Business/Finance

The profits of doom

Have you ever wondered what happens when you take a really, really dumb idea and run with it?  Not just run with it for a few steps either, run withthe it for nearly three decades until it becomes the foundation for the decision making process throughout the business world.  Look around.  This, right now, is what happens when you run with a really dumb idea for that long.

In 1981, Jack Welch gave a speech about “shareholder value” that became the mantra for corporate America.  Thursday he said, “On the face of it, shareholder value is the dumbest idea in the world.  Shareholder value is a result, not a strategy…your main constituencies are your employees, your customers and your products.”

Yes, it is the dumbest idea in the world.  Yes, it is a result rather than a strategy.  But it’s been treated as a strategy for so long that the dumbest idea in the world has taken root and grown into a mighty tree that’s in the process of falling onto our house.

American automakers lag behind their foreign competition in terms of technology, quality, and reliability because they were chasing shareholder value.  Our newspapers became little better than Soviet toilet paper because they were chasing shareholder value.  The manufacturing jobs that used to sustain America’s middle-class took flight in pursuit of shareholder value.

Wall Street’s valuable presence on the economic landscape became perverted.  No longer was it a place where companies went to raise the money that would be invested in what Mr. Welch describes as the “main constituencies” of a business; it became a place where companies went to prove themselves to people with no constituency other than their own self-benefit.  In the process of accepting undue fealty to its power, Wall Street deemed itself arbiter of all that is good and right, and did so in the name of the sacred shareholder value.

Rising mightily, it demanded sacrifice for its blessing.  Quarterly profits should, it decreed, be an ever-increasing number.  And like all wrathful gods, it declared that the ends justify the means.  The sacrifices that it required to withhold financial fire and brimstone were to be the very constituencies of supplicant businesses.  And so it was done.

But vengeful gods of justice are not easily satiated.  As the Mayan practice of sacrifice to ensure good fortune descended into an orgy of sacrificial violence, so too did the high priests of American business lose sight of the ends in the frenzy of the means.  Even as they found themselves forsaken by their gods, ready to be consigned to the hell-fires of bankruptcy and begging for mercy in the form of bailouts, they promised that the sacrifices would go on.  Restructuring plans pay little heed to the “main constituencies” of business, focusing instead on how many sacrifices might satisfy the gods.

Mr. Welch, wearing sackcloth and covered in ashes, has returned.  He speaks as one who has been to the mountain top and conversed with flaming shrubbery, telling the faithful to turn away from their golden ram.  But what else do they know?  The constituencies that he speaks of so reverently have already been offered.

Swallower of planets.  The profits of doom.  Quarterly projections.  The profits of doom.*

*Neil Fallon



28 replies »

  1. Interesting post, spoiled for lack of proofreading: “other than there own self-benefit” and “Restructuring plans pay little head” detract from the reading experience.

  2. Are “vengeful gods of justice” the Eumenides (Kindly Ones) of the Oresteia, or is that just a figure of speech in your overwrought writing?

  3. Wow. Tough crowd. While there are mistakes, it’s a good point. I see it all the time in the games industry. Companies do well enough to go public and they develop an infestation of stockholders. Those stockholders suddenly think they know how to develop games and appoint a new CEO. That new CEO’s directive is short term success. The quality staff leaves. The player base feels alienated by suddenly substandard product and then the stockholders jump ship to the next Big Thing. If this were agriculture, it’d be slash and burn.

  4. Just my overwrought writing. Posted on the way out the door, trusted spell-check too much/didn’t read closely enough. Apologies.

  5. Thank god you cleared up the identity confusion with the Erinyes. I thought you were talking about my best girlfriends, and they do NOT like being outed.

    Perhaps from now on you could adopt some kind of color-coded guide for the uninitiated: red is hyperbole, green is an extended metaphor, blue is irony, purple is sarcasm working on becoming irony, and of course a Wikipedia link to every possibly unfamiliar reference. Oh, and a scale to denote “wroughtness” so the sensitive reader knows what to expect… one star would be, say, dead Hemingway; five would be Mrs. Radcliffe on ecstasy.

  6. This post does an excellent job of explaining this ridiculous business model or whatever you want to call it. Next I would like somebody to explain to me how shareholders became so powerful and why we defer to them beyond customers and employees. Though I do understand that they serve as a kind of court to the king, the CEO, and keep (or kept) his coffers filled to overflowing.

  7. Shareholders are so powerful because they own the company. It’s the duty of the management(who works for the shareholder) to maximize the return to the shareholder. Of course, it doesn’t always work this way.

