said no to investor demands. A couple of things got rid of that behavior. First, CEOs who bucked shareholders sometimes found themselves out of a job. Second, executive share ownership and stock options became the coin of the realm. Eventually they comprised the bulk of CEO pay. And now, CEOs wanted the same thing as owners: high returns to owning stock. (However, more than a few executives cooked the books to boost share returns. Remember Enron Corp.?)
Corporations reward shareholders in three ways: with dividends, share repurchases and capital gains. Generally, an investor has to wait for the capital gains. But dividends and repurchases are immediate "payouts" suitable for impatient investors. After the revolution, U.S. companies began raising their payouts. As a percent of after-tax profits, payouts rose from 58 percent in 1981 to 67 percent in 1991 to a whopping 89 percent in 2000.
And now back to GM. Because of its size, the company was ground central for a shareholder revolution. Robert Stempel, chief executive officer, lost his job in 1992 due to pressure from institutional investors. Subsequently, the company raised the percentage of executive compensation based on stock ownership and stock options.
What happened to payout ratios? From 1996 to 2000, GM delivered more than $20 billion to shareholders: $13 billion in multiple repurchases and an additional $7 billion in dividends. And that's where the money went.
Toyota, however, followed a different path. It successfully resisted demands—chiefly from American investors—to raise its payout ratio. Its president in the late 1990s, Hiroshi Okuda, said that shareholders' interests would best be served if Toyota plowed its cash into research and development for hybrids and other long-term improvements. And that's what Toyota did with its money.
It's impossible to say where GM would be today had it spent some of that $20 billion on research and development and a rainy-day pension fund. But surely it would be a far better place than here.
Sanford M. Jacoby teaches management and public policy at UCLA and is the author of "The Embedded Corporation: Corporate Governance and Employment Relations in Japan and the United States."
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http://www.toomuchonline.org/index.html
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Mon Aug 18, 2008 1:30 pm |
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Demeralda
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Thank you, I say that about most of our economic problems, including the newspaper business. Answering for the next QUARTER cannot be sustained when you should be looking out for at least the next DECADE.
All the corporate idiots tied compensation to stock performance, thus making it so only a real visionary or a real idiot would volunteer to hurt himself by pushing a big-vision agenda.
Thanks again, capitalist pigs, for ruining society so you could have a $2000 shower curtain. Brilliant. |
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I'm no model lady. A model's just an imitation of the real thing. - Mae West |
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Tue Aug 19, 2008 1:20 pm |
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