Guest post: Misguided corporate expansions are not the answer | R. Rodney Elliott

R. Rodney Elliott is a partner at Kreindler & Kreindler in New York, representing individuals and companies in business law disputes. The views expressed are his own. It’s been a turbulent week. Just after…

Guest post: Misguided corporate expansions are not the answer | R. Rodney Elliott

R. Rodney Elliott is a partner at Kreindler & Kreindler in New York, representing individuals and companies in business law disputes. The views expressed are his own.

It’s been a turbulent week. Just after departing Best Buy, Hubert Joly, the former CEO who aggressively dismantled the legacy company that his friend Richard Schulze began repairing over a decade ago, is angling to reverse his own ouster through a lawsuit.

Unfortunately, Joly’s investment is losing altitude now he’s trying to take on the behemoth American economy. First, Best Buy announced a massive restructuring, its fourth since it joined the public markets eight years ago. The announced 18,000 layoffs are the latest victim of excessive expectations and weaker-than-expected sales in the wake of hurricane-induced disruptions, caused by Joly’s other strategies. Best Buy’s reorganization also raises tough questions about employees’ rights to sue the company, including what they must disclose.

By next year, Joly may have to bow out of competition with Schulze’s hostile bid for Best Buy in response to disclosures of Schulze’s personal investments in the deal. The underlying price of the shares meanwhile continues to slide, a victim of a broader trend in retailers of weakening sales, profit margins and sales over the past year. Joly’s track record was either impressive, or too good to be true. We’ll probably know soon enough.

Economists Kenneth Rogoff and Carmen Reinhart have noted that the U.S. corporate debt ratio has risen faster than its long-term historical average since the financial crisis. Using total debt as a proxy for companies’ risk, Gross Domestic Product has grown at a similar rate but the debt ratio has grown faster, sometimes by as much as four percentage points per year. This is not good. For debt to support GDP growth, the ratio needs to be low. The current level of debt could be accounting for a limited of 1 to 1.5 percentage points of the 2.5 percentage points over the last seven years that total economic growth has been lower than its long-term average.

In short, a corporation is falling below its potential to grow its economy through building and running its own organization. Economists have already been calling the current era of unsustainable economic growth into question for decades. In these times of discussion and economic angst, Joly’s full attention may be better served focusing on integrating the important changes in Best Buy rather than trying to reverse them in a lawsuit.

This post originally appeared at American Lawyer.

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