Chainsaw Management

Too many employees in too many companies are quivering in their cubicles or at their workstations, waiting to face the HR hangman.  This is partly the result of slumping auto and home sales, but it is more the result of poor management.  Large corporations are no longer run by entrepreneurs.  They are run by bean-counting nebbishes who only have one answer to a reduction in business–layoffs.  The results of this human-resource belt-tightening are A) the employees who remain are stressed and overworked to the breaking point and B) the company’s skilled workforce is no longer available when business picks up again.  An entrepreneur should exploit the opportunity presented by excess employees, not shed them like dead batteries from an over-indulged child’s electronic toys.
Albert “Chainsaw Al” Dunlap is the mismanagement poster boy of Downsizers Syndrome.  He killed Sunbeam in 1996 by cutting payroll by 50%, closing 18 of 26 factories and simulating profits by “channel stuffing.”  Channel stuffing is over-producing merchandise and jamming the distribution network with the excess, then reporting the merchandise as sold.  Like a Ponzi scheme, this only works in the short term and it soon became apparent that Sunbeam was headed for the graveyard of failed companies.
Chainsaw Al is only an extreme example of the Little Johnny One Notes of corporate governance.  The current crop of CEOs seem hardwired to respond to any problem with pink slips.  The bigger the problem, the more pink slips get handed out.
Publicizing layoffs often results in an escalation of the stock price.  However, that is only a speedbump in the stock’s slide and seldom has a lasting effect.
In 1996, Robert Reich, then Secretary of Labor, said “I do think it’s unfortunate to view a company’s employees as costs of production rather than assets.”  A skilled workforce is the engine that powers the organization.  Chopping away parts of the engine in response to reduced demand for products or services is foolish.  A creative, entrepreneurial management team sees excess workers as an opportunity, not a problem.
I was the chair of the board of directors of a community mental health provider when its budget was cut by 25%.  This was a situation where layoffs would impair the organization’s ability to provide services, resulting in a vicious cycle of reduced budgets causing reduced delivery of services and reduced delivery of services causing further budget cuts.  Calling the employees together, I pledged that there would be no layoffs.  As it turned out, there were some unpaid leaves taken by managers and employees and there were a couple of “pay holidays,” but no one was laid off and we survived the cut-backs until our budget was restored.  What was crucial was that the organization made it clear, as soon as the budget restrictions became known, that it would stand by its employees.  This improved morale and gave the staff the determination to weather the crisis.
The budget dilemma faced by our non-profit was the opposite of that faced by home builders and car makers.  We were expected to maintain production despite budget cutbacks.  In the for-profit world, companies may find that they have too many workers for the production demand.
There are also those managers who want to lay off employees to show how tough and frugal they are; so they cut the number of staff without regard to productivity or merit.  These are managers who think that if 100 employees can get the job done, 90 should be able to handle it.  Then they decide that if 90 can do the work, 80 employees are enough.  They are like tax-cut maniacs for whom no tax cut is ever deep enough.
What would a canny manager do instead of cutbacks?  Put supernumerary employees to work in new areas and on new products.  A car company CEO should consider moving employees into green initiatives–working on hyper-efficient vehicles.  The latest gas crisis will not be the last and sooner or later, the U.S. public will decide that they don’t need 5,000-pound SUVs to commute to work or to drive to the bodega.  If the U.S. Big Three want to stay in the game, they should stop designing the cars that they think are the most profitable and start developing the cars that are adapted to the uses people put them to.
A company that produces products for the home-construction industry does not have to cut back, just because there is a slump in new housing starts.  The CEO should think outside the big box and use the excess production capacity to start new ventures.
Many of the laid-off employees walk off with a severance package equal to several months of salary and benefits.  Figuring that cost, added to the company’s investment in those workers, it becomes apparent that a huge amount of the company’s assets are walking out the door.  These employees could work on new products or services for up to a year, at no cost to the organization!
The stock market has lost half of its value in the past year.  So what?  The money is not gone, as I recently pointed out.  Depressed stock prices and tight credit make it difficult for corporations to raise capital.  This will lead 99 out of 100 CEOs to cut back operations and lay off employees.  However, one in 100, or maybe even one in 1,000, will see the opportunities in the current market.  Instead of cutting off the hands that produce the wealth of the nation, they will find ways to keep those hands busy.  Instead of bemoaning the trouble U.S. businesses are in, they will take over troubled businesses and turn them around.  This is still the Land of Opportunity and CEOs who see that will lead their companies to unguessable prosperity.

