Should Private Equity Portfolio Companies Get a Bailout?

Should Private Equity Portfolio Companies Get a Bailout?

Under the CARES Act, to qualify for loans as part of the PPP, businesses generally must have fewer than 500 employees. However, due to the SBA’s “affiliation rules,” all employees across a private equity firm’s portfolio are included in calculating a business’s employment total. As a result, the majority of Private Equity portfolio companies are above the qualifying threshold.

Private Equity companies are crying foul and claiming that without access to the PPP, there will be layoffs. In a recent survey of over 1,000 members of the Association for Corporate Growth, 92% said the exclusion from PPP would result in layoffs, and 60% said they anticipate laying off workers in the next two weeks. Private Equity is asking for the affiliation rules to be relaxed so that they can benefit from the PPP. While I do not doubt that these companies are feeling the squeeze from COVID-19 and that their companies are suffering, I think we need to put this claim in context.

 

Private Equity Model

Private Equity has long claimed that it is a superior business model because of greater efficiencies and management effectiveness due to their skills (after all, they are the Masters of the Universe), resulting in increased productivity and profitability of their portfolio companies.

However, when comparing a private equity run firm vs. the average business owner, it is worth noting that the Private Equity model is to acquire the company with a large amount of debt, usually over 50%. When one considers the rolling of equity by the prior owner, the PEG may be contributing only 30% of the equity. Furthermore, the Private Equity firms charge their portfolio companies fees for their “excellent skills,” which are high. As quickly as possible, Private Equity seeks to refinance the company by taking on more debt and paying out distributions to the owners. The result of this model is that Private Equity gets its significant returns by saddling a company with excessive debt, which reduces the company’s ability to withstand economic shocks. As I have pointed out elsewhere, data is now showing that Private Equity portfolio companies are:

  • Less profitable than non-PE companies due to their debt load;

  • More likely to go bankrupt;

  • Invest less in business due to the limitations of capital

  • More likely to move production and manufacturing to low costs areas, i.e., China

  • More likely to cut staff to protect profit margins.

To add further fuel to the fire, Private Equity managers manage to get capital gains treatment on the income they receive from their portfolio companies, the “Carried Interest Rule.” This quirk of the tax code combined with limited downside risk, incentivizes Private Equity managers to take more significant risks as they make more money, pay lower taxes, and have little chance (other than the ability to raise a new fund).

 

The CARES Act

There are arguments that large companies that used the benefits from the Tax Cuts and Jobs Act to increase pay to their management and undertake share repurchases should not receive government bailouts without some penalty or equity kicker for the government. I agree with this argument. Once more, it appears that our “capitalist model” is a model where those that are wealthy and powerful get all the upside of their high-risk activities, and society gets all the downside. In 2008, the bankers had received enormous bonuses for putting together the products, which nearly brought the entire edifice, and all of us had to pay the bill to bail them out. To justify their behavior, they quickly pointed to the poor subprime borrowers as the culprits, but it was the banks. One of the failings of the banks and rating agencies in the last recession was the belief that property prices could not fall across the country. That failure was incredibly expensive!

Now we have corporate executives who have benefited over the last ten years from massive bonuses and options payouts seeking to have all us to bail them out for failing to invest in their businesses and keep sufficient reserves for the proverbial rainy day. Again there has been a failure by the management of many companies to consider “Black Swan” events that could severely disrupt their business. While I know that most will argue that they never foresaw COVID appearing, there were warnings. If you run a large multinational company, they pay you the big bucks to consider these events and ensure that you have the resources available to withstand them.

Now, as the crisis spreads, it is Private Equity’s turn to pass the begging bowl and ask all of us to bail them out. Using the threat of significant layoffs, they are conveniently ignoring the massive returns they have made by overburdening their portfolio companies with debt. Also, as I and others have pointed out, Private Equity has been quick to let portfolio companies fail and put the pension liabilities on all of us by having the Pension Benefit Guaranty Corporation pick up the tab.

As employees lose their jobs and are suffering, it hard to justify a bailout to the group that pays a lower income tax rate through lobby fund exemption. Especially galling is when the likes of Stephen A. Schwarzman, CEO of Blackstone Group, to compared removing the Carried Interest loophole to the German Invasion of Poland. Sounds a little like “Qu’ils mangent de la brioche to me.

