Monday, October 13, 2008

1. The Credit Crisis: What Does it Mean for You and Your Company?

One of the biggest problems we face today is the egregious mismanagement and reckless incompetence of many American corporate boards which utterly fail to do their primary job of holding managements accountable.

Carl Icahn, Oct 7, 2008

Don’t Be an Ostrich
Many people watch what is happening on Wall St hoping they will not be affected. Sooner or later, it will affect you. Rather than avoiding the issue and burying your head in the sand, let’s understand what’s happening, what it means and what you can do to get ahead of the curve.

We will do this in four posts:

  1. The Credit Crisis: What Does it Mean for You and Your Company? - This will look at what’s currently happening and what it means.
  2. The Credit Crisis: Why It Is Important? - A Little History - To get some context, we’ll look at why companies were set up and why investors, like Carl Icahn are so outraged.  Understanding this is important to recognizing good opportunities.
  3. The Credit Crisis: For Project Managers - What Does It Mean? - What are some things as project managers you should be doing.
  4. The Credit Crisis: For Project Managers - What should you Expect? - What are things to look for and think about.

What’s Happening on Wall St?

A couple of things about this clip.  In addition to its humorously irreverent and more accurate than you might think description; it is also over a year old.  The credit crisis is not new.  It has been brewing for awhile and its resolution will take awhile.

Expect to Feel the Pain
Even if you’re not in financial services, expect to feel the pain. Consider that as of Friday Oct 8th 2008, US stock markets are down over 42%.  $8.2 Trillion dollars has been lost.  If there are 300M Americans, each is out $28,000. [Editor: This is worse than a divorce.  I lost half my money and I still have to put up with you!]

More concerning is that this is a credit crisis, not an equity crisis.  The stock market crash is the symptom, not the cause.  I won’t go into the details [Editor: Please don’t], but the cause is the credit crisis - banks unwillingness to lend to other banks and now businesses.

How this will work out is the real question.  Uncertainty leads to questions of confidence. How will the uncertainty be resolved? Transparency. What’s visible can be dealt with, it’s what isn’t currently visible that will drive people to want to know more.

Who will want to Know?
For public companies, executives and the board of directors will want to know.  Hence the Carl Icahn quote.  Consider this:

NEW YORK, Sept 15 (Reuters) - Shareholders sued Merrill Lynch & Co Inc Chief Executive John Thain and the company’s board of directors on Monday over the proposed buyout by Bank of America Corp, claiming the terms of the deal are unfair [to shareholders]. (Full Story)

What is important is that the suit is filed personally against John Thain and the board of directors. They are personally liable. The suit claims John Thain and the board “have clear and material conflicts of interest and are acting to better their own interests at the expense of Merrill public shareholders.”  There will not be enough D&O (Directors and Officers) Insurance to satisfy investors after all the money that’s been lost.

Nothing like the fear of a class action lawsuit to persuade you to get more transparency in your business.  Where is money going, how is it being spent, what returns are we getting from projects we invest in?

Private companies will answer similar questions from their own investors and executives. Furthermore, suppliers will want to be sure firms can pay. Vendors will want to be sure they can deliver. Banks will want to know how funds are being used.

We are heading into budgeting season.  Expect Ronald Reagan’s “Trust, but verify” to accompany the belt tightening.  Whether you call it transparency or regulatory oversight or SOX or corporate governance or [Editor: the following line was deleted, you can’t use that language.]; executives, directors and investors will want to know more.

Why Are Investors Like Icahn Using This Moment To Demand Change?
In addition to the reasons stated above, but there are historical reasons for wanting transparency. Understanding this will provide you insight to take advantage of the opportunities which will arise.  We will take that up in our second post: 2. The Credit Crisis: Why It Is Important - A Little History.

Have you started seeing changes?


PM Hut said...

An excellent post indeed!

IMHO, this post is a bit on the pessimistic side Sooner or later, it will affect you, I do have the feeling though that the rest of the posts will be more optimistic!

I am involved quite a bit in the PM community, and still I haven't seen mass layoffs or a decrease in demand. In fact, I've heard that during such times, Project Managers are more in demand to manage crisis-related projects such as mass layoffs. Additionally, there is so much demand worldwide for Project Managers that, even now, supply still does not meet demand.

Andrew Meyer said...

Thanks for the comment and thought. Where I think you'll see the effect is in budgeting. Budgets in many firms are likely to be cut back drastically in 2009. It is also likely that thresholds, gates, targets or ROI (return on investment) numbers will need to be included with cost estimates.

That is what I'll really start going into in the third post, what should PMs do and the fourth post, what should PMs expect.

You may well be right, that PMs will not lose their jobs, but I do believe there will be accounting and budgeting element along with stricter corporate governance requirements added into the PM position. These have not really existed before.