October 28, 2023

Publisher: As is our policy in The Directors Letter we approach events from a business commentary standpoint rather than taking political positions. In most cases, this would also apply to our Executive Insight Video interviews series. Not for a moment does this imply that we are not concerned about the tremendous loss of life and humanitarian suffering that is occurring both in Gaza and Ukraine.

Headlines:   

• Gaza Your Message
• Again Nasdaq & Net Neutrality
• Reflecting on Private Credit
• Goldman Sachs & Marcus

Upcoming Video:  In the next several weeks, we intend to record several videos discussing China from an economic and military standpoint with Prof. James Holmes of the US Naval War College. Complete access will only be available to full subscribers. To join us Click Here  

Your Company’s Middle East Position    The war related crisis in the Gaza has evolved into a global and divisive moral issue. Palestinians and their followers are on one side, Israeli and their followers on the other. As is often the case, the burden of suffering is primarily falling upon innocent civilians including children. More strategic and complex are the issues of control of geography, economic strength, government intervention, physical security, and decades of history.

As individual board members and senior executives, you will have your own individual opinions regarding this crisis, the cause, the execution, and the possible resolutions. From our perspective and talking with experienced and knowledgeable peers the role of your company is to publicly address your concerns about the humanitarian crisis. As appropriate consider making a financial contribution to a neutral humanitarian organization such as “Save the Children.” Taking a public political position or offering specific commentary beyond the humanitarian is a mistake. Your obligation is to provide the leadership for all stakeholders that ensures the safety and security of your workforce and your company’s assets. The leadership of the company must speak as one designated voice without exception. Any other course of action will guarantee an unacceptable and potentially costly result. Only someone who is naïve or inexperienced would think otherwise.

Let the academic community in an independent manner host the student discussions.  The religious community can take the lead on similar discussions. For both, these roles are part of their raison d’être. The politicians at all levels can rise to the occasion if they feel so motivated.

From a business perspective the assessment of the potential impact on your company and its operations is becoming more complex by the day. Israel is involved in an all-consuming war, one which very possibly could expand beyond the borders of Gaza. Supply, demand, investment, and workforce safety are just some of the considerations that should be part of your company’s detailed analysis and planning. This is not Operations Normal. Israel is, and must be, on a wartime footing and be prepared for the involvement of other related parties and nations, friend, and foe. Do not make the mistake of comparing this situation to the equally tragic one in Ukraine. The players involved have vastly different objectives and capabilities. Ukraine will still have a major impact on the global economy from a business, political, and military standpoint regardless of the outcome of the war in Gaza. Both conflicts are being carefully watched around the world but specifically by major players such as China, Russia, and India. At every level the leadership role of the United States is being carefully monitored by friend and foe relative to how they will work with us going forward. Uncertainty, confusion, and divisiveness in corporate America is not the message we want to send globally. Can US companies be counted on as good clients, suppliers, partners, and investors? This scenario sounds complex because it is complex. If your company’s leadership does not understand their responsibilities and today’s challenging realities, your company may have a problem.

Editor Add On:  This was brought to our attention. Review your company’s relationship with any of the parties even remotely involved in the conflict. With whom does that party have alliances with? Might that alliance commit your company to some level of support or involvement unacceptable to you. Research this potential, no surprises.

You Should Know   Driverless cars will be offered to riders in Tokyo by the self-driving unit of General Motors called “Cruise.” Honda will be a partner in this effort beginning operations early in 2026 with several dozen self-driving vehicles. Cruise offers rides in several US cities including San Francisco and Austin. Other car companies have significantly pulled back on their autonomous car ambitions, not to be confused with their EV endeavors.

Update:  The California Department Of Motor Vehicles suspended Cruises autonomous – driving permit this week. Reason stated was the vehicles are not safe for public operation, and the company has misrepresented information related to the safety of the technology. “Win some, lose some,” is not really the mantra you want to utilize when rolling out a new strategic technology.

The UAW strike recently extended to a large Stellantis facility in Detroit employing 6800 UAW workers assembling the company’s highly profitable Ram pickup truck. Shortly following that, the strike was extended to a General Motors’ assembly plant in Arlington, Texas employing 5,000 unionized workers. That plant assembles several large sport utility vehicles including the  Chevy Suburban, Tahoe, and GMC Yukon all profitable vehicles. At this time an agreement with Ford may be near at hand.