John B. Payne, Attorney

Dearborn, Michigan & Pittsburgh, Pennsylvania

(800) 220 7200

FAX (313) 562 3340

©2008 John B. Payne, Attorney

www.law-business.com

Money (That’s What I Want)

As the stock market gyrates wildly, the question of where the money goes when the market drops begs for an answer like a poorly disciplined puppy when dinner is served.  The figure that was mentioned in news broadcasts when the market dropped 777 points in a day was a trillion dollars.  If a trillion dollars went out of the market, where did it go?  The immediate assumption is that the country became a trillion dollars poorer when the market fell by that much.  But is that really what happened?

For an investor who buys and holds stock for a period of time, it seems that appreciation and depreciation come out of nowhere.  Let’s say that Rosco buys a share of Youngstown Universal Cotter Keys, Inc. for one dollar.  He holds the share of YUCK for a year and he gets $10 when he sells it.  As far as Rosco is concerned, he just received nine dollars for nothing.  Conversely, if Rudy bought that share from Rosco for $10 and it dropped to one, Rudy’s nine dollars just vanished like civil servants at quitting time.  What if Rosco had not sold his share of YUCK and it went from one to ten and back down again?  Were these virtual dollars with no more substance than idle musings?

The money is real and even if Rosco bought and sold his share of stock for the same price, the fact that it rose and then fell nine dollars means that there were real money flows that enriched some investors and impoverished others.  The money that the rise and fall of Rosco’s share of YUCK represents was real money that flowed into and out of the market, but was not gained or lost in the broader economy.

The first step to understanding how the money comes into and goes out of the stock market, is to consider that the rise and fall of the value of Rosco’s single share of stock is not an isolated event.  If shares of YUCK go $1.00 to $2.00, it is because tens or hundreds of  thousands of shares were traded and the final sales were for $2.00 at the end of the trading period.  However, for the sake of simplicity, consider the situation where YUCK is being sold one share at a time.

Everyone who bought for a dollar and sold for two took a dollar in profit out of the market.  If Rosco receives $2.00 from Rosie for a share of YUCK that he purchased for $1.00, Rosie puts two dollars into the market and Rosco takes two dollars out–his initial investment and a dollar of profit.  If Rosie then sells to Reginald for $3.00, he puts that much in and Rosie gets back her investment plus a dollar in profit.  Tracing a series of transactions up to the $10.00 price, then back to $1.00, it becomes obvious that the rise and fall of YUCK reflects the change in what investors are willing to pay for YUCK shares, but no money disappeared.  In this hyper -simplified economic picture, every dollar that went into the market came from an investor’s cash account and every dollar that came out went back into a cash account.  Therefore, all of the money that pours out of the stock market stays in the economy!

Expansion and contraction of the stock markets makes some poor investors rich and some rich investors poor, but the wealth of the country does not rise and fall with the stock markets.  It just gets relocated within the economy.

A portion of the change in share prices reflects real growth or lack of profitability of individual companies.  Investors have been scurrying away from U.S. auto manufacturers like dexedrine-dosed lemmings this year because they did not foresee rising gas prices–like, Who would have thought that the price of a limited resource would go up as supplies diminish?–and produce fuel-efficient vehicles.  However, the shares were high a few years ago because Ford, GM and Chrysler had a big line-up of popular gas-guzzlers that yielded high profits.  Some of the drop in U.S. auto stocks is therefore related to the companies’ market strength, but not all of it.

The price of YUCK shares may go up or down, based on YUCK’s profitability and financial health, but it may also go up or down based on investors’ perceptions of the cotter key industry specifically or the U.S. economy in general.  Although some change in the market indices will be reflective of the health of the corporate sector, wild swings, such as in the last few weeks, are not due to rapid variations in corporate financial viability.  If the Dow drops 6% today, is the U.S. business climate 5% colder today than it was yesterday?  As the Dow declined from 14,000 to 8,000, the country did not lose 42% of its value, or even 42% of the value of its businesses.  The Dow fell due to a dramatic mood swing in the investing public away from stocks.  That deflated stock values, but all that money is still out there in the U.S. economy.

Don’t panic!  Although there will be cutbacks and business failures, the money that left the stock market is still out there.  Sooner or later, investors will realize that they cannot make money on their money unless they put it where profits are being generated.  That’s the stock market; and when money starts flowing back into stock, the markets shall rise again.

John B. Payne, Attorney

Dearborn, Michigan & Pittsburgh, Pennsylvania

(800) 220 7200

FAX (313) 562 3340

©2008 John B. Payne, Attorney

www.law-business.com