One of the biggest problems we face today is the egregious mismanagement and reckless incompetence of many American corporate boards which utterly fail to do their primary job of holding managements accountable.
Don’t Be an Ostrich
Many people watch what is happening on Wall St hoping they will not be affected. Sooner or later, it will affect you. Rather than avoiding the issue and burying your head in the sand, let’s understand what’s happening, what it means and what you can do to get ahead of the curve.
We will do this in four posts:
- The Credit Crisis: What Does it Mean for You and Your Company? – This will look at what’s currently happening and what it means.
- The Credit Crisis: Why It Is Important? – A Little History – To get some context, we’ll look at why companies were set up and why investors, like Carl Icahn are so outraged. Understanding this is important to recognizing good opportunities.
- The Credit Crisis: For Project Managers – What Does It Mean? – What are some things as project managers you should be doing.
- The Credit Crisis: For Project Managers – What should you Expect? – What are things to look for and think about.
What’s Happening on Wall St? [kml_flashembed movie=”http://www.youtube.com/v/UC31Oudc5Bg” width=”391″ height=”322″ wmode=”transparent” /] A couple of things about this clip. In addition to its humorously irreverent and more accurate than you might think description; it is also over a year old. The credit crisis is not new. It has been brewing for awhile and its resolution will take awhile.
Expect to Feel the Pain
Even if you’re not in financial services, expect to feel the pain. Consider that as of Friday Oct 8th 2008, US stock markets are down over 42%. $8.2 Trillion dollars has been lost. If there are 300M Americans, each is out $28,000. [Editor: This is worse than a divorce. I lost half my money and I still have to put up with you!]
More concerning is that this is a credit crisis, not an equity crisis. The stock market crash is the symptom, not the cause. I won’t go into the details [Editor: Please don’t], but the cause is the credit crisis – banks unwillingness to lend to other banks and now businesses.
How this will work out is the real question. Uncertainty leads to questions of confidence. How will the uncertainty be resolved? Transparency. What’s visible can be dealt with, it’s what isn’t currently visible that will drive people to want to know more.
Who will want to Know?
For public companies, executives and the board of directors will want to know. Hence the Carl Icahn quote. Consider this:
NEW YORK, Sept 15 (Reuters) – Shareholders sued Merrill Lynch & Co Inc Chief Executive John Thain and the company’s board of directors on Monday over the proposed buyout by Bank of America Corp, claiming the terms of the deal are unfair [to shareholders]. (Full Story)
What is important is that the suit is filed personally against John Thain and the board of directors. They are personally liable. The suit claims John Thain and the board “have clear and material conflicts of interest and are acting to better their own interests at the expense of Merrill public shareholders.” There will not be enough D&O (Directors and Officers) Insurance to satisfy investors after all the money that’s been lost.
Nothing like the fear of a class action lawsuit to persuade you to get more transparency in your business. Where is money going, how is it being spent, what returns are we getting from projects we invest in?
Private companies will answer similar questions from their own investors and executives. Furthermore, suppliers will want to be sure firms can pay. Vendors will want to be sure they can deliver. Banks will want to know how funds are being used.
We are heading into budgeting season. Expect Ronald Reagan’s “Trust, but verify” to accompany the belt tightening. Whether you call it transparency or regulatory oversight or SOX or corporate governance or [Editor: the following line was deleted, you can’t use that language.]; executives, directors and investors will want to know more.
Why Are Investors Like Icahn Using This Moment To Demand Change?
In addition to the reasons stated above, but there are historical reasons for wanting transparency. Understanding this will provide you insight to take advantage of the opportunities which will arise. We will take that up in our second post: 2. The Credit Crisis: Why It Is Important – A Little History.
Have you started seeing changes?
