Is Corporate America undergoing a paradigm shift? GE, the company that brought good things to life, recently announced the sale of GE Plastics to a Saudi based company, SABIC. Meanwhile, the recent news of Chrysler being sold by Daimler, to Cerberus Capital Management, a New York-based private equity firm did not quite rattle Wall Street, yet it was a watershed moment in the auto industry. The fall of Chrysler, known as one of the Big Three, came even as Toyota silently moved up in the auto world, displacing GM as number one.

What remains to be seen is how a private investment firm would transform a behemoth into a smooth and efficient organization over the coming years. In her book, ‘The End of Detroit’, Micheline Maynard argues as to why the American auto industry has undergone such upheavals.  

It is indeed puzzling that given the same market forces, raw material costs, labor costs and union headaches that the US automakers face, how is it that the Japanese auto makers who operate in the same level playing field, manage to stay afloat and remain healthy. In fact several of the Japanese autos are made on US soil, by American workers, sold to American consumers and without an iota of doubt, are superior in quality.

While there are probably many factors that contribute to this, at least one of the factors that needs some consideration is the gap in the remuneration of the top executive relative to the assembly line worker. The New York Times recently ran a special report on executive pay stating that CEOs made around 40 times more than the average worker during the ’70s, while the gap has grown to an incredible 500 times in recent years. The LA Times laments that the compensation for CEOs has skyrocketed into the stratospheric heights of pro athletes and movie stars. It further goes on to say that, ‘If the minimum wage had risen at the same pace as CEO pay since 1990, it would be worth $22.61 today, according to the Institute for Policy Studies’. With mergers and acquisitions happening at breakneck speed, the top executive often comes out the winner no matter what. Robert Nardelli, the ousted chief of Home Depot, walked away with a $210 million compensation package while Henry McKinnel of Pfizer Inc left with nearly $200 million for a job well done,…. er..! Has Corporate America somehow lost its soul in the netherworlds of capitalism?

And in case you have forgotten what happened at Enron, Worldcom and Tyco, it was the scandal of options backdating at United Health Group late last year that resulted in the ouster of its CEO, Dr. William McGuire. Thanks to some excellent sleuthing by the Wall Street Journal who discovered a pattern in the timing of these stock options, it eventually brought the downfall of McGuire.

In a fascinating study by Crocker Liu of Arizona State University and David Yermack of New York University-Stern School of Business, the authors found that when a CEO buys real estate, future company performance is inversely related to the CEO’s liquidation of company shares and options for financing the transaction. They also found that, regardless of the source of finance, future company performance deteriorates when CEOs buy extremely large mansions or costly mansions and estates.

Facing tremendous pressures from Wall Street every quarter, most executives feel the panacea lies in restructuring and outsourcing. Senator Dorgan cites in his book that in the 70s, GM was the largest corporation in the US where most workers stayed till retirement and enjoyed the fruits of their labor. Today the largest employer in the US is Wal-Mart which has a 70% employee turnover in the first year!

Maybe it is time to outsource the CEO!

June 23, 2007

References
Micheline Maynard, The End of Detroit: How the Big Three lost their grip on the American car market, DoubleDay, 2003
Ellen Simon , ‘Half of S&P 500 CEOs topped $8.3 million’, LA Times, June 11, 2007
Charles Forelle & James Bandler, ‘The Perfect PayDay’, The Wall Street Journal, March 18, 2006
Liu, Crocker H. and Yermack, David, "Where are the Shareholders' Mansions? CEOs' Home Purchases, Stock Sales, and Subsequent Company Performance", Social Science Research Network, April 2007
Byron L. Dorgan, ‘Take this job and ship it: How Corporate Greed and Brain-Dead Politics are selling America’, Thomas Dunne Books, 2006

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