George Romney and Mitt Romney

George Romney, like his son Mitt Romney, was a successful business executive before he became governor of a state and a presidential candidate.  George Romney was a hero of American business.  Mitt Romney was not.

George Romney’s success was based on creating value.  Mitt Romney’s success was based on extracting value.  As CEO of American Motors Corp., George Romney gave back compensation to the company when he thought it was excessive.  As CEO of Bain Capital, Mitt Romney profited even when the companies that Bain took over went bankrupt.

George Romney

George Romney worked for Alcoa, the aluminum company, and the Automotive Manufacturers Association before going to work in 1948 for George W. Mason, who merged Nash Kelvinator with Hudson Motors to form American Motors Corp.  Romney headed development of the Rambler, a compact car, and became CEO of American Motors in 1954 after Mason’s death.

From then until his resignation in 1962, he focused American Motors on development of compact cars—a contrarian strategy, because General Motors, Ford and Chrysler, the big three auto manufacturers, were building ever-larger gas guzzlers.  Romney reorganized the company, cutting management jobs and reducing executive salaries by an average of 35 percent.

The Rambler brand became highly successful.  Sales increased during the late 1950s recession when sales of large cars declined.  In 1960 and 1961, it was the third most popular U.S. car model.  American Motors’ stock went from $7 to $90 a share.  George Romney became a millionaire through stock options, although in some years he gave back what he considered excess pay to the company.

He resigned from the company in 1962 to successfully run for Governor of Michigan and was an unsuccessful presidential candidate in 1968.   His successors at American Motors diversified away from Romney’s compact car strategy.  Eventually AMC formed a partnership with French automaker Renault, which acquired a controlling interest in 1983.

Mitt Romney

Mitt Romney worked for two business consulting firms, Boston Consulting Group and Bain and Co., before becoming head of an investment firm, Bain Capital, in 1983.   The theory was that Bain Capital would invest in companies and use Bain management methods to make them grow.  Bain began as a venture capital company.  Its most successful venture was Staples Inc., the office supply chain, which returned Bain’s investment sevenfold.

In a few years, Romney shifted Bain Capital’s emphasis to leveraged buyouts.  Bain bought existing companies largely with borrowed money, with the companies themselves collateral for the loans and repayment company out of company profits.  When corporate assets were more valuable for their resale value than for the profits they generated, they were sold off.  Sometimes the companies Bain acquired thrived and grew, despite the handicap of their large new debt, but Bain was able to profit by means of fees and dividends even as the companies were going bankrupt.

The New York Post gave examples.

Bain and Goldman Sachs … put $85 million down in a $415 million 1994 leveraged buyout of Baxter International’s medical testing division (renamed Dade Behring), which sold machines and reagents to labs. … …

Bain reduced Dade’s research and development spending to 6 to 7 percent of sales, while its peers allocated between 10 and 15 percent.  Dade in June 1999 used the savings as part of the basis to borrow $421 million.  Dade then turned around and used $365 million from the loan to buy shares from its owners, giving them a 4.3 times return on their investment. … …

In August 2002, Dade filed for bankruptcy.

This was not an isolated case.

* Bain in 1988 put $5 million down to buy Stage Stores, and in the mid-’90s took it public, collecting $100 million from stock offerings.  Stage filed for bankruptcy in 2000.

* Bain in 1992 bought American Pad & Paper (AMPAD), investing $5 million, and collected $100 million from dividends.  The business filed for bankruptcy in 2000.

* Bain in 1993 invested $60 million when buying GS Industries, and received $65 million from dividends.  GS filed for bankruptcy in 2001.

* Bain in 1997 invested $46 million when buying Details, and made $93 million from stock offerings.  The company filed for bankruptcy in 2003.

Romney’s Bain invested 22 percent of the money it raised from 1987-95 in these five businesses, making a $578 million profit.

via NYPOST.

As the Boston Globe noted, Bain Capital sometimes invested in companies that later thrived and grew, but the growing companies did not necessarily deliver a higher return than the companies went bankrupt. 

In many cases, such as Staples Inc., the Framingham retailer, and Steel Dynamics Inc., an Indiana steelmaker, the companies expanded and added thousands of jobs.  In other cases, such as AmPad and GS Industries, another steelmaker, Bain-controlled companies shuttered plants, slashed hundreds of jobs, and landed in bankruptcy.

But in almost all cases Bain Capital made money.  In fact, the firm earned substantially more from Ampad than Staples.  Staples returned about $13 million on a $2 million investment; Ampad yielded more than $100 million on $5 million, according to reports to investors.

via The Boston Globe.

Mitt Romney in his presidential campaign claims that his business success shows that he knows how to create jobs.  But his business endeavors were never about creating jobs.  That would be a new mission for him.

Click on George W. Romney wiki for his Wikipedia biography.

Click on Mitt Romney wiki for his Wikipedia biography.

Click on Add-Mitt mistakes: Romney’s past is more a working-class zero for the full New York Post article.

Click on As Bain slashed jobs, Romney stayed on sidelines for the full Boston Globe article.

Click on Romney’s Fortune Tied to Business Riches for a New York Times article on Mitt Romney’s career with Bain Capital.

Part of the difference between George Romney and Mitt Romney is a difference in philosophy as to the purpose of a business corporation.

In the 1950s, writers such as Peter Drucker in The Concept of the Corporation said a corporation was a community institution, possibly more important than geographic communities, which served shareholders, customers, employees and the public alike.  In those days, corporate executives were derided in books such as William H. Whyte’s The Organization Man as bland conformists rather than feared as dangerous predators.

Drucker’s book was based on General Motors Corp., whose seeming benevolence was based on a balance of power between GM management and the United Auto Workers; Drucker thought labor unions were an anachronism, because they created antagonism.  But other companies, such as IBM Corp., Eastman Kodak Co. and Xerox Corp. did operate that way, and so, apparently, did George Romney’s American Motors Corp.

But in law, a corporation is not a community.  It is a structure for managing flows of funds, and its fiduciary responsibility is to maximize the return to shareholders, by any legal means necessary.  Laws that tamper with that concept, such as state laws to prevent hostile takeovers, have been overturned by the Supreme Court.

Mitt Romney’s Bain Capital embodies the prevailing view of the role of a corporation—that the only considerations are financial considerations, and that this will somehow work out to produce the greatest good for the greatest number.   But if the only responsibility of a CEO is to maximize profits within the law, we don’t want CEOs to be the ones who write the laws or who choose those who write them.

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