The Cerberus Deal: Chrysler in the Mouth of the Whale

Every few years, business needs to come up with a new savior. If only we had zero-based budgeting; if only we were driven by the search for excellence; if only we could stick to our knitting or follow the seven habits of seven successful people. If only… The newest addition to this grand litany of salvation seems to be the arrival on the scene of huge private equity funds and their ability to rescue publicly traded corporations from the curse of public shareholders. We have discussed this subject, and our reservations about the trend, on a few occasions previously.

So often it seems there has to be a crutch to explain away failure or a magic elixir that will solve all the problems. Rarely will management admit that it dropped the ball or that a company’s difficulties were the result of limited vision or poor judgment. You never see complacency, which is often the real culprit in boardroom misadventure, booked and fingerprinted as an accomplice to underperformance. Spend a few hours with senior managers, as I have done on thousands of occasions over some 30 years, and you will quickly see that arrogance, denial and a stunning disconnection from the real world of customers and markets are too often the overriding characteristics of their style and the seeds of their folly. As I have long contended to rather stunned audiences of business students and corporate executives alike, if businesses were actually run by well-grounded managers with a true sense of vision, a genuine appreciation of the people and stakeholders who shape corporate success and an ability to be governed by sound judgment, many companies could improve their performance by between 20 and 33 percent. Too often, it is the over-paid, game-playing manager with the Napoleonic power complex, the one who will cut corners to look good in the short run, who places himself ahead of all others and lacks an understanding of the contribution of employees and other stakeholders —and then looks for scapegoats when his plan fails— who is at the helm today.

Which brings us to the Chrysler-Cerberus deal. Look at these words carefully:

We’ll be able to run it the way we want to run it and not worry about quarterly numbers or what somebody might think on the outside. We’ll do what’s best.

—Chrysler CEO Tom LaSorda, May 15, 2007

To suggest, as Mr. LaSorda has, that Chrysler’s investors, or the fact that its stock was traded on the New York Exchange for the better part of the past century, prevented the company from being run the way they “want to run it,” or that they were hampered from doing “what’s best” during this period, shouts of a disingenuousness that will not serve the company well. Why not blame the full moon? At least it has some effect upon the Earth’s reality.

Chrysler performed unsuccessfully because of a number of factors —high production costs, poor image, quality problems and the fact that Japanese makers seem to get so much more right. The company was looking for a crutch when it merged with Daimler nine years ago in another deal that many, myself included, thought ill-advised. (Is it not curious that, during this time, the Mercedes-Benz division also experienced a marked deterioration in the quality and reputation of its cars, along with a significant slump in sales? As a three time Benz owner, I can attest to the fact that cars being built during much of this period were nothing like the ones built in the pre-merger days, which is why I have a new Japanese-brand car today.)

Chrysler is looking for another crutch with Cerberus. Many depend upon Chrysler, especially its 88,000 employees and 111,000 retirees and their families, so it is natural to hope for the company’s success —if one views success as restoring Chrysler to a point where it is optimizing its assets and its capacity for innovation and advancing the well-being of customers and stakeholders.

I am skeptical that the Cerberus deal will do that, however. Chrysler was a great American icon — a business institution that had a distinct culture and history. It was the master of its own destiny for generations. That will change with its new owners. Cerberus makes money, not icons and institutions. It does so secretly and behind closed doors, not as a transparent corporation with pubic investors. There’s no roster of executives or board of directors on its web site. There’s no code of ethics that is held out to the public governing the way they do business. You don’t get to see who is behind the company and from where —and what countries— the investing dollars are coming. If you believe that accountability and transparency are indispensable attributes of success, and that they are necessary characteristics of great power in a complex society, as I do, you might have some misgivings about this deal.

Ultimately, what is likely to happen is that much of the company will be dismantled and the American public will be saddled with a large part of the pension and health care liabilities facing Chrysler. Cerberus can play hardball with unions, governments and others, and not care much about what people think. They can hire—and already have— platoons of lobbyists to advance their case, which will invariably involve whatever enhances their profits —the profits of a select and unknown few. It can become a troubling matter when concentrations of wealth and power become untethered from the discipline of public opinion. Because it is not a publicly traded company, it is said Cerberus doesn’t need to be worried about how it is perceived by the public. J.P. Morgan and his cronies thought the same. Then there were those pesky hearings in the House of Representatives headed by Arsène Pujo in 1912 that changed some of the ground rules under which the likes of Mr. Morgan operated. The power and privilege which today’s cabal of private capital is accumulating, and the troubling issues of responsibility, lack of transparency and social impact it raises, will, I predict, one day see a similar burst of legislative involvement.

The myth that removing the company from what some now regard as the shackles of quarterly statements will make all the difference is just one of the ironies in this deal. Cerberus, like the other members of this secretive club of private funds, is known neither for its patience nor its altruism. When you move from the cold of the storm into the mouth of the whale it may seem warm and quiet. But it’s only a short-term feeling.

You’re still in the mouth of the whale.