Focusing on shareholder value rather than mundane concepts such as workers' pay can prove "the dumbest idea in the world", writes TONY KINSELLA
ON FEBRUARY 12th last, Colgan Air flight 3407 from Newark crashed into the Wielinskis’ house just short of the runway in Buffalo, New York, killing all 49 on board and Douglas Wielinski. Just under five months earlier, the collapse of Lehman Brothers signalled a calamitous nosedive for the global economy.
The US National Transportation Safety Board (NTSB) investigation into the Buffalo crash has focused on pilot error. There is no equivalent body charged with forensically investigating global economic crashes, so we are left with informed commentators. While they lack any mandate to issue binding curative regulations, they can at least point us in the right general direction.
All agree that this recession will, eventually, end. A few would like to believe it will bottom out this year; others talk of 2010, or later. Nobel Prize-winning economist Paul Krugman told a forum in Taipei last Thursday that he was “very optimistic about the world in, let’s say, 2030; it’s the next 10 years or so that have me worried”.
Across the Taiwan Strait in Shanghai, the former president of the World Bank and current chairman of the international advisory board at troubled bank Citigroup, James Wolfensohn, was wondering “whether it’s going to be a V, U or L-shaped recession . . . more likely the latter”.
The letter W might come closer to what Mervyn King, the governor of the Bank of England, forecasts to be “a relatively slow and protracted recovery”. Maybe our alphabet lacks a letter capable of tracing a prolonged bumpy recovery, and one that must bring us to somewhere new.
If our immediate concern is avoiding total collapse, our fundamental challenge has to be that of determining what it is we need to put in place of a system that has so spectacularly failed us. Since the system crashed, there is simply no point in trying to restore it to its former, inglorious inadequacies, which led, as Paul Mason of BBC's Newsnightputs it in his book Meltdown, to a "financial Krakatoa".
It is bad enough that those in office, such as Brian Cowen or Gordon Brown, seem incapable of grasping this obvious fact. It is more worrying that those who would seek to replace them, such as Enda Kenny or David Cameron, demonstrate similar confusion. John Locke warned, over 300 years ago, that a madman can be someone “reasoning correctly from erroneous premises”.
Like the scientists and technicians of the NTSB, we must first analyse why the crash happened. Only then can we begin to elaborate measures to prevent a recurrence.
The key role of stock markets should be to make capital available to those with ideas for profitable goods and services. The rewards for those who provide the capital should rise in line with the degree of risk involved. State bonds provide low returns, while investments in new businesses promise a higher one.
Somewhere along the line, this logic became perverted. It became more attractive for businesses to increase their market shares by taking over their competitors, rather than by developing better products to achieve higher sales and returns on investment.
Sometimes new owners found themselves forced to strip their new acquisitions down to finance the debts they had incurred in order to buy them in the first place. Eircom offers an Irish example. On other occasions, the level of leveraged debt grew to such proportions that it threatened the very survival of the would-be purchaser. Porsche now faces the challenge of servicing the €10 billion it borrowed in its ill-fated attempt to take over Volkswagen.
Such costly efforts added not a single new product, nor one additional cent in sales revenue. While much was made of the increased shareholder value such efforts purported to produce, it often turned out to be virtual. Ask any AIB shareholder who has watched 93 per cent of the value of their investments vanish over the last two years.
Jack Welch, the legendary GE CEO, has recanted on his belief in theoretical shareholder value, calling it “the dumbest idea in the world”. He now says employees, customers and products are what matter.
The pain inflicted on companies and shareholders pales when compared to the decimation employees suffered in terms of redundancies and/or stagnant salaries. The financial system not only stalled and crashed – it managed the impressively perverse trick of neglecting its raison d’etre of creating real wealth, thus betraying investors, while also penalising the employees on whose output its very survival depended.
Sergio Marchionne, the Canadian-Italian drafted in to rescue Fiat in 2004, has succeeded in revitalising the group. One of his early observations was that “when you’re losing €2 million a day, the workers are not to blame”. Marchionne went on to fire 90 per cent of the group’s management, but not a single production worker.
Fiat recorded profits of €3.4 billion in 2008 and is now in the process of acquiring the remains of Chrysler, while negotiating for GM’s Opel group.
The NTSB investigation into the Buffalo disaster found that both the pilot, Marvin Renslow, and the co-pilot, Rebecca Shaw, seemed distracted and slow to respond to icy conditions and cockpit warnings. Ms Shaw (24) was paid €11,000 a year, making it financially impossible for her to live near Newark. Her overnight 4,000km jump seat “commute” from Seattle may have contributed to her fatigue.
Mark Rosenker, acting chairman of the NTSB, told a hearing in Washington last Wednesday that passengers on flight 3407 were “entitled to an extremely well-qualified and fit” aircrew, something they didn’t get.
Colgan Air vice-president Harry Mitchel admitted that while the firm offered cost-of-living adjustments for managers to live near workplaces, it had no such programme for pilots. There’s “shareholder value” for you.