    Jeff

  8. Jeff, is there a difference between investing in the company and owning the company? Certainly, shareholders are ownership, but i wonder (and that’s what it is, not a statement of fact) how healthy it can be for individual companies and the economy as a whole if ownership is not in it for the long haul.

    And i think that Welch’s recent statement is important because he clearly states that shareholder value is the result. No argument from me that management should seek to maximize return to the shareholder, but if that becomes the only concern and the focus is short-term does it not become dangerously close to pillage?

  9. One can invest in a company without buying shares, simply by buying their debt. Although buying corporate paper is riskier than buying Treasuries, some very attractive yields (9-15%) are out there right now. Companies are under relentless market pressure to perform every quarter, and underperformance guarantees a trouncing of the stock price. Welch was a master at massaging GE’s numbers so they would do a little better that expected each quarter. He did this at the expense of the company. As far as I’m concerned, he’s a tool. But it is of no concern to me what the CEO does to a company, as I’m only interested in what the price action of the stock will be.

    Companies right now are in the pillage mode, and I see no foreseeable end to this for a long time. The key is to find the companies that are pillaging the best, and invest in them before everyone else does.

    I generally don’t like to be in a stock for the long haul, as it can take years for it to double. I like stocks that move quickly, either up or down….doesn’t matter. On Wednesday, Citi was $0.97 and closed on Friday at $1.78 per share. I bought it at $1.00 and sold it 2 days later at $1.82, which is a great return. Citi might go up to $5 near term, of it could become worthless, it doesn’t matter because I pulled out $0.82 in two days. One can get good performance from stocks in the short term provided that you’re on the right side of the trade. Longer term holding of stocks benefits from the upward drift of the market, but that’s a long slow process.

    I have no expectation of any company to be a good citizen, nor do I care if one is or is not. It only matters if it makes me money. To survive in the jungle of the marketplace, one must be dispassionate or go under.

  10. Jeff-

    “I have no expectation of any company to be a good citizen, nor do I care if one is or is not. It only matters if it makes me money. To survive in the jungle of the marketplace, one must be dispassionate or go under.”

    Sounds to me like you’re the kind of guy Jon Stewart was talking about.

  11. Josh,

    If John Stewart hates something, it must be good.

    It sounds like you don’t have a clue about the markets.

    Jeff

  12. So I keep going back to the same question, based on my own lack of knowledge, but I still haven’t gotten an answer… if dispassionate acceptance of the reality of market forces is the rational way to make money (and so far I’m with you), then why do we regulate the markets at all? If Madoff deserves to go to prison forever for breaking the rules, there must be rules which are important to even the most pragmatic trader. What are those rules based on?

    I can look up SEC regulations and the like for myself, although any concrete example to illustrate a point would be welcome. What I do wonder is how the line is drawn between an every man for himself free-for-all and a regulated system to govern behavior and ethics. What’s”fair” and what’s not? Who decides and based on what?

  13. Jeff-

    I wasn’t passing judgment, just making an observation… and just because I happen to agree with someone doesn’t mean I allow them to make decisions for me.

  14. I like business, I like capitalism. What’s been going on are stupid conflations of religious-like idealism with things that actually help and, I dare say, ALLOW a market to function. One is simple honesty, or transparency. You MUST have regulations AND regulators for a market to even exist! Imaging it in its simpliest form: A Farmer’s Market. Government has a role even in that, if you bother to take off the blinders. For example, regulation of weights and measures, or simple protection… a hoard of barbarians would quickly destroy your market, philosophically and literally! Protection from favoritism in contracts… say you want to buy a booth space but your likely competitor is the son of the politician who regulates weights and measures! You need legal system to make sure things are fair. You need ALL KINDS OF GOVERNMENT things just to make a simple farmer’s market work!

    These bozo Republicans CLAIMED to favor business (as a concept) they INSTEAD favored a few BUSINESS constituents. That RUINS the market. They didn’t give a shit about a “free market,” they used that as a rhetorical foil while helping RUIN the markets for quick profits.

  15. Jeff, you clearly know the mechanics of the market–and that’s the problem.

    You explicitly assume that the market is a “jungle.” So much for all that evolution and socialization crap, it’s Lord of the Jungle time again! “The Market is a jungle, and I intend to be its biggest ape.” Thanks, fellow citizen, like we really need more big apes.

    You have our livelihoods confused with the games played in Las Vegas (aka Lost Wages).

    As Stewart said, brimming with righteous anger: “it’s not a f^(!^% game.”

