MBA FPX 5910 Assessments 4 Capstone Project

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Capella University

MBA-FPX5910 MBA Capstone Experience

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Capstone Project: Hertz

Introduction

Hertz, a longstanding player in the car rental industry, filed for bankruptcy in August 2020 amid the COVID-19 pandemic. This financial crisis was attributed to several factors including unprofitable acquisitions, leadership mismanagement, financial inaccuracies, ongoing legal issues, declining consumer trust, and reduced employee satisfaction. This Capstone project aims to explore the accounting errors in Hertz Global Holdings’ annual reports. The company is seeking to reclaim seventy million dollars in bonuses from former CEO Mark Frissora and other senior executives due to their involvement in accounting scandals and financial mismanagement (AccountingToday, 2019).

Hertz Global Holdings, Inc. History

Hertz was founded in Chicago in 1918 by Walter Jacobs with a fleet of twelve Model T Ford cars (Lachapelle, 2017). In 1923, Jacobs sold the company to John D. Hertz, who renamed it “Hertz Drive-Ur-Self System” and made it a subsidiary of his Yellow Truck and Coach Manufacturing Company (Lachapelle, 2017). According to Chokshi (2020), Hertz’s ownership changed multiple times over the next century, including periods under General Motors and the Ford Motor Company. In 1925, Hertz sold a controlling interest to General Motors, which later acquired the remaining shares in 1943 (Companies History, 2019). Hertz was the first car rental company to establish a reservation office at Chicago’s Midway Airport in 1942 and expanded into Europe in 1944 (Companies History, 2019). In 1953, Hertz repurchased its car rental business from GM through Omnibus Corporation, renamed it “The Hertz Corporation,” and took it public on the New York Stock Exchange (Companies History, 2019).

Hertz later became a subsidiary of RCA, joined UAL Corporation, and was sold to Park Ridge Corporation, which was then owned by Ford Motor Company and Hertz’s senior management (Companies History, 2019). In 2005, Ford announced Hertz’s removal from its portfolio, and the company was sold to Clayton, Dubilier & Rice, The Carlyle Group, and Merrill Lynch Global Private Equity for $15 billion (Companies History, 2019). The company went public again in 2006. Hertz remains a significant entity in the car rental industry, with Enterprise and Avis as its main competitors. By June 2020, Hertz, Enterprise, and Avis together dominated ninety-five percent of the U.S. rental car market (Barro, 2020). Hertz’s fleet included 10,200 corporate locations, around 38,000 employees across 145 countries, and a fleet of over 500,000 cars (Chokshi, 2020).

Company Problem

Hertz’s journey from an industry leader to a bankrupt entity involves examining its recent history. Sales grew from $7.6 billion in 2010 to $11 billion in 2014 but fell to $9.8 billion in 2019 (Welch, 2020). Since 2014, Hertz has experienced multiple CEO changes, with each leader implementing significant changes to save the company. The company’s outdated fleet and obsolete computer systems contributed to its struggles (Chokshi, 2020). Competitors like Enterprise and Avis have more stable management teams and better adapted to the global business stoppage (Chokshi, 2020).

Mark Frissora, CEO from 2006 to 2014, oversaw Hertz’s $2.3 billion acquisition of Dollar Thrifty, which expanded the fleet by twenty percent and enhanced its market position. In 2013, Hertz introduced the Firefly brand and expanded into the Chinese market, resulting in substantial revenue increases (Lachapelle, 2017). However, Hertz’s decision to relocate to Florida from New Jersey in 2013 troubled investors, leading to the loss of experienced employees and further complications (Lachapelle, 2017).

Restated Finances

A board review of Hertz’s finances revealed that the company had overstated GAAP net income by $87 million for 2011, 2012, and 2013 (Reuters, 2019). To correct these errors, Hertz had to restate its financial results, which led to a 12% drop in share value starting June 2014 (Reuters, 2019). The restatement impacted the reported net income for 2011, 2012, and 2013, reducing it by 18%, 14%, and 6% respectively, resulting in losses of $32 million, $35 million, and $20 million (Basu, 2017).

SEC Investigations

In June 2014, Hertz informed investors of the need to restate three years of financial results due to accounting errors (Administrative Proceeding, 2019). These issues stemmed from poor management, ineffective leadership, and unethical accounting practices, as identified by the SEC (Administrative Proceeding, 2019).

