Which would be harder?
I have been reading articles about Mitt Romney and his tenure at Bain Capital over the past few weeks. I’ve been seeking out clarity and other information about his time there, how he ran the company, and why so many people are so mad at him.
This week, an article came to my attention, and a section of the article resonated with me. Here is that text:
“When he (Romney) spun out of Bain & Co. to form Bain Capital in 1984, he launched an Olympian record in private equity that was not effectively impeached despite many efforts during the political campaigns that followed. He capped it with a bold and utterly ruthless rescue of the parent firm when Bain & Co. ran off the rails as the founders attempted to cash out in the early 1990s. Romney cut the founders’ share by half, slashed compensation, fired half the people, shook or faced down the creditors, notably including Goldman Sachs, and saved the day for his future entry into politics. He doesn’t boast about it, but this flawless performance in the clutch expressed Romney’s extraordinary gift for crisis management, demonstrated again and again in his career and personal life.”
This section really stuck with me because of a conversation I had with Dr. Jim Shelton, then an accounting professor at Freed-Hardeman University, during the final weeks of my time in undergrad.
All business majors were/are required to participate in a capstone course that is meant to combine all of the coursework into one very serious class. The class population is divided into groups and each group runs a company in an environment similar to that of the USA. Our business was candy. We chose pricing, budgets, production, long-term capital investments, short-term loans, dealt with bonds and credit, and managed many parts of the machine that ultimately makes up running a company, even a fake one.
Midway through the exercise (each week we made four independent “quarterly decisions” that would then be run through a program and the results of our work would be made available), my team chose to build a factory in what would be considered Mexico for the purposes of the game. Lower wages, less taxes, more risk, potentially more reward. We maintained multiple factories in “Merica” (yes, that was really the name) because we had invested enormous amounts of money in those plants, and the plant in “Mendico” or whatever it was called only accounted for 10-15% of our total production.
As “time” went on, we saw some trends that began to worry us. Wages were rising rapidly in “Merica”, but were shrinking in “Mendico.” We had made efforts to spread our risk, and it was paying off to some extent. We had an opportunity to sell a factory in “Merica”, take the money and build more capacity in “Mendico” and keep the company from economic trouble.
At the end of the term we had to present our business plan to a panel of professors and business executives. Cash flows for every year, balance sheets, the whole nine yards. It was a great lesson in the amount of work putting together financial statements could be, and these were all fake numbers. Real life could only be more difficult.
During our presentation, Dr. Shelton noted that we had sold a factory in “Merica” to fund more capacity in “Mendico” and questioned our morals (he’s an excellent Devil’s Advocate). Why had we done this? He asked if we had considered the jobs of the people who had worked in that factory. I answered, “I can’t think about those jobs. I have to think about every job. We employ X people (I can’t recall what the numbers were), not only the people in this factory. If we kept this factory open, we were risking every job.”
That may seem callous, but consider the truth behind the statement and understand I was 21 or 22 years old and hadn’t quite nailed down tact. I still haven’t. You can ask around.
I think that most people don’t have the fortitude to make the hard choices when it will absolutely hurt others. In our class scenario, which was nothing like real life or real money, we made a decision we felt was best in the long-term, though it was going to be hard to explain in the short-term. Romney made tough decisions, and likely saved jobs in the process.
What would be harder – explaining that a decision you made cost a few people a job, or that a decision you didn’t make cost everyone their job? I think the latter would be much more difficult.
The job market is not a fixed number. There isn’t a crystal ball telling employers there are only 100,000,000 jobs available in America. There are as many jobs available as our economy can sustain. For our fake candy company, we realized that if we remained on our initial path, we would be risking every job we had “created” in order to keep as many people employed as possible. It wouldn’t have worked in practice, and it certainly doesn’t work in the real world. We need a stronger economy. “Creating jobs” isn’t magic. It requires all the moving parts to be well-oiled. If the machine begins breaking down, it takes a LOT more to get it running smoothly once again.