    By assuming such a strangely atavistic cosmos actually obtains; and by further restricting your concern for the return effects of your actions (you don’t care if a corporation is a good citizen), you out yourself as one of the market fanatics who have pursued your own self-interest at everyone else’s expense.

    Nce going, self-confessed knuckle-dragger! Do us all a favor, and evolve out of 19th-century Social Darwinism, will ya?

  16. Thanks. I have often wondered how and when the universe of business stakeholders got narrowed to shareholders only. Let us hope that it is not too late to turn this around.

  17. Ann — I am a man, so I guess I want to marry your cat just to be close to you, I loved your color coding post so much.

  18. Knowbuddhau,

    I checked out your very well crafted blog. I just pity your poor neck muscles that have to support your enlarged head, plus all that tin-foil you wear.

    Your strong invective reminds me of the many bitter losers I run across every day. Participating in the market is only about self-interest. Any other interpretation of the market is wrong, and anyone expecting a free ride in the market is in for a surprise. Anyone expecting the market to keep going up forever needs to have their meds adjusted. There’s no such thing as a friendly market, just as there’s no such thing as a friendly poker game.

  19. Wow, the poll suprised me. No one here must know anything about Ron Paul OR Austrian Economics. Back to Mises.org for me.

  20. No one is ever going to answer my question… I think Allen addressed it, and thanks, but I’m interested in the underlying decision-making process of regulation more than the practicalities.

  21. If you dont care about a corporation being a good citizen, then you are begging for disaster. Especially since corporations have more rights than you as a citizen do. They are afforded all the rights and none of the responsibilities that citizens have.

    When I was younger, corporations and busineses DID think of themselves as part of the communities they were in. They did things to help the community, they helped fund schools, parks, hospitals, they paid 36% of all taxes paid in this country. They tried to be responsible, largley, and they saw themselves as members of a society. There were excceptions, of course, and those companies were looked apon with scorn and derision, and deserved it.

    Then Reagan came along, and turned business against the very communites that gave them life. Now, it’s business against their very markets, against their customers, against their workers and against the country itself. If that doesn’t bother you, it should.

    I get the feeling that you who don’t worry about taht are too young to know what it was like back when we were a country, and not just a collection of individuals to be fleeced by the business world. That’s a shame. A world run and consumed by greed is a pathetic thing to have to live in. To be one of those defending that way of life is a terrible thing to watch. It’s a selfich, pigheaded way to live, and it’s against the very essence of adult thought. You think like a child who never learned that sharing keeps everyone happy. And as adults, it keeps people and families, and in our case, countries alive.

    I feel very sorry for those of you who think that this is how things are supposed to be. This is a sickness, an aberation, and is filthy beyond belief.

  22. @ann ivins

    The Federal scheme of securities law and regulation is Federal law directed specifically at fraud as practiced by issuers, underwriters and dealers in securities. Investors are generally ripe for the picking and there is probably no other area of economic activity where gullible people are so easily exploited . In the early days before the Federal Govt got into the game, state securities law was called Blue Sky Law because stock promoters would offer to sell their victims a piece of the big blue sky.

    The Federal scheme doesn’t so much regulate markets as to require disclosure for purposes of transparency by securities issuers at the time of 1) issuance; and 2) subsequently on a quarterly basis or whenever a ‘material event’ occurs. Other aspects of the scheme operate to prevent insider trading on the theory that the use of information otherwise unavailable to outsiders defrauds the wider market.

    If Madoff does indeed fall afoul of securities regulation, then he falls afoul of it because he practiced fraud, not because he represented the crueler forces of the marked. It should be noted that securities law doesn’t protect ‘rich people’. Hedge funds exist to sell investment products to ‘qualified investors’, i.e.., individuals who are presumed by reason of their wealth or income to possess sufficient expertise to protect themselves from abuse of fraudulent practice. There is no other definition of a hedge fund except that the impecunious are excluded from investing.

    There’s tons more, of course. But the main point is that securities regulation is not so much regulation as a comprehensive disclosure requirement directed at the prevention of fraud in the sale and trading of securities.

  23. I’ll be damned. Thank you. So transparency is the goal, not a certain set of practices or a specific ethical underpinning. Many things make more sense now.

  24. You have a body of laws in this country that have a basic agenda. They have made corporations into “persons” in the area of rights and privileges, and they have not found any way to have that corporation shoulder the responsibilities and liabilities of personhood. They are also legally bound to make their shareholders as much money as legally possible. This is a recipe for disaster. Without negative feedback, any system will hit the walls, or heterodyne until it blows up. Without positive controlled feedback, the “system”, whatever it is, won’t improve.