It sometimes seems to me that America’s bosses are determined to prove Karl Marx right when he posited that capitalism contains the seeds of its own destruction and is therefore doomed to fail. He maintained that the concentration of power and money in too few hands inevitably leads to excessive greed and a moral turpitude that together ensure the collapse of the system. Given that Marx voiced that belief more than 150 years ago and capitalism has survived with no better alternative ever being found, it is fair to assume that he was wrong.
However, every now and again, a CEO or a board make decisions that are so oblivious of the message they send, so short-sighted, and so blatantly self-serving that one has to wonder if he wasn’t on to something after all. Take GM’s (GM) big announcement this morning, for example.
Just a few short weeks ago, this country’s auto industry was in turmoil. The largest auto workers’ union, the UAW, was hitting manufacturers with targeted, single plant strikes that did maximum damage to the companies, with minimum hardship for their members. The success of that tactic can be seen from the fact that when all was said and done, the union won a deal that seemed to give them most of what they wanted. During that strike, though, we were on many occasions warned by the car companies’ management teams that giving the workers what they wanted would have dire consequences.
And yet as soon as the dust has settled and presumably as soon as the board and managers at GM felt they can get away with it, they made a few announcements: They reinstated guidance for next year, but at a lower level than before it was suspended during the strike, and announced an increase to both the stock’s dividend and the share buyback program that was already in place. I am not someone who generally opposes share buybacks or dividend increases out of some twisted envy or sense that they are somehow “unfair.” After all, shareholders are literally the owners of a company, and should derive their share of profits when they come about.
This particular instance, however, is a bad decision on several fronts.
First, the optics. For a company as conscious of their brand as GM, this is a remarkably insensitive, even crass, announcement. The statement included a $9.3 billion markdown for the impact of the strike, which is roughly what the company said it would cost them. However, the argument that that would massively harm the company is destroyed by what came with it: Even after accounting for that impact, Mary Barra and her fellow C-Suiters felt able to add $10 billion to the buyback program, and to increase the dividend by 33%. That is a big payout to shareholders, a group which, lest we forget, includes those same C-Suiters.
The UAW spent months telling us that the workers wages had stagnated while management’s salaries and bonuses had soared, and now that the workers got a raise, it seems that management wasted no time in redressing the imbalance by effectively giving themselves one too. That is not a great look and will make the union’s arguments even more powerful in the next round of negotiations.
Then there is the business side of things. Returning value to shareholders is something that mature companies should aspire to and should certainly do when the time is right. For GM, though, this is not the right time. They are in the process of dealing with a major upheaval in their industry. Despite what is increasingly looking like an organized campaign to discredit them, EVs are coming. GM and the other legacy manufacturers have to deal with that fact, by either producing their own — which will incur big costs for years to come — or accounting for a big drop in sales.
Either way, now is not the time to be handing cash to shareholders, and boosting managers’ incomes. The company also announced a big drop in its spending on its robotaxi division, which when considered alongside all of the above, looks like they are bereft of a plan to deal with the transition to EVs, and are simply throwing in the towel. To be clear: The money they will need to deal with the threat to their business is being handed out to shareholders to boost the stock to give it a short-term boost rather than being salted away or invested to deal with long-term challenges.
Shares in GM jumped in the premarket on the release of the announcement this morning, as you might expect given that the buyback would, at Tuesday’s closing price, represent a nearly 25% reduction in the number of shares on the market. However, when you consider the reputation damage, the impact on future labor negotiations, and the timing of the announcement from a business perspective, that pop looks more like a chance for shareholders who didn’t sell on the big drops this year to do so, than it being the start of a strong, sustained rally.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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