While watching the speech, I tweeted that “Obama sounds remarkably similar to the CEOs I used to listen to on earnings calls: the ones with mediocre EPS and a failing business model.” This wasn’t a crack at Obama, or Democrats; it was a reaction to the content. And after watching the responses, the impression lingers–indeed, maybe it’s strengthened.
The nation is facing some really difficult problems, particularly on the fiscal front. There’s no longer any way to put it off; pretty soon, the government is going to have to start making some very hard choices about taxes and spending. No matter what they choose, that probably means lower economic growth, angry voters, and some real loss on the part of whoever’s ox is gored.
LIstening to earnings calls means listening to quite a few CEOs in analogous situations. Often, the situations they are in are largely not of their making, or indeed anyone’s fault at all. But they are expected to fix it. And too often, they can’t, at least not yet. Think of Rick Wagoner, and the other managers at GM who knew they were on the road to disaster, but couldn’t exit without the consent of stakeholders who weren’t quite ready to believe it was necessary.
Faced with that situation, what does the CEO say? He puts the best face on things. I once listened to the head of a biotech company which was burning cash every quarter, had no good research prospects in the pipeline, and had already capitalised (i.e. sold) the income streams from their existing intellectual property. Despite the fact that this was obviously patently insane, he spent quite a lot of time detailing his plans for the future of the company. What was he supposed to say? “Sell my stock now, guys!”
Everyone on the call knew that the future of the company lay in bankruptcy court or a fire-sale liquidation, but bizarrely, they sort of went along with it. Of course, for obvious reasons, there weren’t really a lot of dedicated analysts dialling in.
The US government’s situation is not quite that bad. But it’s pretty bad. The underlying economy is, I think, ultimately fine, but the structural problems with the government’s finances are driving it rapidly towards an unpleasant denouement. Like a CEO with a stuck company, however, he can’t just say that. Stating the obvious would make things worse, as customers and creditors decide that the end really is nigh, and it’s time to get out while they still can.
So what do those CEOs do? They spend a lot of time talking about their company’s proud history, even if that history only stretches back a few years. They lavish extravagent praise on their awesome, dedicated workforce. And they deftly avoid talking about the big problems, for which they have no solutions, by talking about strategic areas for potential growth (“green jobs”), and going over a laundry list of new initiatives that do nothing to solve any of the core problems. When they are forced to talk about the core problems–and if the company is big enough to attract analyst coverage, they will rudely draw his attention to the problematic areas on the financial statements during the Q&A–he responds in vague generalities that restate the problem as if doing so constituted a solution:
To put us on solid ground, we should also find a bipartisan solution to strengthen Social Security for future generations. And we must do it without putting at risk current retirees, the most vulnerable, or people with disabilities; without slashing benefits for future generations; and without subjecting Americans’ guaranteed retirement income to the whims of the stock market.
The absolute favourite tactic, however, is the management reorganization. You may be in a saturated market where your second-rate franchisees are slowly destroying your brand, making it impossible to attract higher-quality franchisees . . . but that’s nothing that can’t be fixed by creating a new Chief Strategy Officer under the CEO, and giving that officer oversight of marketing, research, and HR. Perhaps a much larger competitor whose cost structure allows them to undercut your prices by 32% has entered your niche, but can they really withstand the fearsome might of your ISO 9000 certification and your new cross-functional product teams? The government regulators who just outlawed your three top-selling products and made two-thirds of your capital plant obsolete may be powerful–but not as powerful as your revolutionary sales force compensation scheme!
You can’t blame the dodges, but they are a warning sign. Not that the CEO is a bad CEO, but that the CEO is in a bad situation he can’t fix.
It’s not that Obama doesn’t know how to fix the problems; I think that like most people in Washington, he understands the broad parameters within which the fixes will be carried out. But he can’t make congress do it before there’s an actual crisis. And saying all of this is all too likely to trigger the crisis–a crisis he’d much rather would happen during someone else’s presidency. So he tells us what we want to hear: that we need to find a way to fix social security without, y’know, changing it in any way. And will you look at those green jobs! I think we’re going to have a bumper crop!
The reason he does this, of course, is that like the analysts on all of those calls, we let him. Indeed, we actively, even eagerly, participate in the denial. After all, if we knew how to fix the company, we’d be CEOs, not sitting on the couch kvetching about their nonsense.
Business Insider Emails & Alerts
Site highlights each day to your inbox.