According to Fortune, in January, “Private equity firms are sitting on $1.5 trillion in unspent cash, and looking to raise more.” If Private Equity has that much dry powder, I would argue that they should use the capital to save their portfolio companies. If they don’t want to keep them, then we will see if Private Equity is more like the Masters of the Universe or The Emperor’s New Clothes.

If Private Equity is genuinely the Masters of the Universe, they should be willing to fund their portfolio companies and help them to survive to become the greatest in their sectors when this is over. Poorly managed companies will fail, and good ones will become market leaders for the next decade or more. As market leaders, they should realize higher than average returns, which is a bonus to their owners. However, as I pr
eviously noted, if your business model is purely generating returns for shareholders, it is hard to rally the “troops” and get them behind you to save the organization.

The President has referred to the COVID crisis as a “war.” I look forward to the answer to “What did you do during the war?” Right now, it appears the answer will be, “I laid off everyone and asked for a government bailout to protect my returns.”

I am constantly reminded by many that as someone from Europe, I need to understand that the United States is a capitalistic country that benefits those that take risks. I have no problem with capitalism, but it continues to appear that the U.S. is a capitalistic country for the poor, and a socialistic one for the rich. If the U.S. is to be genuinely capitalistic, then Private Equity needs to pay the price for its gluttony and business leadership dictated by spreadsheets.

 

Copyright (c) 2020, Marc A. Borrelli

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Arthur Laffer, The Horror Sequel Maybe Coming

Arthur Laffer, The Horror Sequel Maybe Coming

Say it isn’t so! Sean Hannity is promoting the idea of putting Arthur Laffer in charge of getting American back to work, and Laffer has been advising the President. Laffer is the mastermind behind the Reagan-era tax cuts and a pioneer behind the notion that slashing taxes unleashes economic growth. While Reagan cut taxes, he had to raise them later as the economic growth Laffer promised never materialized to prevent huge deficits. George H. W. Bush had to increase taxes further as growth still wasn’t enough to overcome the deficits from the tax cuts. However, never one to let facts get in the way of a theory, in his 2018 book, Trumponomics, which he co-authored with conservative economic commentator Stephen Moore, Laffer argued that the Trump administration’s 2017 tax plan would raise growth rates to as much as 6% and not increase budget deficits. Wrong on both counts – 10pts. Of course, after Laffer’s great theory hit the proverbial iceberg in Kansas, one would think he would be more circumspect, but alas no. As I look at it, he is at least 0 for 4.

According to Reuters and Business Insider, Laffer is calling for three actions:

  • Impose taxes on non-profit organizations that encourage the arts and education, among others.

  • A 15% pay cut to the taxpayer-funded salaries of government officials and professors.

  • Enact a payroll tax cut holiday for employees and businesses until the end of the year.

Also, Laffer was against the current stimulus because he argues it would serve to discourage people from working and inflict more pain on the economy.

Let’s look at each of his proposals, in reverse order.

Against the current stimulus
The country is closed. With unemployment soaring, 16.6 million as of the latest count, many cannot afford the basics, like rent and mortgage payments. Their inability to work is not due to laziness; they were just laid off. If they don’t pay those bills, landlords and banks will suffer. Besides, without some form of help, they cannot afford car payments, groceries, or medical bills, to name a few things. The U.S. is a consumer economy, and consumer spending in the U.S. was about 71% in 2013. A reduction in consumer spending hurts companies that supply consumers who, in turn, lay off more workers as revenues fall. Thus, we get into a negative feedback loop, increasing the damage at each turn. When this is over, which it will be, those hurt through this negative feedback loop will be unable to quickly return to spend as they would have had their wealth decimated and will look to keep expenditures low while they rebuild their savings or come out of bankruptcy.

Enact a payroll tax cut holiday for employees and businesses until the end of the year.
The President has touted this many times, but as has is noted, it only helps that are working. With nearly 17 million now unemployed, this does nothing to help them. Those that have jobs are unlikely to rush out to spend the little extra they have as everyone is hunkering down financially due to the uncertainty. There is an expected tsunami of bankruptcies coming and possibly worse than in 2008. His proposal will do nothing to alleviate that issue, further depressing the economy.

