Top officials at Chrysler Financial turned away a government loan because executives didn't want to abide by new federal limits on pay, according to new findings by a federal watchdog agency.
The government had offered a $750 million loan earlier this month as part of its efforts to prop up the ailing auto industry, including Chrysler, which is racing to avoid bankruptcy. Chrysler Financial is a major lender to Chrysler dealerships and customers.
In forgoing the loan, Chrysler Financial opted to use more expensive financing from private banks, adding to the burden on the already fragile automaker and its financing company.
This gets at an observation I've long had about capitalist economics. Capitalism assumes that corporations will behave in the ways that maximize their profits. But that's not quite right. Corporations will behave in the way that maximizes the interests of their elite decision makers (e.g., the top executives). These overlap considerably, but they aren't the same thing, as this case indicates. To take another example, if the Board of Directors of X-Co, Inc., found that they could save a net hundred million dollars by out-sourcing their own jobs to India, they still wouldn't do it, because executives obviously aren't going to eliminate their own jobs, only other people's jobs.
4 comments:
isnt possible that this leaves them open to lawsuit by shareholders? i havent taken corporations but it seems like there is a possible cause of action there.
David,
You should take a class on corporate governance. It will fill the facts of your intuition about the behavior of boards and executives. I'd especially recommend Bebchuk & Fried, Pay Without Performance.
Gaucho,
You can be sued for anything, including the temerity of an acquisition: either the price offered for the acquired entity's stock is too low, in which case that entity's shareholders sue, or it's too high, in which case the acquirer's shareholders who sue. Or your stock price drops, and there's a suit, or ...
Business judgment rule generally prevents most of these lawsuits from succeeding on the merits, however. Chrysler already is denying that they were motivated by the pay restrictions, and it's within business judgment to say that the loss of talent caused by pay restrictions outweighs the benefits of the federal loan. Disney indicated that paying a useless jerk tons of money to do nothing and then tons of money to go away is still within the BJR. Unless there's a heavy distinguishing or overturning of that precedent, Chrysler's in the clear.
While executives, in the short run, may make decisions that benefit only themselves this will backfire in the intermediate/long run. After all if the company suffers because of their decision to think and act only for themselves the company will not grow and profit. And they will fail.
As for Chrysler taking or not taking a bail out it must consider the voice the government would then have and their motivation. For example it is clear that the Democrats running the government are indebted to labor unions for their support in the past election. Consequently it is not inconceivable that the government would force a solution that favors the workers but not solve the underlying defects of the American auto industry which involve union pay and benefits.
Lastly you are making the same mistake that Marx made in Das Kapital. Or rather he ignored statistics that did not fit his theory of scientific socialism. He stated that the capitalists will get increasingly richer and the workers increasingly poorer. However the statistics from that era clearly indicated that everyone was getting richer.
After WWII Marxist theorists, unable to explain the failure of Marx's scientific socialism, came up with monopoly capitalism but this likewise is not panning out in the real world of today or when it was formulated.
After all if the company suffers because of their decision to think and act only for themselves the company will not grow and profit. And they will fail. Yes, we live in a world of binaries in which either an executive acts without self-interest solely for the benefit of his company, or the executive acts primarily in his own interests which may or may not converge with his company's and the company must fail. Manichean capitalism, kids!
He stated that the capitalists will get increasingly richer and the workers increasingly poorer. However the statistics from that era clearly indicated that everyone was getting richer.What about the statistics from this era indicating that real incomes (i.e. adjusting for inflation) have stagnated or fallen for the average American worker?
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