Capitalism. The most successful economic system in human history. With all its flaws, no other system has generated more wealth and elevated more people from poverty to riches. But like every other system, it’s designed and managed by humans, so obviously it will be full of flaws. And there is no better place on earth to observe these flaws than the United States of America.
The richest country on earth, with huge conglomerates and companies that are homes to the richest people on the planet. But after just a month of shutting down their business, these capital behemoths are already asking their government for bailouts.
The importance of emergency funds
Financial advisors usually teach their clients about the importance of emergency funds. Rule of thumb is to have 3-6 months of expenses allocated in an easily accessible deposit account. Whether it’s cash or short term, high-yield savings accounts. Whatever. Point is, that if you lose your job or if there is any other reason for why your cash-flow will get suspended, you should have a quick and easy way to access that cash. So even if your life does get disrupted, you can take the time to fully focus on getting back on your feet.
It’s obvious now that such lessons would be also critical for companies, especially the larger ones. As doors are being shut and balance sheets shattered, mass-unemployment is on the rise and demands for government support is increasing. Again, we are only a month into lockdowns, which may easily extend by another month or two.
Should governments bailout companies?
Governments around the world have responded quickly with stimulus packages, low-interest loans, grants and even direct cash payouts to citizens. I honestly don’t know and can’t think of any other solution for now. But it’s ironic, and funny enough, that even a country like the US, which is currently being led by the republican party, jumps in with help so quickly.
The republicans. Everything they are doing now is against every core principle of how capitalism should look like in a country that devoted itself to that system. Why should the government bailout unsuccessful businesses? A company that fails within as little as a month of trouble certainly can’t be called “successful” or “sustainable”.
Keeping an unsuccessful company alive just to preserve some jobs makes no sense. Wouldn’t it be better to restructure the company or to let it go bankrupt so new, smarter and better competitors get the opportunity to fill the void?
The only way I could imagine this to make any sense is if the government would see opportunities in the business for itself. Then it shouldn’t give any grants either, but rather take a stake in it.
By taking a stake in a company, the government can ensure the operations can continue and support a larger restructuring to put it back on feet. It can also keep better oversight to make sure the money goes to where it’s supposed to go to. Does anyone really believe that stock buybacks and CEO bonuses won’t happen in 2020, while employees are being laid-off, or staff salaries and benefits cut?
I am not alone with this this idea. It has been also supported by Mark Cuban and other prominent voices, who by the way might come up as an independent candidate for the presidential election in November.
The real strength
I think I heard the quote from Howard Shultz:
“It’s very easy to lead when things are going great. It gets really hard when you get headwinds, disappointments, and people are telling you that you’re in the wrong way.”
As of now, the headwinds are really strong for all of us. But it’s also an interesting and exciting time, becasue as investors, right now we can observe easily which companies are on the right track, which can endure hardships, and which have sound business strategies designed to go beyond their quarterly reports and dividend distributions.
We can (and should) also observe which companies have the strength not only to navigate through this crisis but to do so by simultaneously supporting their stakeholders. Keeping employees is just one part. Business partners are another piece of the puzzle. And yes, asking for taxpayers money is also a factor.
Being financially strong means, in my humble opinion, to not need to rely on anyone coming to rescue. Not only that but also to make a point that even if one would be eligible to get benefits, grants or subsidies, this money should be rather distributed to those who really are in need of it.
Putting them to the test
Less than a year ago the Business Roundtable declared the end of shareholder primacy and a stronger focus on stakeholders. There won’t be a better time but now to see who of those who signed the paper really meant it.
The best statement on paper is only worth as much as our actions tell. In good times, and in bad times. The world will be watching.