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I read with great interest details surrounding the recent acquisition of Georgia-Pacific, a publicly traded company, by Koch Industries Inc., a privately held firm. As a consultant, I've observed that my privately held clients seem to be more successful in implementing reliability improvement initiatives than their publicly traded counterparts. Could privatizing manufacturing companies be the future for American manufacturing and process industries? If so, will this finally enable reliability improvement initiatives to deliver the value promised?
The Associated Press quoted Charles G. Koch, chairman and chief executive officer of Koch Industries, as saying, "By joining our group of privately held companies, Georgia-Pacific will be able to maintain a long-term focus on growth and commitment to delivering value for all its constituents." He went on to say, "As a wholly owned subsidiary, (Georgia-Pacific) will benefit from (Koch Industries') historical practice of reinvesting up to 90 percent of earnings in our businesses."
I'd like to make three important points about Mr. Koch's statements.
(1) Mr. Koch pointed out that being a part of a privately held group will enable Georgia-Pacific to focus on the long term. From life-cycle cost minimization (which drives design and procurement) to proactive maintenance, reliability is a long-term commitment. By definition, we're investing a little today to avoid costs and gain capabilities in the future.
Reliability management is risk management. Exercising and eating properly are investments that you make today and on an ongoing basis so that you may live a longer, happier and more productive life. But investments made in your 30s and 40s aren't fully felt until you reach your 50s, 60s and beyond. Reliability is a long-term proposition - one that doesn't always fit Wall Street's definition of success. On Wall Street, long term is the next quarter.
(2) Mr. Koch discussed delivering value to all of Georgia-Pacific's constituents.
One aspect I always look at before purchasing shares in a company is its amount of institutional ownership. Here's why. If the company is largely owned by institutions, and one of the fund managers wakes up on the wrong side of the bed, he or she can decide to unload the stock. Moreover, he or she will likely trigger a similar reaction from other fund managers, which can send the share price into a downward spiral. All of a sudden, the senior management team is focused on making Wall Street fund managers happy, not building company value and serving all of the stakeholders.
My clients often comment that they don't understand why senior managers don't see the value in reliability - why they don't "get it." They get it. These folks are smart and didn't just fall off the turnip truck. The problem is that Wall Street, and the stock market in general, is mercilessly objective and very myopic. Senior managers are in a tight spot - building long-term value often results in poor short-term performance.
Pressure on the senior management team to build short-term value often leads to very damaging cost-cutting measures that beef up short-term performance but put the future at risk. It's a bit like killing and eating the goose that lays the golden eggs.
3) The third item is Mr. Koch's statement about reinvesting up to 90 percent of earnings back in the business.
The stock market demands yield and it wants it the day before yesterday. There are two ways to create yield - share price growth, which is heavily influenced by institutional investors' collective decisions, and dividend policy. If a company maintains an aggressive dividend policy, retained earnings get tight, making it hard to fund growth. Retained earnings is typically the firm's cheapest form of capital. Some organizations actually take on debt, at a higher cost of capital than retained earnings, while maintaining a dividend policy so they can beef up yield. This creates an ever-worsening cycle of despair.
The fact is that few reliability initiatives will turn a quick buck.
Wall Street creates extreme pressure on the executives of publicly held manufacturing companies. In some instances, this pressure even causes otherwise honest and honorable people to do things that are illegal, leading to felony convictions and time in jail. It's a high-stakes pressure cooker in which these executives live.
The problem is really quite simple: Large, equipment-asset-dependent plants are big ships that simply can't effectively turn on a dime at the whimsical fancy of a large institutional investor or analyst. Achieving true value creation requires the pursuit of a long-term commitment and vision. Being privately held is attractive from that perspective.
Mr. Koch stated the case as plainly as it can be stated. The drawback, of course, is the loss of an important source of capital. But if that capital source is driving a company out of business, maybe it's not worth it.
I foresee a trend toward privatization of U.S. manufacturing and process industry firms. Perhaps Koch Industries is showing us the way to the future - a future in which reliability management strategies play a crucial role.
|BRING DREW TO YOU|
Want to supercharge your knowledge on lean manufacturing and/or effective plant reliability management? Want to make a bottom-line impact in 2007? You can accomplish both by inviting Reliable Plant's Drew D. Troyer to speak at your event or company meeting. Drawing on his personal plant experiences and MBA - along with an entertaining and spirited style - he has a unique ability to challenge and inform professionals at all levels.
For more details, contact Tammy Johnson at 800-597-5460, ext. 143.