Financial Statement Manipulation

The accounting errors were found to be due to:

Misstated Financial Information: Hertz’s public filings inaccurately reported pre-tax income due to errors in various business units over three years. Management estimates violated accounting principles, indicating deliberate financial manipulation (Cohn, 2019).
Concealed Financial Information: Hertz failed to disclose the extension of planned holding periods for a large portion of its rental fleet in 2013. Despite revised earnings guidance, the company publicly reaffirmed inaccurate projections (Cohn, 2019). The guidance misled investors and affected stock ratings (Administrative Proceeding, 2019).

Hertz’s Questionable Business Practices

Companies often face pressures that lead to unethical practices. Hertz’s management, under pressure to meet financial targets, employed inappropriate methods to manipulate financial results. The company underestimated expenses related to uncollectible accounts, magnifying its income (Cohn, 2019). The SEC has addressed such issues, but conflicts of interest between auditors and clients persist (Adkins, 2019). In 2019, Hertz settled charges over inaccurate reporting with a $16 million payment (Feeley & Melin, 2019). Former CEO Frissora was required to reimburse $2 million in August 2020 for aiding inaccurate financial disclosures (Sandler, 2020).

New Leadership

A Gallup poll in 2012 found that companies often fail to select the right leaders (Gallup, 2012). Inefficient leadership can cost businesses significantly, while effective leadership can provide a competitive edge (Craig, 2018). Hertz has seen high CEO turnover since 2014, employing four CEOs between 2014 and 2020 (Welch, 2020). John Tague, appointed in 2014, implemented revenue optimization strategies similar to those used in the airline industry but faced criticism for higher rental rates compared to competitors (Sandler, 2020). Kathryn Marinello, appointed in 2017, updated the fleet but increased costs (Sandler, 2020). In May 2020, Paul Stone was elected CEO, bringing a customer-focused approach and process excellence to Hertz (Welch, 2020). Stone previously served as Hertz North America Chief Retail Operations Officer.

Organization Strategic Analysis

Hertz’s PESTLE

PESTLE analysis helps understand external factors impacting business performance (Detob & Malungo, 2017). It includes Political, Economic, Social, Technological, Legal, and Environmental variables.

Political: Factors such as trade tariffs and tax policies affect Hertz, particularly with the uncertainties surrounding the UK-EU partnership affecting strategic planning (Barro, 2020).
Economic: Economic factors like inflation, interest rates, and consumer demand influence Hertz’s operations and pricing strategies, especially post-COVID-19 (Story, 2019).
Social: Social trends, including cultural shifts and changing demographics, impact Hertz’s business practices. Lowering the age limit for rentals has expanded the customer base (Hanson, 2018).
Technological: Technological advancements, such as digital dashboards and biometric technology, enhance customer experiences and operational efficiency (Roberts, 2018).
Legal: Compliance with safety criteria, labor laws, and consumer protection laws is crucial for Hertz’s operations in various countries (Story, 2019).
Environmental: Environmental factors impact both internal and external aspects of Hertz’s operations (Story, 2019).

Challenges and Opportunities in the U.S. Car Rental Industry: A Case Study of Hertz

The car rental industry in the United States faces increasing scrutiny regarding environmental standards. Hertz, a prominent player in this sector, has faced criticism for not including electric hybrid vehicles in its fleet. Such criticisms reflect the growing demand for eco-friendly options among consumers concerned with environmental health. This shift towards energy efficiency could also potentially enhance Hertz’s profit margins by appealing to a more environmentally conscious customer base (Hanson, 2018; Levy, 2019).

SWOT Analysis of Hertz

Strengths:

Financial Leverage: Hertz’s ability to leverage its financial position can significantly bolster its marketing strategy and earnings potential. Effective use of financial leverage can provide a substantial competitive edge, making it a robust aspect of Hertz’s business strategy.
Customer Loyalty: Hertz enjoys a strong base of loyal customers. The company’s focus on nurturing this loyalty can enhance its market position and drive long-term growth, particularly if it targets its efforts towards prospective consumers rather than a broad audience.
Brand Name: Hertz’s well-established brand name allows it to command higher prices for its services. This premium positioning reflects the added value customers place on the brand, contributing to its competitive advantage.

