December 8, 2008

Strings Attached May Include Loss of Stockholder Autonomy, Inability To Pay Dividends, And Nationalization

When you go to the government for money, you have to expect that, even if you are successful, it will come with strings attached. As the President and Congress warm to the idea of a $15 billion auto industry bailout, aimed mainly at General Motors, we learn what some of those strings are going to be:
  1. The Boards of Directors of the companies receiving the adjustable-rate loans from the government (they start out at 5% and escalate to 9% after five years, the same terms offered to banks) will have to submit to governmental oversight -- Congress would create an "auto board" consisting of six Cabinet officers and the President would appoint its chairman, who inevitably will be called the "car czar."
  2. The companies would be prohibited from paying dividends to stockholders while the loans were outstanding. Presumably any dividends that they can pay are to be directed to the government.
  3. No transaction of $25 million or more could take place without the government signing off on it.
  4. Executive compensation would be sharply limited and could not include any kind of bonus pay.
Now, I understand why the executive compensation issue is out there. It is unseemly to pay executives millions of dollars to run a company that is laying off regular working people and not returning profits to its shareholders. All the same, good executive talent is hard to find and it doesn't work for free -- good executives have to be incentivized. There has to be some sort of an exeuctive compensation scheme that enables these companies to get good talent in place and would reward good work with substantial compensation. If they give value, they should get value. We resent high corporate salaries and bonuses precisely because we fail to see that these executives add value to the companies they run -- they seem to take value away and it hardly seems right to reward that.

But here's the piece of the puzzle the government seems to miss. Earnings drive the market. Therefore, the ability of a company to post dividends is what supports the price of the company's stock. This proposal would prohibit the company from posting dividends. Therefore, the stock can reasonably be expected to fall to a point roughly equal to the liquidation value of the corporation's assets and to remain there for the duration of this restructuring. One objection to a bankruptcy is that bankruptcy would disrupt shareholder value until the restructuring plan is completed -- this, however, seems even worse from a shareholder value perspective.

It is typical big-government thinking. There will be no restructuring, no innovation, no change. There is no incentive to change because a) the risk of stasis will have been removed; the company will be rewarded with massive low-interest loans for its misconduct; b) the need to generate profit in order to survive will be removed, for the same reason; c) the company's officers and directors will not be the real leaders of the company, since any transaction of any significance will require the blessing of a board of political appointees; and d) the government will be calling all the shots from a perspective that has nothing to do with what these companies should actually be doing. Meanwhile, you can keep on paying your taxes and by the way, we'll just step in line ahead of everybody else in the world to take all your profits if you somehow manage to generate any.

The result of all of this will be, in essence, the Sovietization of the American auto industry. As Mataconis puts it:
And thus the most vital functions of what is being described as one of America’s key industries would be handed over to a board composed entirely of political appointees, each of whom would be answerable to their own set of interest groups. [¶] And thus three companies that one produced cars would become little more than a laboratory for the latest social experimentation.
Someone explain to me how this is not socialism -- or explain to me why a lame-duck Republican President seems to approve of the idea. Someone explain to me how this would be better than a bankruptcy. Or better than the government acquiring a significant amount of equity in the companies outright. Or better than the government doing nothing and allowing the invisible hand to do its work.

Someone, please, make it stop.


Michael Reynolds said...

I'm going to get me a Pontiac Trabant.

There's a non-cash incentive for whoever replaces Rick Wagoner -- assuming optimistically that his incompetent head finally rolls: ego.

Find an egomaniac executive -- I read someone suggesting Steve Jobs, or maybe Jack Welch -- offer him a dollar a year to turn GM around. The man or woman who does it would be a corporate god, regardless of money, which let's face it, none of the guys in question need.

Michael Reynolds said...

One more point: 20% of VW/Audi/Porsche voting stock is held by the government of Lower Saxony. And Airbus seems to have done pretty well for itself despite the role of the EU. Also most of China's industries have heavy government/army investment.

Government doesn't necessarily have to f*ck up a business, although I think we can be confident that ours will.