BA is now down to about $160 and facing a strike. Problems in one area of a company (e.g. quality) may seem easy enough to solve, but they lead to other problems in seemingly unrelated areas. The quality issues have led to a mentality among workers that they'd better get a fat contract to extract as much value for themselves as possible before the layoffs come in a couple of years. The same layoffs of engineers, lean staffing on the assembly lines, and diffuse supply chains that led to the quality problems are now factors making it harder for BA to drop their worst planes and come out with a new product. Meanwhile, the company's reputational hit and future uncertainty will make it harder for them to attract the talent needed to turn things around. Eventually, the ratings agencies will downgrade BA, raising their cost of capital. Management will become distracted by activist threats and throw tens or hundreds of millions of dollars at that problem, further depleting the company's resources and making all the other problems worse.
Boeing's upper management including the last four CEOs have all been Jack Welch acolytes, either having worked for Welch directly at GE or were influenced by him. That means reducing jobs, closing plants, spinning off companies, curtailing investment in new products, etc. That's great for the stock price, but you can only follow that strategy for so long until you wind up like GE. A shallow husk of the company that it used to be.
Avoiding this management style should be an investing style.
I keep returning to this idea - that identifying features of mismanaged companies could be a way to avoid losses or find short candidates.
This article, in a corporate governance blog/magazine seem to identify a few key features that lead to a specific path to failure:
- Company is in a technical field but management/CEO often have a degree in business administration or law.
- Cost cutting or financial engineering is management's focus, rather than developing great products.
- Management expresses a "shareholder capitalism" mindset that disregards the continual creation of value for customers in favor of financial efficiency.
- The firm is thought of as a "grab bag" of unrelated parts that can be bought and sold, merged and divested, without much thought to how the pieces come together for customers or how the employees relate to the firm.
- The firm is risk-averse to developing new products, lowering prices, or cannibalizing its own sales with new and improved products, but risk-seeking in term of mergers, spinoffs, reorganizations, leverage, or labor disputes.
Today we're joking about companies like Apple, Alphabet, Meta, Tesla, and several major pharmaceutical firms not creating a significantly new breakthrough product since their initial hits, and in fact laying off the talent that produced their blockbuster products.
Yet I wonder if we're still not seeing just how bad things have gotten, and are again taking companies' leadership positions and growth rates for granted. Perhaps these fish are currently rotting from the head down, informed by the same management culture and short-term executive incentives that ruined former technology leaders GE, Sony, Intel, IBM, and... Boeing.
What's scary is how these zombie companies have become such a large part of the indices. Investors have absolutely not gotten the memo about value-destructive management tactics that pump the numbers in the short term but cripple companies in the long term. Thus the incentives are still in place for management to destroy their companies, harvest their stock options with each quarterly beat, and ride their golden parachutes on the way out. It just keeps happening.
What's curious is how this managerial culture emerged during some of the lowest interest rate decades in history - the 2000's and 2010's, and it seems to continue now that stock valuations are very high. Low rates and high valuations mean investors are primarily assigning value to cash flows occurring in the distant future. So why are investors rewarding companies that are potentially sacrificing long-term stability for the sake of not disappointing analysts each quarter? You'd think a short-term mindset would emerge when rates are highest, not lowest!
My best guess is that corporate leaders are assuming technological change will eventually leave them in the dust, even if they run everything responsibly. However this attitude would have to not be shared by investors, who are buying at prices and interest rates that assume decades of future cash flows. Management is right because they can make their vision happen.