A 15% pay cut to the taxpayer-funded salaries of government officials and professors.
Such a policy would harm those federal workers as such a significant reduction in their income will reduce the level of their spending as well since the federal government employs about two million people and pays about $136.3 billion a year in wages and salaries. Thus a 15% cut would reduce the wage bill by $20 billion. Economists estimate that the marginal propensity to consume in the U.S. is about 5%, so that the reduction would reduce U.S. spending by $270 billion a year. In effect, this would wipe out the stimulus and decimate the economy further.

Since Ronald Reagan’s statement that the worst thing was the government, those on the right have been seeking to cut the size of the government. However, as we think of cutting “worthless,” government employees consider that (i) if you pay peanuts, you get monkeys, and (ii) surely in relevant agencies we want the best people, not those that have no choice. Among government employees, there are:

  • The military – probably a “No-No.”

  • The FBI – what we need, more problems with law enforcement, and increase the probability of corruption.

  • The Justice Department and Federal Prosecutors – See FBI

  • Medical researchers and specialists who are working on COVID and other diseases. These people sacrifice a considerable amount for relatively little pay because they believe in what they are doing, unlike many in business who are just in it for the money. They work to keep us safe from COVID, Ebola, and other diseases. However, discouraging competent medical professionals and scientists is an excellent start to protect us from other pathogens.

  • The scientists are Los Alamos, N.W., and Oak Ridge, TN. We don’t need to take care of our nuclear facilities and weapons because hey look at Chernobyl.

  • International relations. Of course, we don’t need relationships with others now that we are going it alone. We may need someone to help us get essential medical products from a foreign county. I am sure Mike Pompeo or Jared Kushner can squeeze it in.

  • Air traffic controllers. We don’t need them, ask any pilot that has flown into Cairo.

  • Professors. Hopefully, the government hires excellent professors at its educational institutes. I am sure a pay cut will improve the quality of teaching and graduates.

I am sure, he didn’t mean any of these groups, so really what he is proposing is a non-event financially and just a personal vendetta against those he believes add no value.

Impose taxes on non-profit organizations that encourage the arts and education, among others.
I am sure that doing so would be a massive tax revenue booster. While false, the famous story of Churchill’s response, “What are we fighting for,” when asked to consider cutting funding for art programs to support the war effort, does strike a point. However, Churchill did say, “The arts are essen­tial to any com­plete national life. The State owes it to itself to sus­tain and encour­age them….Ill fares the race which fails to salute the arts with the rev­er­ence and delight which are their due.”

As I and others have noted, that those with a humanities background are better at management than STEM and business graduates. The arts are there to teach us empathy and what it is to be human. If we want to improve as a country, this is not the way to go about it.

As the saying goes, “When all you have is a hammer, everything looks like a nail.” Once more, it appears that Mr. Laffer is proposing his standard solutions without considering the facts. He should look to another economist, with a much better record, Keynes, who supposedly said, “When the Facts Change, I Change My Mind. What Do You Do, Sir?” Laffer has never changed his mind regardless of how the facts judge him. As someone whose views on many things have changed over the years, be it down to persuasion by others, more information and data, or just Bayesian logic, I find his position enough to disqualify him and his suggestions from any serious economic consideration.

 

Copyright (c) 2020, Marc A. Borrelli

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As I predicted, following a stay at home, many couples will realize that they don’t like their spouses, which, when the restrictions are over, will seek a divorce. As China opens up, the number of divorce applications is hitting an all-time high. The Chinese city of Xi’an reopened its Marriage Registration offices on March 1, and by March 4 all appointments were taken through March 18.

According to Esther Perel, “The quality of your life ultimately depends on the quality of your relationships . . . which are basically a reflection of your sense of decency, your ability to think of others, your generosity.” Therefore at times like this, the quality of our relationships takes on greater meaning. Having been through the big “D”, I hope that none of you will experience it, but thought that the following might help.

