When Norm Bodek and I wrote Rebirth, we included a chapter called "The End of the Quarter Shuffle", describing the lengths public companies go to in order to make the quarterly and year end numbers look good, and often doing very destrucive things to accomplish that end. Those of you working for publicly traded companies know exactly what we were talking about. The end of the quarter is a huge deal in those companies responsible to Wall Street. It is not much more than just another day on the calendar in privately held companies.
The news of the day is the settlement between GE and the SEC over GE's accounting practices. According to the SEC, "GE misapplied the accounting rules to cast its financial results in a better light." They were cited for 4 different abominations, but the goal of all of the dishonest practices was to inflate quarter-end earnings and drive the stock price up. The problem the SEC had with GE was that the company misled investors and caused stock prices to move based on false information, which hurt investors.
It seems to me that the financial community is missing the big picture here. To heck with the stock price – that will right itself sooner or later. In the meantime we have real money being thrown away. Let's look at one of the four shady dealings at GE – "selling" 381 railroad locomotives to financial institutions for $370 million. It really was just a financing deals that left the locomotives in GE's hands to sell to real customers. Using GE's own numbers, $370 million in gross sales translates to $44 million in Pre-tax profits. Again, using GE's average results, $44 million in false profits results in $6,947,000 in unnecessary taxes to be paid. That means GE paid almost $7 million in taxes on profits it knew were not real in order to jack up the stock price. That is $7 million of the company's money they paid out knowing full well they did not owe it.
OK – let's give GE the benefit of the doubt - although I can think of no reason to do so – and assume they would have sold the locomotives to some real customer soon – even though that is an awful lot of locomotives. GE says they make 14.8% on their money. So if we assume they would have sold the locomotives, and paid the taxes three months later – that amounts to $257,000 in lost earning straight down the drain. That would have paid the salary and benefits of two or three of those 'headcounts' GE eliminated. That is like dumping a truckload of perfectly good parts into 4 Mile Creek, which runs next to the locomotive factory. That is as wasteful as waste can get.
It is impossible for companies like this to really emulate Toyota, or actually adopt lean management practices, or a lean culture. How many people had to work on how many six sigma and kaizen events to save the quarter of a million the executives burned simply to manipulate the stock price? The locomotives were really one of the lesser infractions at GE. They horsed around with aircraft spare parts to the tune of $585 million in profits – that means at least $3.4 million gone based on the same 'give them the undeserved benefit of the doubt' logic. That is something like 30 families hammered by a GE layoff to recoup the money burned to manipulate the stock market.
GE, of course, is the extreme case, but every company that plays games with quarter end results is doing the same thing to some extent. Every company that builds inventory, or refuses to reduce inventory in accordance with good business practices, so as to prop up reported earnings is deliberately overpaying taxes – giving away real money that belongs to the stockholders – the collateral damage of playing the Wall Street game.
It is style over substance – looking good rather than actually being good. The saddest part is that most of the stockholders would be appalled if they knew what senior management does with their money. The school teachers with their retirement money in the hands of some fund manager are the real losers. That was their money the shysters burn to make themselves look good. Those school teachers are not concerned with quarterly stock prices – they are in it for the long haul. They want Warren Buffett, long term value based investing. They want their money in the care of managers committed to lean business principles.