48th Edition
The Wall Street Journal ran an interesting article about General Motors’ struggle with its attempt to transition into electric and driverless cars. According to the story, GM’s CEO, Mary Barra, has received a fair amount of criticism for terminating the development of a new high-end Cadillac, which happened to be a gas-powered V-8. According to the article, Barra squashed the new, gas-guzzling vehicle, despite rave reviews, because she felt it would send the wrong message. The article does not say to whom this wrong message would have been sent. Everything a CEO does, particularly at a company as prominent as GM, but also at companies much smaller, sends a message to various constituents. A message that is positively received by one constituent may be negatively received by another. Which begs the question, which constituent(s) is (are) the most important? Should a CEO prioritize them? How would that be accomplished, exactly? Are shareholders more important than employees? Are customers most important of all? How do politics and the government fit into all this, given politics and government are involved in every aspect of our economy? Let me try to answer some of these questions…
First, all constituents matter. In most cases, decisions that benefit the ultimate customer will also, over time, benefit shareholders, employees, management associates, and the overall economy. Stated another way, achieving competitive success by producing better products and services, and selling them at a greater profit than the competition, will result in benefits that can be shared by virtually all constituents. This economic model is called free-market capitalism, and it has proven to be the best economic system ever devised to create wealth. Unfortunately, as we all know, free-market capitalism no longer exists (if it ever did). Corporate greed, political corruption, and an unquenchable thirst for power are all forces that have created crony capitalism, with various harmful consequences. One, the overall level of wealth creation is lower. Two, inequities are made worse by entrenched corruption and cronyism. Constituents who might have been aligned under free-market capitalism, are at odds under crony capitalism. Smack dab in the middle of this mess are CEOs who have to decide which constituents to favor.
It seems clear that Mary Barra decided that advocates for electric vehicles and a carbon-free economy are more important to satisfy than consumers and shareholders. I base this conclusion on the fact that over the past 5 years GM’s stock price has dramatically underperformed the S&P 500, rising only 9% compared to a 94% gain in the index. Moreover, GM has fallen woefully short of its EV goals, yet continues to ignore market demands because it is wary of sending the wrong message to political activists and government bureaucrats. Importantly, I am making no judgment regarding the morality of GM’s commitment to leading an EV transition, or the environmental issues within, only that favoring this particular constituent over consumers and shareholders has had quite negative economic and investment consequences for GM and its shareholders. Point being, in most circumstances, some constituents will invariably face undesirable impacts from crony capitalism.
It would seem logical to some, and many would advocate, that a CEO’s primary responsibility is to customers, shareholders, and employees. Over the long run, these constituents have compatible goals in the sense that business success benefits all three while business failure does the opposite. More recently, others advocate for what is called stakeholder capitalism, which calls for a broader list of constituents not limited to customers, shareholders, and employees. In the case of EV vs. gasoline automobiles, advocates of the former argue that the environment and even the future of the planet are important considerations to consider. Many seem willing, at least in the short run, to sacrifice business success for what they perceive to be a greater long-term benefit. Not surprisingly, these advocates lay claim to the moral high ground. Perhaps that is what Mary Barra is doing, attempting to do the moral right thing instead of the economic right thing. Is that a CEO’s job? Good question. At this point Barra contends that her bet on EV and driverless cars will eventually payoff. But what if it doesn’t, at least in a reasonable amount of time? This leads me to invoke one of my investment rules – You don’t get paid for being wrong the longest. How long will she stick to her guns in the face of market forces that remain aligned against her strategy?
From an investment perspective, a warning flag goes up for me when CEOs subordinate the needs of customers and shareholders to the demands from political activists or government bureaucrats. This, in my view, is what GM has done. The underperformance of the stock would seem to validate that viewpoint.
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Michael Kayes
*These views are my personal opinions and are not the viewpoints of any company or organization.