A tragedy, or crisis, is an accelerant for relationships. If the relationship wasn’t healthy, it is like to deteriorate under the stress of COVID-19 and lockdown. Being trapped in an enclosed space with someone for an extended period could lead to disdain – especially if you were having problems before it started.

Being cooped up and experiencing the monotony and boredom, repetition, lack of variety, the feelings of anxiety and fear, and the social proximity, put us on a par with astronauts on the space station and others in isolated extreme environments according to Nathan Smith, at Manchester University. However, while astronauts are trained to deal with this environment and its challenges, we are unprepared – both mentally and in our supply of toilet paper. As a result, we are likely to feel a similar amount of fear as an astronaut going into space, but we need to adapt much more quickly to deal with it. “Preparedness is a big contributor to whether things like this are a success,” says Smith.

Furthermore, Sarita Robinson, a cognitive psychology lecturer at Central Lancashire, says, “If you’re with [your isolation partner] for a long enough time, things will eventually get too close.” However, she noted, “You get social support from the people that you’re close to. They provide you with a social buffer, and if you’re worried or anxious or upset, they help you deal with it.” So, if you’re down, lean on your partner for support, but be aware that complaining too much puts additional stress on the relationship. Also, a person’s mood is contagious.

Different people respond to partner support in different ways. Research has shown that men find isolation with a partner quite lovely, and women go a little nuts.

John Gottman, a psychology researcher, has defined certain behaviors, the “Four Horsemen of the Apocalypse,” that lead to the dissolution of romantic relationships, namely:

  1. Criticism. An attack on your partner’s character, as distinct from offering a critique or voicing a specific complaint. While you might not saying anything about your partner’s flaws to avoid conflict but bottled up, anger and frustration will turn to resentment.
  2. Contempt. An insult to your partner. People might do this verbally using sarcasm, or only by rolling their eyes.
  3. Defensiveness. A counterattack, most often in response to perceived criticism. Such a strategy is used to people when they are feeling victimized. They assign their partner the responsibility of causing them pain.
  4. Stonewalling. Elaborate maneuvers to avoid interacting with a partner. People who stonewall will often stop communicating with their partner, except for negative non-verbal gestures.

In addition to avoiding the Four Horsemen of the Apocalypse, here are some other things to consider.

  • Grief. The is “Grief” from what is happening and “Anticipatory Grief” from what we know is coming. Both are grief and are affecting us and those with whom we are isolated. We all know that there are five stages of grief: denial, anger, bargaining, depression, and acceptance. However, our response to this is not always linear, and we can move back and forth through these stages. For many, they are still in denial; others have moved to anger, and those in suffering in New York, Detroit, and Chicago maybe somewhere among the last three. Those in the bargaining stage are organizing themselves in practicalities, rather than acknowledging our vulnerabilities. Thus many are working hard, but productivity is not increasing in proportion.

  • Stress. At the moment, we are suffering acute stress from either economic anxiety (loss of income) or health care stress (loved ones are sick) or a combination of both. We all have different styles of coping with stress. To maintain our relationships, we need to acknowledge our anxiety and that of our partners. Be patient, and be kind. We may look like our usual selves, but realize that underneath we all are stressed and scared. Because you are so close to those close to you, acknowledge the positive in them. In thanking them and showing gratitude, we need to focus on the person more than the task. Finally, monitor the balance between positive and negative interactions with your partner. Aim for a ratio of 5:1

  • Personal space. One of the best ways to manage conflict is to physically remove yourself from the presence of the person who’s annoying you. Thus find a personal space that you can retreat to that has a door. A couple on the Diamond Princess suggested a closet. Also, there is that time when you need to withdraw from everyone. In that case, retreat, but before doing so, articulate your feelings, make a commitment to return, withdraw, and return.

  • Emotional Issues. Don’t rationalize away emotional issues or pretend it is business as usual, acknowledge them. If you don’t you don’t provide a place for acceptance, and this can lead to worse behaviors. Listen to your partner’s feelings and validate their response to these stresses as being OK. Become defensive and attacking your partner for how they feel or act will not help. Reassure your partner and your children of their safety. Have a conversation about what security means and how you plan to keep yourselves and other members the household safe. In the US, where everything is about “self,” COVID-19 is showing us that we cannot survive on our own. An emotional connection is essential for survival and mental wellness. Don’t ignore your children. Talk to them about it and acknowledge it because they know it not typical.

