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Opinions: ChicagoTribune.com
By Sanford M. Jacoby
August 11, 2008

Much has contributed to GM's woes: overreliance on gas-guzzlers, mediocre product quality and unimpressive design. In the late 1990s, however, the company could have done something about these problems. It had lots of cash, but failed to use it.

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.

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.

SOURCE

 

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More proof that GM's current predicament isn't because of just one or two issues. Its a combination of many different things. Still waiting to see if all these factors have combined to form the perfect storm to sink this ship. I hope it isn't.
 

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This is a serious problem for many American companies and our society. The upper class of our US society is growing at a fantastic rate while leaving a wake of damaged companies and a shrinking middle class.

We can't pay a good wage for work in this country because we have to remain competitive with other countries. Fine. But how does that translate to paying our executives significantly more, ie 10x more than companies of similar size overseas and constantly making short term decisions for the good of the market.

I don't know how to stop it, because the very people who control these trends benefit from it - but what I do know is stop it we must, of suffer consequence. Without sounding alarmist - I think its prudent to point out that the fall of many past civilizations from greatness was due to wealth distribution.
 

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American labor has always been competitive with labor around the world, the problem is that they have made it all about cost. Our labor was able to make a much better and higher quality product then labor from any other nation however capital just wants cheap labor.
 

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American labor has always been competitive with labor around the world, the problem is that they have made it all about cost. Our labor was able to make a much better and higher quality product then labor from any other nation however capital just wants cheap labor.
The more I think about it, the more I believe the stock market is systematically damaging our society.
 

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Poor corporate finance decision.

There are times when paying out cash to shareholders is appropriate. One example would be ExxonMobil. XOM requires a very high rate of return for its investments. One current scenario is that if it cannot find enough projects to invest its cash reserves, that it will simply buy back all of its shares and go private. Or simply liquidate and disappear, and pay out all of its cash to shareholders.

GM had absolutely no business paying out cash to shareholders when it needed that money for product development.

To me, when I see a company paying out big dividends, that says that they simply aren't smart enough to figure out what to do with the money, so they just give it away.
 

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American labor has always been competitive with labor around the world, the problem is that they have made it all about cost. Our labor was able to make a much better and higher quality product then labor from any other nation however capital just wants cheap labor.
Labor is a commodity. A guy in Thailand can put screws in a car dashboard just as well as a guy in Michigan, but the guy in Thailand would be happy to do it for $5 per hour.

What makes Americans any better at labor than other people around the world, with proper training? Americans just demand more money for their labor than it's worth, hence the downward pressure on wages.
 

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I think though that in GMs situation they are just looking for anyone to blame besides themselves for the poor choices that they have made in the past and continue to make now.
It sure sounds like the article is blaming GM... it was the board's decision to pay out all this cash to shareholders instead of making investments.

GM was constantly complaining about a labor and exchange rate disadvantage compared to the Japanese, but they were giving away all this money that could have made up the difference!
 

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Sounds like something said in 1929
I know what you mean, its like we're headed for something bad.

My biggest complaint is the housing bubble. Completely predictable and preventable. Lets see, housing is a relatively fixed supply at any given point in time. It takes months if not years for the supply to correct.

So, make it easier to qualify for loans. Increases demand. Then, add a new mortgage product to the masses called interest only which is basically the equivalent of incentivized leasing, except people don't want to turn it in at the end. Again, increased demand.

Fixed supply. Wonder what would happen? Put another way, the vast, vast majority of people mortgage homes. If you double the amount of home they can afford with exotic mortgages - the home price will near double. IE: people will still get the same home, just with a risky mortgage and a huge loss in the purchasing power of their downpayment, if they had one at all.
 

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The more I think about it, the more I believe the stock market is systematically damaging our society.
If it weren't for the stock market and capitalism you'd be living in a third world society. If you think your approach is the solution, take a look at how well the population of Cuba has fared over the last 50+ years with your approach! As I recall there weren't a lot of people trying to get into the USSR either. :mad:
 

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"If it weren't for the stock market and capitalism you'd be living in a third world society. If you think your approach is the solution, take a look at how well the population of Cuba has fared over the last 50+ years with your approach! As I recall there weren't a lot of people trying to get into the USSR either."

That's a knee-jerk talk radio type response to a valid point. You should consider his argument before ripping off a shot like that.

There is a difference between valuing free exchange and free markets (which has always been the American system) and maximizing quarterly payouts to investors at the expense of future growth (which is a recent trend). Any company that relies on market share, product quality, and customer satisfaction for success needs to put its money into those goals.

The alternative to this isn't "communism," it's short-term fixation on placating huge shareholders who have no particular interest in what GM will look like in 5 years as long as the next quarter delivers for them. It's the difference between planning for continuous sustainable corporate profits and explosive payouts followed by corporate contraction. Communism/socialist hysteria has nothing to do with this.
 

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"The alternative to this isn't "communism," it's short-term fixation on placating huge shareholders who have no particular interest in what GM will look like in 5 years as long as the next quarter delivers for them. It's the difference between planning for continuous sustainable corporate profits and explosive payouts followed by corporate contraction. Communism/socialist hysteria has nothing to do with this.
:soapbox: Too many people confuse the words democracy, free market, and capitalism, but that's an ethics lesson for another day! :brick
 

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The more I think about it, the more I believe the stock market is systematically damaging our society.

Not the stock market, but rather the large insitutional investors and investment banks. The analysts (which they employ) issue pronouncements that may or may not be true, but nonetheless affect the stock price dramatically. Couple that with computer trading models that have automatic sell points that dump large blocks of stock onto the market every time there's a decline and it becomes a self-fulfilling prophesy that has nothing to do with business fundamentals.
 

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Not the stock market, but rather the large insitutional investors and investment banks. The analysts (which they employ) issue pronouncements that may or may not be true, but nonetheless affect the stock price dramatically. Couple that with computer trading models that have automatic sell points that dump large blocks of stock onto the market every time there's a decline and it becomes a self-fulfilling prophesy that has nothing to do with business fundamentals.
This is a problem why?

I suggest reading "Buffetology", a book by Mary Buffet, an ex-daughter-in-law of Warren, who outlines his stock investing strategy. Warren figured out the market nearly 50 years ago, and makes money hand-over-fist by playing against the market's psychology.

The ghist is, find fundamentally strong stocks (high growth, low debt, low dividend, unique product/service), then wait for market forces to push the price below its intrinsic value, buy, and wait until market forces push it far above its intrinsic value, then sell. Rather easy, if you want to make some money for yourself.

Short-term market ticking has little to do with business fundamentals, but long-term market trends do. Traders can make millions playing spreads from small market inefficiencies, while the rest of us can make millions from playing easy to predict long-term trends.
 

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Tim_M said: There is a difference between valuing free exchange and free markets (which has always been the American system) and maximizing quarterly payouts to investors at the expense of future growth (which is a recent trend). Any company that relies on market share, product quality, and customer satisfaction for success needs to put its money into those goals.

The alternative to this isn't "communism," it's short-term fixation on placating huge shareholders who have no particular interest in what GM will look like in 5 years as long as the next quarter delivers for them. It's the difference between planning for continuous sustainable corporate profits and explosive payouts followed by corporate contraction. Communism/socialist hysteria has nothing to do with this.

Bingo! Shareholders have gone from being actual owners of a company who are looking for long-term growth and success, to short-term investors looking for capital gains and maximized short-term returns.
 
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