Cheap debt and steady economic growth has made it easy for bad actors to fly under the radar. That may change if there’s a prolonged economic downturn.
Don’t commit financial crimes. Ever. It’s not worth it. Losing everything you own and your reputation is better than spending a meaningful chunk of your life in federal prison.
Burning Bellatorum is an excellent example of how hubris and an economic crisis (Covid) drove a great business into the ground, damaged countless lives, and will likely lead to prison time for the CEO. Definitely worth reading if you’ve ever raised capital or plan to in the future.
> If you accept for a moment that there is de facto discrimination arising from the actions of private actors, and you believe that this is a net negative for society, how would you go about reducing or elimination it?
Laws can’t make people love each other. We have to make that choice on our own. We learn to accept and include others through our life experiences and the examples set by leaders in our society. If you want people to change their behavior, set a good example for others to follow and encourage others to follow suit.
Yes, Excel spreadsheets frequently contain errors that are hard to spot. Sometimes those errors end people’s careers and damage companies. Tools like Quantrix that use multi-dimensional models provide a formula syntax that’s radically less error prone while providing far superior reporting.
This is ultimately a cultural challenge, not an analytical challenge. You don't win cultural battles with intellectual debate, rigorous analysis, or facts. You win cultural battles with politics and power. That means finding a way to get "the wrong people" off the bus and "the right people" on the bus.
Incentives matter and PEGs want companies to grow significantly over the life of their investment. The biggest reward comes from the future sale after you’ve increased the enterprise value 10x. I’m sure that people have made poor decisions for short-term gains, but the real issue is giving immense power to someone who has never actually had to build teams, ship products, or go the extra mile to make customers happy. Being “smart” doesn’t mean you always make good decisions. Some of the most successful entrepreneurs I know aren’t particularly book smart. In fact, much of their success could be attributed to the fact that they just didn’t quit when any other reasonable/normal person would have thrown in the towel.
I agree. Considering the complexity within organizations, imagine pleading your case to a couple of Stanford MBAs that are 1) incredibly smart, 2) operate in a PE culture that rewards managers that provide others with "negative feedback" to get results, and 3) believe in their hearts that cutting benefits is "optimizing" the business to maximize shareholder value. They can make a compelling counter-argument for just about anything.
> I just couldn't understand why the managers and other people in leadership positions stuck around.
Money. Investors typically carve out equity to retain key personnel (i.e., management units/stock). The units are worthless unless the company appreciates in value, so management becomes laser-focused on doing whatever it takes to increase the company's valuation. Everything else becomes a secondary concern.
>> Having dealt with 2 PE exists, rarely is the proposal something as upfront and silly as slash everyones pay.
Agreed, but a gradual erosion can occur over the course of several years. PEGs and the operating company's management team have massive incentives to hit their growth metrics. If decreasing 401K contributions helps management hit their EBITDA target, many would argue that they should do exactly that. However, the impact of these decisions accumulates over time and can eventually derail a company's performance.
They do understand that cutting costs will have an impact on culture and morale, they just think the marginal benefit exceeds the marginal cost. Keep in mind, PEG managers are chasing a carried interest bonus which they only achieve after covering the minimum return promised to their investors. Plus, leveraged buyouts--which PEGs frequently use--increase a company's risk of failure. Everyone's under intense pressure to perform.
Quick story: I was the CFO for a company that sold to a private equity group (PEG). I took over as the CEO as the founders retired, leaving me to deal with the PEG. It quickly became apparent that the PEG managers looked at everything through the lens of an Excel spreadsheet. These guys were brilliant attorneys and analysts but lacked experience building businesses and managing teams. Ultimately, they couldn’t add much value in terms of operations or strategy, but they were great at financial modeling/quantitative analysis and forcing us to justify expenses. That may sound good at first—eliminating wasteful spending—but it ultimately led to the gradual erosion of the company culture and employee loyalty. It’s easy to cut benefits and pay given that many workers lack the leverage to do anything about it, while it’s much harder to reduce hard costs like materials and equipment. That meant employees just kept getting squeezed, and it was surprisingly difficult to quantify the impact that terminating an employee or cutting benefits would have on morale/culture/performance.
The moral of the story is that people with analyst mindsets play an essential role in our economy, but sometimes giving those people power over large organizations can have disastrous consequences. There truly is a disconnect between measurement and understanding.
https://www.cnbc.com/2022/07/13/inflation-rose-9point1percen...