We have to be careful to differentiate between profitability and cash flow. If the GM of the 60's had been forced to purchase a unit of pension/retiree health benefits from a 3rd party for every employee-year worked, that decade's annual reports would have looked a bit different. And, the reports from this decade would look a bit rosier.
Since GM's future obligations were not obvious to investors, the stock price remained relatively high and GM was able to borrow money at favorable terms. Obviously, things have changed. So much so that even newer accounting rules couldn't keep investors from being afraid of the unknown. So, the Big3 negotiated VEBAs (http://en.wikipedia.org/wiki/Voluntary_Employee_Beneficiary_...) as a way of converting a seemingly unknown stream of future payments into a simpler scheme of definite ones.
The politics of this are interesting -- a bankruptcy would allow a judge to modify contractual provisions, an outcome likely unfavorable to UAW members. I suppose that these changes could include the recently negotiated VEBA payment structure?
Thinking beyond GM's current woes, I have often observed behavior in large companies and thought: If there was a single owner, and he was sitting in this meeting, he'd be screaming. Instead, because of screwed-up incentives, employees do stuff with dire consequences for the business. If GM's 60's era CEO had been a majority owner (and he expected the business to stay in the family), I doubt that the UAW contract would have looked anything like it did then.
I once heard a marketing manager say in a meeting, "I don't care about that revenue stream because we're already above plan there -- concentrate on the other one because we're below plan!" Compared to the latter stream, the former was likely 100x as profitable per dollar, and additional dollars were much easier to capture. When the accounting scheme is "variation from plan," it's obvious what you'll get.
I failed to consider the variable of increasing health care costs and lifespans. These contracts were negotiated in the days when union guys all smoked and were expected to fall over from a heart attack well before age 70. Now, they'd get a $50K surgery and live to age 80.
My grandfather just had a double bypass, a stent, and a pacemaker put in. (After his third heart attack.) The grand total for operation and post-op therapy came to $942,000.
Granted, the surgery itself was only like $25k. It was all the stabilization in ICU beforehand, and all the therapy afterwards, that really ran up the bill. The majority of it was paid for by Medicare and his supplemental insurance too, which probably ran the price up as well.
GM faced the classical agency problem where the interests of owners and managers are not aligned with each other. Usually, if the managers (executives) own 40-50% or more, OR own less than 10% of the share, their interests are well aligned with those of the common shareholders because if the company benefits, they benefit. It is when senior managers own between 15-25% of the stock that they tend to use their positions for their personal benefits instead of those of the shareholders. This is known as entrenchment.
For companies where managers own 0-10% of the stock, cash bonuses make them take larger short-term risks. A better solution is long-term stock options for the senior executives and cash for the middle or lower levels. However, as recent turn of events has shown, lots of companies give these kind of stock options to lower and middle level managers who ended up with their entire life savings in the very companies that went bankrupt. The senior management was getting extremely large cash bonuses and thus they had no incentive to care for the long-term growth of the firm.
We have to be careful to differentiate between profitability and cash flow. If the GM of the 60's had been forced to purchase a unit of pension/retiree health benefits from a 3rd party for every employee-year worked, that decade's annual reports would have looked a bit different. And, the reports from this decade would look a bit rosier.
Since GM's future obligations were not obvious to investors, the stock price remained relatively high and GM was able to borrow money at favorable terms. Obviously, things have changed. So much so that even newer accounting rules couldn't keep investors from being afraid of the unknown. So, the Big3 negotiated VEBAs (http://en.wikipedia.org/wiki/Voluntary_Employee_Beneficiary_...) as a way of converting a seemingly unknown stream of future payments into a simpler scheme of definite ones.
The politics of this are interesting -- a bankruptcy would allow a judge to modify contractual provisions, an outcome likely unfavorable to UAW members. I suppose that these changes could include the recently negotiated VEBA payment structure?
Thinking beyond GM's current woes, I have often observed behavior in large companies and thought: If there was a single owner, and he was sitting in this meeting, he'd be screaming. Instead, because of screwed-up incentives, employees do stuff with dire consequences for the business. If GM's 60's era CEO had been a majority owner (and he expected the business to stay in the family), I doubt that the UAW contract would have looked anything like it did then.
I once heard a marketing manager say in a meeting, "I don't care about that revenue stream because we're already above plan there -- concentrate on the other one because we're below plan!" Compared to the latter stream, the former was likely 100x as profitable per dollar, and additional dollars were much easier to capture. When the accounting scheme is "variation from plan," it's obvious what you'll get.