  • Conflicts. Some partners have come up with a code phrase, i.e., “Cuban Missile Crisis” so that they can call a truce on little arguments without actually having to apologize or be kind to each other. Choose one that works for you, but it is helpful to have one that is a reminder things could be a lot worse.

  • Routine. You need to have a fixed routine in this “new” world. That routine will include work, but should also allow for family commitments at home, especially some couple time. Also, the schedule must consist of time apart. Please take it in turns looking after the kids or other family members at home, and allow each additional time to work on individual hobbies. As part of this routine, you can practice healthier h
    abits, i.e., eating well, sleeping, exercising, practicing mindfulness, meditation, or learning a new skill. These things improve mental well-being and can help build intimacy if done together.

  • Rituals and After. During this time, create new routines. Many have noted that as a result of the lockdown, we are improving our relationships with our second-degree connections. It is a great time to have a virtual happy hour, virtual book club meetings, and virtual dinners. Such events create more significant relationships with those people too. Finally, make plans with your partner for when the crisis is over. While you need to accept reality, it is essential to recognize that the situation is not permanent. Planning something fun or different can help keep you positive and motivated to stay safe.

Hopefully, you will not be singing,

I’m goin’ through the Big D and don’t mean Dallas.
I can’t believe what the judge had to tell us.
I got the jeep and she got the palace.

Songwriters: Ronnie Rogers, Mark Wright, and my colleague from another time, Jon Scott Wright.

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During a Crisis, You Need A Different Board

During a Crisis, You Need A Different Board

When a company is in a crisis, you need to make sure you have a board that can meet the task. Some crises develop over time due to shifting markets, deteriorating profitability or lack of access to capital.  As we are seeing today, the other form of crisis can be characterized as a Black Swan Event (low-probability, high-impact).  In either event, the crisis threatens the survival of the organization and is characterized by obscure causes, effects and a lack of apparent solution.  There will be a demand for fast track decision making as a crisis creates moments of truth for an organization and is often existential.  It is important that the C-Suite and the Board acknowledge that the company is in crisis, which threatens the company’s viability, and have a plan for dealing with the challenge.

Boards often fail to have the right complement of directors with crisis expertise for fear of sending stakeholders the wrong message: that there is something wrong.  However, a crisis is the ultimate test of resilience for any institution, its board, and its top executives. Senior executives and directors have exposure to continuous external scrutiny from the media, the legal profession, regulators, and other stakeholders for months or even years during and after a crisis. These compounding pressures force boards and senior management to act quickly to appease anxious or angry stakeholders. However, uncertainty compromises the ability to respond promptly due to the lack of information regarding the cause and the effects of any action.

If a board does not have directors with the right skills to address a crisis or there are conflicts of interest that may interfere with addressing a crisis, it becomes critical to add independent directors with those skills and who are free of conflicts.

McKinsey identified four critical fault lines that pose a severe threat to a board’s effective crisis response.

  1. Overreliance by the board on the CEO or senior management. A board that is unwilling to check or challenge senior management for fear of crossing the line into operational activities is failing in its governance. Candid, or as some call “Carefrontational,” conversations enable the directors to avoid poor judgment calls by management and better able to take an independent stance when a crisis comes.
  2. Micromanagement by the board. An equally significant and opposite problem is micromanagement by the board. Board members seeking a direct say in the management process because of their prior executive positions can cause chaos in the organization. While there is pressure to act quickly and decisively, a board’s role is one of oversight and not management. If it is apparent that the leaders are not up to the task, the board members must reserve the right to step in and steer the organization. In such circumstances, boards will take on some operational responsibilities and make decisions that would otherwise fall within management’s purview.
  3. Complicated dynamics within the board. Crises are an accelerant to all relationships. Thus, a crisis can expose an existing board dysfunction or lack of clear leadership. Boards tend to spend too little time addressing such issues before a crisis hitting. Given the few times that directors meet, there may be a lack of trust and questions of everyone’s different strengths and weaknesses. If the CEO is the leader of the board, rather than one of the directors, it worsens board dynamics.
  4. Imperfect information flows between management and board. 
    During a crisis, there is a conflict between the board and management. The board wants more data to meet their fiduciary duty of staying informed to make decisions and demonstrate a duty of care. Management, who are seeking to fix the problem and minimize distractions, don’t to commit the time and energy to meet the board’s demands. Too many board demands stop management performing, and too little information for the board damages trust.