Weaknesses:

Outdated Technology: The use of obsolete technology impacts Hertz’s operational efficiency. Upgrading technology could mitigate this weakness and improve overall performance.
High Staff Turnover: Hertz has historically faced high staff turnover, which can disrupt service delivery and increase costs associated with hiring and training new employees.
Weak Supply Chain: Inefficiencies in Hertz’s supply chain can lead to delays in product delivery and affect customer service, highlighting the need for supply chain optimization.
Bad Acquisitions: Poor acquisition decisions can inflate costs and reduce the overall value of Hertz’s business, emphasizing the need for strategic and well-considered acquisitions.

Opportunities:

Online Market: Expanding its online presence can help Hertz reach a broader audience with relatively low costs, presenting a significant growth opportunity.
New Products: Introducing new products can diversify Hertz’s offerings and expand its customer base, positively impacting long-term business value.
International Expansion: Exploring international markets allows Hertz to grow its business and introduce its products and services to new regions.

Threats:

Economic Downturn: Economic volatility can influence Hertz’s business practices and customer volume, potentially impacting its financial stability.
International Competition: Competing with international firms poses challenges due to diverse and intense competition in both domestic and global markets.
Intense Competition: Rivals such as Uber and Lyft offer alternative transportation options, potentially drawing customers away from traditional car rental services.
Changing Consumer Preferences: Rapid shifts in consumer preferences require Hertz to stay agile and responsive to maintain market relevance.

Hertz’s TOWS Analysis

SO-Strategies: By leveraging its market share and resources, Hertz can develop sustainable strategies and enhance service quality, helping retain customers and secure long-term success.
WO-Strategies: Updating IT services to improve customer interactions and reduce overhead costs can enhance Hertz’s operational efficiency and customer satisfaction.
ST-Strategies: Developing new products in response to increased competition can help Hertz retain existing customers and explore new market opportunities.
WT-Strategies: To address competition and service delivery challenges, Hertz should strengthen its hiring practices and incorporate technology improvements to better compete in the market.

Legal and Financial Issues

Customer Lawsuits:

Hertz has faced legal challenges due to faulty technology and poor management practices, leading to wrongful theft reports and legal troubles for customers (Taylor, 2020). These issues, stemming from outdated computer systems, have resulted in significant damages and ongoing legal battles.

Employee Lawsuits:

Hertz has violated labor laws in several states, leading to a class-action lawsuit and a $9 million settlement for employees (Wood, 2020). Additionally, Hertz is facing a lawsuit under the WARN Act for failing to provide proper notice before mass layoffs due to the COVID-19 pandemic (Pierson, 2020).

Financial Breakdown:

Hertz’s financial troubles became evident with its bankruptcy filing in May 2020, triggered by a lack of capital and rising debt (Steinmetz, 2020). Despite attempts to capitalize on stock market fluctuations, the company struggled with financial instability and substantial losses.

Recommendations for Improvement

To regain trust and stabilize its financial position, Hertz should:

Adopt Ethical Accounting Practices: Implementing ethical standards and transparent financial reporting can restore public trust and ensure accurate financial statements.
Enhance Financial Disclosure: Providing comprehensive financial disclosures can improve transparency and rebuild confidence among stakeholders.
Utilize Consistent Accounting Methodologies: Adhering to Generally Accepted Accounting Principles (GAAP) and SEC guidelines will enhance the reliability of financial reporting.
Engage External Accounting Firms: Employing external auditors can validate the accuracy of financial statements and identify areas for improvement.

Addressing Hertz’s Financial Missteps: A Path Forward

Hertz, a prominent player in the car rental industry, has faced significant financial challenges that echo issues from its past. In 2011, the company grappled with similar problems related to asset capitalization, depreciation timing, and doubtful accounts (Administrative Proceeding, 2019). Currently, Hertz is under scrutiny by the United States Securities and Exchange Commission (SEC) and the Federal Trade Commission (FTC) for alleged mismanagement and manipulation of financial records. This lack of effective leadership has led to billions in lost profits and eroded customer trust.

Historical Financial Mismanagement

Hertz’s ongoing issues are reminiscent of its financial troubles from over a decade ago. The company has been implicated in inaccuracies related to the capitalization and depreciation of non-fleet assets, along with questionable allowances for doubtful accounts (Administrative Proceeding, 2019). The present investigations by the SEC and FTC into financial mismanagement have compounded these problems, revealing a broader pattern of financial instability.

Leadership and Organizational Impact

The absence of strong leadership at Hertz has had detrimental effects on its profitability and reputation. The company’s organizational culture, coupled with safety concerns and various legal disputes, has resulted in a significant decline in revenue. Hertz’s market position has been compromised, ceding ground to competitors such as Avis and Enterprise (Mohammed, 2020). Effective leadership is crucial for navigating these challenges and restoring the company’s market stance.

