Nardelli and the uncorporation

I didn't have time earlier this week for more than a brief comment on Nardelli's ironic on-his-feet landing from Home Depot to Chrysler via Cerberus. In the meantime, some readers expressed skepticism about the appointment.

On reflection, and with the help of Monday's WSJ story, the move is readily understandable as an illustration of what makes private equity -- or more generally what I've called the "uncorporation" -- different from conventional public corporation governance.

First, the WSJ story notes that Nardelli will

play [a] key role[] in what are expected to be tough negotiations over a new national labor agreement with the United Auto Workers union* * * [T]he move to Chrysler puts him in a top position at a private company without pressure from public shareholders. That could give Mr. Nardelli freedom to undertake more ambitious restructuring, and that in turn could drive rivals Ford and General Motors Corp. to rethink the pace and scope of their own overhauls.

As I said in May:

Cerberus is bringing a lot of money to the table, in return for which it is demanding cooperation. One way to characterize this is that private equity is bidding to clean up contracting problems that are threatening to send an otherwise viable business down the tubes.

I had earlier observed:

The problem with US automakers clearly isn't the basic business* * *[I]f there's money to be made, and it's just a matter of dividing the pie, I suppose it might help to have a new pie-slicer -- particularly since the alternative is burning the pie in bankruptcy.

If you want a tough pie-slicer, Nardelli's tough attitude toward the unions (including some of the Home Depot shareholders) is a job qualification, not a drawback.

Of course the pay issue won't matter with a private equity owner the way it did at Home Depot. As Monday's WSJ article notes:

Mr. Nardelli's pay will be tied to Chrysler's performance and based on the equity value of the auto maker, people familiar with the matter said.

And Nardelli does have the sort of experience that private equity values, according to the WSJ article:

Mr. Nardelli's experience at GE is one of the main reasons why Cerberus wanted him. Many of Cerberus advisers and executives are made up of former GE employees. Cerberus is also a big believer in the Six Sigma system and other lean management strategies, according to people familiar with the matter. Six Sigma is a complex discipline that combines aspects of statistical quality control and operational efficiency analysis to attack waste. The name is a reference to the goal of driving defects or problems in a process down to 3.4 per million. Six Sigma programs have been implemented at various auto manufacturers and suppliers, including Ford Motor Co., with mixed results. Chrysler has already implemented aspects of lean manufacturing such as its flexible production system, in which a few of its factories are able to produce three different models in one plant.

As I discuss in my Rise of the Uncorporation (which will be shortly moving to the piles of law review articles editors' late summer reading material):

[Michael C. Jensen, The Economic Case For Private Equity] stresses the importance of having engaged and expert principals making the critical strategic accountability decisions in a firm. This means hiring people with both the knowledge of how to operate a business and the perspective of a financial analyst on what capital markets value. Firms need to be able to pay these people enough to cover their opportunity costs and motivate them to apply their skills. By contrast, in conventional corporations, as discussed above, there are limits on incentive compensation, including insider trading rules that inhibit managers from cashing in on the value they add to the firm’s equity.

Nardelli was evidently a poor fit for a conventional publicly held firm like Home Depot, but arguably a good one for the private equity structure. And although Chrysler and Home Depot are very different firms, we may also get a chance to see which one works better.

Comments

[save_the_rustbelt]

Apparently Cerberus does not believe in a free labor market for employees, from the Detroit News today ...

"Chrysler fears edgy executives will bolt

David Shepardson / Detroit News Washington Bureau

WASHINGTON -- Chrysler LLC is discouraging white-collar employees from applying for jobs at former parent Daimler AG or its Chrysler Financial unit in a bid to keep jittery workers from leaving the automaker during its transition under a new owner and a new chief executive.

Requests to interview for positions at Chrysler Financial and other Daimler units, including Mercedes-Benz USA, "are currently not advised," Rita C. Rinner, Chrysler's manager of global staff, wrote to senior Chrysler employees Monday in an e-mail obtained by The Detroit News. "Any exceptions must receive prior approval and should be channeled through HR."

Lower in the article we find that the real concern is the accounting and finance people will leave for --- better jobs! More secure jobs!

They want the white collar employees to do the heavy lifting during the transition and then get fired - what a bunch of ruthless SOBs.

See www.detnews.com for the full article. The company spokesmen fall all over themselves.