Assuming that your board doesn’t have any of the above potential fault lines, the next issue is dealing with the crisis.

While many boards and C-Suites have crisis plans in place, the problem with Black Swan events is that by their nature, they are unpredictable, and as Mike Tyson said, “Everybody has a plan until they get punched in the mouth.” Crises fundamentally change the terms of engagement between boards and senior management, forcing both groups to make difficult decisions, including whether the senior-executive team or the board itself requires significant changes.

In a crisis, some of the tough calls that the board needs to make are:

  • Who should lead the nuclear crisis response team?

  • What decision authority should the crisis-response team have to ensure the right balance of speed and oversight?

  • Is the senior management team up to the task, or are significant changes necessary?

  • Is the board’s broader composition right? Should members who can’t add value leave? Are additional, independent member(s) to help the company respond and recover required?

  • What are the immediate shifts required within the board’s composition and roles?

  • Does the board need to establish the principles to guide the organization’s response and recovery?

To manage these calls and other tasks, Boards need to consider the following.

  • The Buck Stops with You. Responsibility for proper crisis response rests squarely on the shoulders of the board and the management. If heads roll, not only will management heads roll, but the board’s will as well.

  • Does each director understand their fiduciary duties?  The primary duties here are Duty of Care and Duty of Loyalty.  Legal counsel should be consulted if only to remind directors and help avoid problems down the road.

  • Proactivity is needed. The board must get out in front of the problems on their own. It looks and is terrible when the board is only reactive.  Reactive boards are failing to exercise their proper governance function. To be proactive, board members need experience in dealing with a crisis similar to the one the organization is facing. A PR crisis is not the same as dealing with a financial crisis. Thus, the board needs to ensure that among its members, it has supply chain, HR, turnaround and restructuring expertise.

  • Determine levels of intrusiveness vs. hands-off governance. The old governance mantra used to be “noses in, thumbs out,” no longer applies. Every board must find its new balance with management on how to increase its oversight to appropriate levels and provide expertise where needed.

  • Risk committees are insufficient. Boards need to look not only at-risk metrics but include room for anecdotal data and information that percolates up through the org
    anization. The committee must be open to all these data sources, rather than be guided only by management’s statistical reports and data.

  • Monitor emerging risks. Reporting on emerging risks is essential not to be caught flat-footed, and thus appropriate expertise is critical. A CFO that has not experienced a financial crisis can better respond with input from a “restructuring” expert on the board.

  • Timing: Immediacy is the rule. In this new world, boards and management aren’t allowed the luxury of time to make decisions. Responses have to quick, even if only “We don’t know yet, but are doing everything in our power to find out immediately. We will stay in close communication with you as we do.” Besides, direct experience is essential during a crisis, as the time element is now critical. Having resources that have real-world experience can make the difference in executing plans and knowing what is time-critical and what is deferrable.

  • Provide a firm moral center for the organization. The board can inspire the right kind of action and attitude throughout the organization, and help the organization recover from the crisis not only with its reputation intact, but more robust than ever. Laying off employees and not paying suppliers raises issues. The manner with which the organization handles this is critical for the firm’s reputation. Mishandling it may result in the inability to attract start talent in the future, or obtain exclusive deals from critical suppliers.

  • Expertise. The board is not to step into managements’ role but to: carefully question management regarding the reliability of known facts and its plans, assess and advise management on its handling of the crisis, and provide assistive feedback to management as appropriate. If the board lacks experience in dealing with the impact of the crisis, it cannot fulfill these functions. Only with experience can the board probe management to discover hubris and blind spots.

So, does your board have these qualities? If not, consider adding independent directors with the right skills and experience.

 

Copyright (c) 2020, Marc A. Borrelli

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Some billionaires are leading the call for people to return to work, Covid-19 be damned.