Strategies for Financial Recovery

To address its financial difficulties, Hertz must adopt a series of strategic measures:

Implement Ethical Financial Practices: Hertz should establish robust check and balance protocols to ensure the accuracy and reliability of its financial reporting. Adopting these practices will help prevent further discrepancies and rebuild investor confidence.
Engage an External Accounting Firm: The company should hire an independent accounting firm to review its financial statements and expenses. This external oversight will help identify and rectify any remaining issues, ensuring compliance with accounting standards.
Restructure Fleet Operations: As part of its debt reduction strategy, Hertz is considering selling approximately 30% of its fleet. This move, supported by the company’s current CEO, aims to alleviate the financial burden and streamline operations.
Enhance Leadership with Expertise: Surrounding the current CEO with experts in organizational improvement, restructuring, and redevelopment is essential. As Craig (2018) notes, informed leaders are more effective in managing challenges. Equipping leaders with the necessary tools and knowledge will facilitate better decision-making and strategic planning.

By implementing these strategies, Hertz can potentially reverse its financial trajectory, reduce stock fire sales, restore shareholder confidence, and address its debt crisis.

References

Adkins, T. (2019). Financial Statement Manipulation. Investopia. Retrieved from Investopedia

Administrative Proceeding (2019). SEC Charges Hertz with Inaccurate Financial Reporting and Other Failures. File No. 3-18965. SEC. Retrieved from SEC

Barro, J. (2020). How Hertz’s Bankruptcy Will Affect the Car Industry. Intelligencer. Retrieved from Intelligencer

Basu, C. (2017). How to Ensure Accuracy on Financial Statements. BizFluent. Retrieved from BizFluent

Chokshi, N. (2020). Hertz, Car Rental Pioneer, Files for Bankruptcy Protection. The New York Times. Retrieved from The New York Times

Church, S. (2020). Hertz Says Survival Tied to Reducing Fleet to Fit New Normal. Bloomberg. Retrieved from Bloomberg

Companies History (2019). Hertz Global Holdings. Hertz. Retrieved from Companies History

Craig, W. (2018). The Role Leadership Has in Company Culture. Forbes. Retrieved from Forbes

Detob, V., & Malungo, M. (2017). What Are Internal & External Environmental Factors That Affect Business. Mageplaza. Retrieved from Mageplaza

Feeley, J., & Melin, A. (2019). Hertz Seeks $70 Million in Clawbacks Tied to Accounting Scandal. Bloomberg. Retrieved from Bloomberg

Gallup (2012). Why Great Leaders Are So Rare. Gallup. Retrieved from Gallup

Hanson, D. (2018). Twenty Things You Didn’t Know About Hertz. Money Inc. Retrieved from Money Inc

Lachapelle, T. (2017). That Troubled Hertz Car Rental Deal. Bloomberg. Retrieved from Bloomberg

MBA FPX 5910 Assessments 4 Capstone Project

Layden, L. (2020). Can Hertz Survive Another Year? Company Raises Doubts in New Regulatory Filing. The News-Press. Retrieved from The News-Press

Levy, A. (2019). Lyft Announces Car Rental Service; Hertz and Avis Shares Plunge. CNBC. Retrieved from CNBC

Mohammed, T. (2020). Hertz is Seeking a $1.5 Billion Bankruptcy Loan. Business Insider. Retrieved from Business Insider

Mohamed, T. (2020). Billionaire Investor Carl Icahn Dumped All of His Hertz Shares. Business Insider. Retrieved from Business Insider

Morgan, A. R., & Burnside, C. (2014). Olympus Corporation Financial Statement Fraud Case Study: The Role That National Culture Plays on Detecting and Deterring Fraud. Journal of Business Case Studies, 10(2), 175-184.

Pierson, B. (2020). Hertz Sued Over Failure to Give Employees Advance Notice of Layoffs. Reuters. Retrieved from Reuters

Pradelli, C., & Mettendorf, C. (2020). Action News Investigation: Customers Sue Hertz for False Theft Claims. 6abc Philadelphia. Retrieved from 6abc Philadelphia

Reuters (2019). Hertz to Restate Results for 2011-2013 Shares Skid. CNBC. Retrieved from CNBC

Roberts, J. (2018). Hertz and Clear Bring Facial Recognition to the Rental Car Industry. Fortune. Retrieved from Fortune