ARE BUSINESS LEADERS SIMPLY GREEDY?

April 22, 2011

Why all the greedy leadership in big business?

Today over 90% of the stock in publicly traded American companies is owned by less than 10% of all investors. These huge owners are mainly institutional funds (mutual funds, pension funds, union funds, state funds, hedge funds, 401K’s, IRA’s, University Endowments, etc.). Contrast that with 1950 when over 90% of all stocks were owned by individuals.

I went back to school to earn an MBA in the mid 1980’s. A finance professor posed this question; “What do you think the first thought the CEO of a major, publicly-traded company must have every morning?” Our class of mainly mid-career, middle-management corporate employees responded with things like; customers, sales, profits, employees, long-term viability, good corporate citizenship, product quality, etc. The professor answered that we were all either ill-informed or naïve. His answer was; “The CEO must have one primary guiding question he asks every day. That is, what can we do to increase the wealth of the owners today?” He went on to explain that this increased wealth is the share price. The owners of almost every company are the shareholders, and, as stated above, most stock ownership in most publicly traded companies is likely controlled by very few entities.

This same Finance professor told us; “The stock market is reptilian in nature and has no possibility of human emotions. It cares only about short term relative financial performance”. Thus, since most large companies’ share prices are determined within this “reptilian-minded” market, it is not too difficult to understand that almost any steps necessary to increase share prices and owners’ wealth will be taken by the leaders of most companies. This includes the ongoing transfer of American industries and jobs to lower cost labor markets. It is also reflected in executive pay programs that offer great incentives to deliver what the reptilian appetite demands…immediate tactics that result in higher share prices…today (or the most recent quarter)! Most executive and management bonus plans I am aware of pay rewards based on specific financial indicators that were selected as prime drivers of stock prices.

The influential relationship these huge institutional owners have with the management of most companies and the speed of information available are two reasons that an individual shareholder simply cannot hope to compete with these large ownership entities in making short term buy/sell decisions. These institutional owners usually know in advance whether quarterly results will meet or miss projections, and have already acted in a manner that has adjusted the stock price accordingly. When you hear an expert say that the market is always forward-looking…this is partly what they mean.

What good does it do to understand this? It seems to me that since this is the basic nature of the beast of our economic system…so to speak…the actions our government leaders take should be aimed at mitigating the actions that these leaders take that can be so negative for our country’s long term interests. A few laws or regulations worth considering: 1. Federal tax penalties for each job sent off-shore. This could serve to help reduce the numbers of jobs sent to foreign countries, and monies collected could be used for retraining programs for displaced workers. 2. Tax credits for jobs being added here by either foreign or domestic companies. 3. Incentives or even requirements for foreign companies to produce products locally if they are to be sold here. Harley-Davidson wants to tap the growing market in India. To do so requires that they assemble in India. Buick is one of the most sought after brands in China…guess where they have to be made? 4. Change our capital gains structure to reward longer term stock ownership. For example, taxes on short term capital gains could be higher, and the short term definition could be extended to 2 or 3 years from the current one year. Then perhaps a ladder of declining rates for each year beyond that. This could encourage longer term investing horizons by these institutions, and allow the management of more companies to have longer planning and measurement horizons. 5. Regulate the compensation packages for the management of financial companies to minimize the potential for serious harm to our economy and country. Do you think the financial industry would have developed the risky strategy of creating, bundling, and selling the mortgages of risky borrowers if their bonus systems didn’t incentivize it? 6. Top management of financial industry companies, including the boards of directors, must be held criminally accountable for the types of fraudulent activities that led to the massive bail-outs required for this industry. This also has to include the elected officials who were so clearly culpable.

The reptilian minded stock market will never develop a social consciousness, or care about our country’s survival. We can get angry about Wall Street abuse and government failures all we want, but without specific ideas to debate and implement, it will do no good.

 If we don’t make strategic changes to our laws and regulations and we keep losing jobs…indeed entire industries, how will our economy ever truly recover? The Stock Market has recovered all the losses since the real estate bubble burst, but where are the jobs? “Shovel ready” has been proven to mean nothing!

Not all companies or their leaders operate this way…just the vast majority!

As usual, these are my opinions. What do you think?

Mike Tower

Hendersonville, NC

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