About the Author
Andrew Meyer studied systems and industrial engineering before spending fifteen years implementing global IT and Business Process Re-Engineering projects. Frustrated with seeing communication issues hurt projects, he returned to get his MBA from the University of Southern California and focused on project communications and risk management. To apply this to real-world problems, Andrew founded the Capability Alignment Professionals (http://www.CompanyAlign.com), which is dedicated to aligning incentives and improving communications. To see more of his writing, please check out his blog Inquiries Into Alignment (http://alignmentinquiries.blogspot.com/)
7 thoughts on “1. The Credit Crisis: What Does it Mean for You and Your Company?”
thanks. You teach me a lot every time I interact with you. This is a new and interesting perspective.
Thanks again and good luck,
This crisis is not only being felt in terms of short term credit needs by small businesses, but also in the more unspoken credit games which are played out on all aspects of the supply chain.
As the owner of a product rather than service-based business, it is the credit system internal to our particular market which is most affected. Our suppliers are being faced with tightened payment deadlines (which were more flexible in the past) for everything from raw materials to labor. At the same time, our customers are angling to win more time to pay for their orders through more lenient payment terms, or even refusing orders they made upon arrival at their shop.
This translates into the very costly and time consuming tug of war for our company of making buying criteria more stringent (which results in turning down business), increasingly aggressive collections activities (which cuts into selling time and slows cash intake), and tighter cash flow management (which reduces the possibilities of new growth initiatives).
thanks. You are correct, there will be tighter corporate governance and as many projects fall under IT, IT will deal with cost accounting and oversight in ways it probably hasn’t previously.
you are correct, the tax implications need to be considered with whatever investment strategy one takes.
St. Offset is the patron saint of all investors. Even in bad years, one hopes there are some gains to be offset.
You are undoubtedly right that some of the changes from the credit crisis can be worked around, but change provides opportunity. If you recognize those opportunities, hopefully you can take advantage of them.
That’s what we’ll look at in posts 3 and 4 on Wednesday and Thursday.
Interesting points you have made here. About the response you provided to Josh, I’d suggest that people closely consider the tax implications of selling off and repurchasing stock. If a tax credit is needed, this could be a reasonable approach but consult your tax accountant. Clearly, this type of action resets the cost basis of the stock and provides for recording the loss but future tax implications most also be included in that decision process.
Are we feeling the pain from this credit crisis yet in the business? Yes, but like most situations there are ways to work around it. And personally, our portfolio has taken a big hit but not the same as the 42% market drop you reported. I’d agree with Josh that as long as emotions are kept in check, and investment horizons are maintained, that we long term investors can weather this storm.
Great article Andy and I look forward to the series. One would hope that investors demand effective IT Governance instead of half baked attempts at compliance. Hopefully some positive can come from this nightmare.
Dr. Chip Council, CGEIT, CISM, CISA
Data Governance Practice Manager
thanks. You’re right, paper losses only become real when you sell, but many times, if you like the stock, you’re better off selling and re-buying it. The reason is to pick up the tax credit.
Anyways, this shouldn’t become an investing blog, there are plenty of those. Issues about how the credit crisis will affect people’s working lives are also important.
Great post Andy! Some things I want to add from the perspective of an individual investor.
[Disclaimer: I’ve sold some articles on investing, but only from my perspective; I am no expert!! 🙂 ]
1) Risk Management – If you are not diversified, you are at risk of having too many eggs in the wrong basket.
2) Paper losses – Yes, I’ve had paper losses of late. They become real losses when you sell. That said, there are many cases were selling is a good idea. Just make sure the decision is based on strategy and the big picture, not emotions.
3) On Sale – I am comfortable with the investments I’m in and the diversity of them, so I am actually buying more now, about double. It’s on sale, and I want to dollar-cost average as much as I can right now and for the next 2-3 years.
4) Time Horizon – Being many decades away from retirement, I don’t feel much impact as long as I keep my emotions in check when I check the performance on my investments. The toughest thing is ignoring how much I’ve gained or lost in the past, and just focus on whether I would buy a particular investment again today or not.
I feel for those who are retiring in the next 5 years though, or are already retired. Hopefully, they have the majority of their assets in investments with less volatility though, focused on protecting principal.