Ed Note: The UAW tactic of striking selective plants across all three major US auto manufacturers was a new strategy. This union strategy was to not allow the manufacturer to plan relative to what plants were to be struck and was intended to give the union more negotiating leverage. 12,000 UAW workers walking out in a matter of days may indicate that the union's strategy was working or in contrast was a poorly conceived alternative. Time will tell. If your company has multiple locations with a significant union workforce, the UAW strike and related tactics is something you should be following.

The Challenges of Private Credit   We had previously written about the shift from traditional bank debt to the utilization of private credit provided by large money managers such as hedge funds and PE firms, both with deep pockets. Companies that turned to private credit were often those that did not have access to public markets, syndicated loans, or high-yield bonds. Those companies that have utilized private credit may find that with the rise in interest rates, their loan terms are not fixed, but flexible and becoming more burdensome. Terms and covenants related to the private credit may have not been important in better times, but now are presenting challenges. These could include exchanging cash payments for additional debt, collateralization utilizing specific assets or an exchange of debt for equity. Many of these adjustments can lead to a lack of corporate control on the part of the board and existing management.

Ed Note: There are no easy or simple solutions, but the board has a responsibility to investigate every feasible alternative including M&A. Doing nothing or waiting for a macroeconomic solution is irresponsible and poor risk management. Treading water only postpones the inevitable.

Goldman Exits Consumer Lending   Goldman Sachs entered the consumer finance business in 2016 under the name “ Marcus.” Fast-forward to the fall of 2023, and the company is rapidly and aggressively going through an exit from this marketplace. What happened?

Considering full disclosure, we have no confidential or insider information regarding this activity. We have not spoken with any senior level employee or outside third-party consultants. We have read extensively about Goldman Sach’s fabled history. We are aware of their ongoing product and service offerings to major corporations and wealthy individuals.

Sophisticated products in the investment banking and money-management area were successfully offered by Goldman to blue-chip corporations and individuals in the top wealth percentages. Goldman Sachs employees were well compensated by any standard, and the company over time was highly profitable. Why start Marcus and  focus on “the Main Street consumer?”

David Solomon has been CEO since 2018 and Chairman of Goldman Sachs since January 2019. The company went public in 1999 but still has many senior executives with significant equity in the firm. Who made this decision to pursue the consumer, which in hindsight was a bad one and one that appears to have been poorly executed?

The targeted clients represented a new segment of the wealth/savings market. The new products offered were personal loans, and checking accounts, and eventually credit cards from Apple and General Motors. On the historical business side, Goldman was offering its corporate clients underwritings of equity and debt along with M&A counsel. Wealthy individuals were provided access to limited investments such as timber, and agriculture, and early round technology investment opportunities on a global basis.

Very important: Where was the marketing and merchandising expertise related to the “Main Street consumer?” These individuals flew coach, not “private.” Their homes were four-bedroom, not eight and were not located in the Hamptons. Their transportation might have been two Toyotas, not top end Mercedes. Were experienced and knowledgeable professionals hired by Goldman or were existing personnel expected to learn and adjust to this new market? Was CEO Solomon’s part time interest in being a weekend DJ and record producer a distraction or misleading factor? Was there an attitude within Goldman Sachs that if you were successful at Goldman, you could be successful anywhere? Did the term hubris play a significant role? This will be known only over time and the eventual release of “ tell-all” books. Today, the company is also selling at a steep loss Green Sky, a home improvement lender, after owning it for one year and is aggressively selling its portfolio of personal loans. It appears that Goldman is desirous of exiting the Apple credit card and other Apple products as well as the General Motors credit card. A newly introduced product, “The Apple Savings Account,” has brought in billions in deposits, but rumor has it that this result is viewed internally by many as making it more difficult to wind down related Apple products.

Lessons Learned: If your business is considering a significant strategic expansion, as we have said in the past, the fickle consumer is a very tough client. Well beforehand, analyze the competition. In Goldman’s Marcus case, there was plenty of it. Plan what you are going to do and why you are different. Absolutely understand the task, challenges, and cost of integration whether it is based on a startup or an acquisition. Do you have the right team to execute and manage the task? No on-the-job training allowed!

No insult to Golden Sachs was intended. This venture will become an interesting business school case because of the various parties involved and the apparent unwinding.