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April 29, 2014

Let’s say that a CEO and his/her board are faced with the issue of making a spending decision that would be good for the corporation but bad for its bottom line in a given quarter, a decision that would make money for the corporation in the medium or long term but show up as a loss subject to savaging by stock analysts in their quarterly reports in the short term. Let’s also say that the board has set a certain performance goal for the quarter which would give the CEO a bonus of a million dollars if met, but it will not be met if the investment by the corporation is made. What advice does the CEO give his/her board on making the investment? Does he/she give up a million dollar bonus and make the investment, or advise against the investment and take the money? Which wins, business judgment or a fat bonus?
Believe it or not, those in favor of “maximizing shareholder value” would likely be in favor of their CEOs’ taking the bonus money instead of doing what is in the best interests of the corporation – and (from their point of view) for good reason. They know that a better showing at the end of the quarter would be given positive treatment by stock analysts doing their quarterly reports, which would tend to raise the value of their shares, which in turn means that such shareholders would enjoy enhanced capital gains upon sale or other disposition of their respective shares in the corporation. Such investors in fact care little about the corporation or how its business is doing; they are chiefly interested in how the corporation’s stock prices are doing. Concern about the core business being conducted by the corporation is limited to its effect upon share price. Such investors are there to make money – not babysit the corporation for profitable times down the road – that’s management’s problem. Many if not most investors are short term traders; they are in-and-out of the market, as proven by a recent finding that for decades the average holding period for corporate stocks was six years but is now down to less than six months. Like many in the broader society, these investors are into (relatively speaking) instant gratification. Get yours today! Take the money and run! Off to the next investment!
Unsurprisingly, Wall Street is also a cheer leader for the “shareholder value” ideology. The Street is transfixed on quarterly earnings and short term trading. Its bankers and traders and hedge fund managers pay a lot of attention to quarterly forecasts and earnings by stock analysts of corporations whose stock is publicly traded on local exchanges given the enormous impact of such findings on share price. Some Wall Street hedge fund managers who try to get advance notice about such quarterly findings in order to reap huge profits by trading on such advance information fall prey to charges of “insider trading.” Apparently the ruling philosophy among such cheaters is that if you can game the system and pull it off and make a lot of money, then why not? After all, Friedman’s commentary of old that corporations were to be managed to make money for its shareholders is now universally accepted; he just didn’t tell us how to do it. That’s our game. Ethics? What’s that? Show me the money!
So what is the bottom line on this rather recent change from managing what’s good for the corporation to managing for “shareholder value?” Does such a management style represent the most efficient utilization of capital, or is it merely surrender to the greed of Wall Street traders? Is it a strategy or an outcome of strategy? Are other stakeholders (the community, employees, customers) to be given consideration for their roles under this new “shareholder value” mandate, or are the day to day valuation of the company’s stock and constant threat of shareholder suit overriding considerations? Are CEOs and others of the corporate managerial class complicit in succumbing to this new management objective because it allows them to get in on the bonanza of stock bonuses when meeting board-set performance standards? Are such “performance standards” based solely on day to day share prices given that shareholder suits await those who manage otherwise? Could this invasion by Wall Street paper shufflers into corporate decision and management explain why corporate America is underperforming European socialistic corporate management? With massive outsourcing of production overseas to take advantage of cheap labor costs, has corporate America now guaranteed that American consumers who have suffered job loss and wage cuts can no longer afford the goods such outsourcers are producing, even at cheaper prices? Do corporations who presume to manage the old way (when they were out-performing European corporations) risk not only shareholder suit but invite “corporate raiders” with junk bonds in hand to buy and dismember the company?
The foregoing are just a few of the questions that could be asked in what I call “managing for money.” There is a whole range of questions in this connection which could be aimed at what economists call “negative externalities,” or the spillover effects of managing for money as opposed to managing for the benefit of the company long term with a sensitivity to the wants and needs of the company’s other stakeholders and not just investors, stakeholders such as their employees who make their profits possible and are entitled to share in the wealth they create along with investors.
Managing for money and the obvious greed involved has not been a PR winner in America. Gallup polls show that people’s trust and respect for big corporations have declined to a point to where now only Congress and HMOs rank lower. The late and brash Steve Jobs of Apple, who reinvested billions of Apple’s profits “back into the business” and out of reach of shareholders, ended up creating more wealth for more shareholders than any CEO in history. Undeterred by shareholder suits and fearless in his pursuit of success, he bullied shareholders out of their short-term profits in trading and wound up making them rich beyond imagination. They should in retrospect be thankful that this now-deceased and “take no prisoners” CEO made them rich by overruling their lust for instant gratification.
Economists and thoughtful politicians (that is not an oxymoron) know and understand that the spillover effects of such a corporate managing for money style (now approved by both academics and the courts) need a response in the larger economic picture of outsourcing, layoffs and unemployment due to such outsourcing, less revenues to government etc. Ordinarily government would intervene for the common good by taxing and regulating such activities to restore or maintain equilibrium in the economy, but, as Pearlstein reports: “. . . One of the hallmarks of the current political environment is that every tax, every regulation, and every new safety-net program is bitterly opposed by the corporate lobby as an assault on profits and job creation. Not only must the corporation commit to putting shareholders first – as they see it, THE SOCIETY MUST AS WELL.” (my emphasis) Thus one need not be a shareholder in order to support corporate managing for money schemes; one must also support a no tax-no regulation regime for these paper shuffling parasites so that they can continue their greedy dreams at public expense.
THE REAL ISSUE: Should a sliver of investors dominate policy for the rest of us, the 99 % who still cling to the myth that such an arrangement is an exercise in democracy? What now? Politics as usual – or elect politicians who regulate moneychangers for the common good and not their bottom lines? GERALD E

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One Comment
  1. As usual, Gerry, you articulate the problem (with adept history as context) well and bring us, again, to the problem: Elections. My opinion is that the political system itself is beyond broken. It seems to me that, with Obama as the latest Democrat example, most politicians that run are already “paid for” by The Monied Class. The stock market continues to break records under Obama. In other words, business as usual. Of course, he agreed with Wall Street bailout in that infamous meeting (while candidate running against McCain who did not attend the meeting) with Paulson, Bush and others in D.C. To “navigate” the economic crisis in 2007. Those are the facts. I wish I could say, with faith, that Obama is on the working mans side. I cannot. He has had many chances to be a populous president in the way both Teddy and Franklin Roosevelt were in their respective eras. For whatever reason, he has not. So, midway in his second term, he continues to blame a frozen legislature on one hand yet continues to support big business and Wall Street in his policies (especially those connected with the military industrial complex). His “transparent” policy has put the likes of Manning in jail and Snowden in Russia. In fact, his AT&T k and arrest of whistleblowers exceeds, by a mile, that of Bush. Again, makes me dubious in the least about who is available to elect for any kind of change. Laughable, now, Obama ran on “change you can believe in.” Yeah, a healthcare law written by private insurance underwriters. Change my ass.

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