THE MORNING RANT: An Outstanding Essay on How to Destroy a Company with Mercenary, Cost-Cutting Executives

”For two generations, American companies have been run to maximize short-term financial returns instead of to produce great products. In the long run, this approach fails disastrously at both.”

That is the thesis embedded in a great piece I just stumbled upon, written by a gentleman named Gautam Mukunda.

It is also a subject I repeatedly revisit in my writing, but Mr. Mukunda’s piece may be the best I have read about the destruction being wrought on once-great corporations by executives obsessed with cost cutting to bring about short-term stock gains. There is one corollary he didn’t touch on, which is the damage being done to corporations by green and ESG distractions. I’ll briefly touch on that, but first here is a sample of Mr. Mukunda’s outstanding piece. I encourage you to link it and read the whole thing.

“From 737s To Sneakers, It’s The Same Sad Story” [Forbes – 9/21/2024]

The CEO of a legendary American company steps down after a series of reverses. His company used to dominate its industry, was the leader in innovation, and succeeded so massively that it became an icon of American success. Despite this track record, it had turned to an outsider with a financial background, but no experience in, or passion for, the industry when it hired him. The new CEO focused on cost-cutting and squeezing profits from older products instead of making the investments necessary to invent new ones. The result was a spike in short-term profits that thrilled Wall Street but was soon followed by a precipitous decline as customers turned to competitors who had new and innovative offerings. The outsider CEO, after receiving tens of millions of dollars for destroying tens of billions of dollars in value, retires, leaving a successor to pick up the pieces.

Boeing and Nike are given as examples.

Nike has just provided us with another case study. Because the product life cycle in fashion is much faster than it is in airplanes, it took only years, instead of generations, to cripple a great company. When John Donahoe became the CEO of Nike in 2020, he was the company’s second-ever outsider CEO. Donahoe had been the CEO of eBay and Bain but – critically – he had no history in shoes, or sporting goods, or even in fashion.

Mr. Mukunda goes on to discuss how CEO Donohoe was so oblivious to the products Nike sold, that several years into his tenure he referred to Nike’s proprietary “ZoomX foam” as “Zoom 10 foam.” But in the circles where Mr. Donahoe comes from, there is no difference between a widget and an airplane and a tennis shoe.

Donahoe slashed sales teams and R&D and shifted products from Nike’s retail partners to its own stores. Unsurprisingly, this boosted numbers in the short term.

Cutting costs, reducing headcount, and slashing research and development is how the current crop of mercenary executives conduct business.

He laid off hundreds of marketers who had an intimate knowledge of Nike’s customers, intending to replace them with data driven insights. Product creation shifted from sports to demographics (instead of a department focused on creating products for basketball, it would have one creating products for men, like Zara, Gap, H&M, or any other generic fashion brand.)

Not mentioned by Mr. Mukunda is the damage done to corporations by committing to unattainable green initiatives. As I wrote a few months ago, Hertz was destroyed by an outsider CEO who decided to impress his buddies in Davos by committing to remake Hertz as an EV rental company.

At the center of the Hertz debacle was its poorly thought-out commitment to electric vehicles. With Scherr at the helm, Hertz acquired 60,000 EVs, with a goal of putting over 300,000 into service. A CEO who understood his product and his customers would have understood what a calamitous mistake Hertz was making. Mr. Scherr, however, was not such a CEO. Customers didn’t want to rent the EVs, counter agents struggled to lease them, and make-ready crews struggled to keep them charged and road-ready.

Corporate America desperately needs to move away from the existing model of recruiting celebrity CEOs from the outside, whose “expertise” is in financial gimmickry, and return instead to developing the best and brightest talent internally, from individuals who have a passion for the company and its products.

And speaking of Boeing, The Blaze has just published a piece of mine discussing how Boeing spent $43 billion in stock buybacks in the past decade, but now the aerospace giant is in a cash crisis and choking on debt, so it is about to do a desperation stock offering of up to $15 billion at a far lower price that what it paid for all its stock repurchases. I’d be honored if you’d give it a read.

[buck.throckmorton at protonmail dot com]

posted by Buck Throckmorton at 10:55 AM

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