  • Lloyd Blankfein, CEO of Goldman Sachs until 2018, helped kickstart these calls when he tweeted that “extreme measures to flatten the virus ‘curve'” were sensible “for a time,” but could crush the economy. Given he was a vital player at Goldman when betting against mortgage-backed securities it sold to its clients, I am not sure he has anyone’s interest at heart other than his own.

  • According to Paychex founder, Tom Golisano, hurting the economy “could be worse than losing a few more people.”

  • Tilman Fertitta, owner of Golden Nugget casinos and Bubba Gump Shrimp, wants authorities to let businesses reopen at limited capacity in a couple of weeks as his company is “doing basically no business.” Given his early response to the crisis, I am not sure he is a credible figure in a public health crisis.

  • Dick Kovacevich, ex-CEO, President and Chairman of Wells Fargo & Co., wants healthy workers below 55 or so to return to work late next month. Kovacevich said, “We’ll gradually bring those people back and see what happens. Some of them will get sick, some may even die, I don’t know. Do you want to suffer more economically or take some risk that you’ll get flu-like symptoms and a flu-like experience? Do you want to take an economic risk or a health risk? You get to choose.”  From a man who is on the board of advisors of Theranos, I find this a little rich.

After meeting with some billionaires and hedge fund managers, President Trump latched onto the idea and is calling for social-distancing business to end sooner rather than later to “save” the economy from the coronavirus. He expects the country to lift all the restrictions and be open by Easter, against the advice of his public health care advisers. Lt. Governor Dan Patrick of Texas thought it was a great idea. He told Tucker Carlson on Fox News, “As a senior citizen, are you willing to take a chance on your survival in exchange for keeping the America that all America loves for your children and grandchildren?” What he is proposing is that older people (the most vulnerable group) should be willing to die, so we don’t lose economic value. Forget John’s gospel, “Greater love hath no man than this, that a man lay down his life for his friends.” It is now, “Greater love hath no man than this, that a man lay down his life for the economy.”

I am not sure what the difference is between this idea and the “death panels” that ACA would supposedly inflict upon us, but I am sure someone can enlighten me.

While I think that the early lifting of the restrictions would result in a horrific situation with possibly a million or more dead and compound Administration’s incompetent initial handling of the crisis, is there a point as the risks of Covid-19 diminish, when we might have to make some hard decisions. As Ray Dalio said, “What is the value of human life relative to a unit of economic activity?”

The determination of this will have interesting effects on our economy, and truly put a price on humanity. Philosophers have argued about this for millennia, and leaders and governments have made these decisions through time. What is different here, is we see illness and death counts daily, models are being discussed and analyzed, so if authorities decide to loosen social distancing, we will know the assumptions behind the decision. As a result, life will be quantifiable in terms of dollars, and we will know what the government deems “a life” worth. From that, we know:

  • The value of a life lost due to actions by a corporation, or person;

  • The amount of military conflict in terms of loss of life;

  • The cost of lost life due to an abortion; and

  • Companies can calculate the value impediments of defective products due to loss of life.

If the government can justify a policy because the loss of economic units exceeds the value of life, then surely murder as “a crime” gets harder to prosecute if the murderer can show that their financial gain exceeded “the value” of the life lost. All the murderer has to do is pay the deceased family the determined value of life, and there is no further loss that one can claim.

When corporations build products that they know are not safe, i.e., the Boeing 737 Max, opioids by Purdue Pharma, the organization can now calculate the cost with certainty that any loss of life is worth and thus plan accordingly. There will no longer have to be “smoking gun” memos showing cold heart corporations valuing lives; this is just a perfectly acceptable analysis. As we get a better handle on the damage of climate change, we can calculate its cost in terms of “lives” and decide accordingly.

With risk quantified, everything now becomes a financial calculation. As such, what does it mean to be human? Where does “humanity” play a role in our society? How do we teach empathy when life is equal to a fixed dollar amount? Maybe more STEM and Business leaders should have read the humanities!

Decisions we make in difficult times, live with us long passed the crisis; hopefully, we will make decisions that we can justify to future generations and leaders.

 

Copyright (c) 2020, Marc A. Borrelli

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