The Concept Of Kitchen Sinking


Boeing’s results are just coming up and the question is, well, how much is the new CEO going to insist upon as provisions against past screw ups? Does he throw the kitchen sink at it or not?

Say that, just as an example, there’s a new management team in a company. We can apply the appropriate level of cynicism as we go along. To be very cynical indeed, the new managers get their stock awards and options priced at the stock price they’re responsible for. So, there’s a temptation to push the price down before those awards.

Less cynically, perhaps more realistically, there’s clearly going to be some clearing up of old matters. The old management would not have disturbed matters too much. Claiming that this contract, or that problem, needed to be written down would have been a reflection on their own performance in either managing it badly or not having written it down before.

New management can instead claim that this and that and t’other are all problems that need to have provisions in the accounts. And to make those provisions, write-downs, as vast as can possibly be sustained by the finances of the company. For by starting for this new low base, their own reigns in office are going to look much better.

That’s the thing to look out for. Not whether provisions but how big are they going to be?

Leave a Reply

1 Comment threads
0 Thread replies
Most reacted comment
Hottest comment thread
1 Comment authors
Spike Recent comment authors
newest oldest most voted
Notify of

Yeah, that’s cynical. Most analysts would evaluate the new executive using the date of his appointment as the baseline, not the value of the stock when he announces his boatload of “one-time” (“non-recurring”) charges. There will be a boatload because he will be judged harshly if the non-recurring charges, or similar ones, keep recurring.