August 4, 2013
During the past several decades, leaders of most large, publicly traded companies have become increasingly and primarily focused on the short-term financial performance of their organizations. Have you ever wondered why?
Nobel Prize-winning economist Milton Friedman may have explained this behavior in his New York Times Magazine article in 1970. He said that "a corporate executive is an employee of the owners of the business. He has a direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires ... ."
Since the early 1950s, it is who these owners have become that may be the most significant reason for current short-term management thinking and practices.
In the U.S. during this time frame, publicly traded stocks have become increasingly owned and controlled by institutional investment pools such as mutual funds, hedge funds, pension funds, etc. In fact, during the entire first half of the 20th century, only about 5 percent of all stocks were held by such institutional investments. By 2010, these huge investor pools owned and controlled nearly 70 percent. Today, these huge institutional owners have become the very entities whose desires corporate leaders must satisfy.
In the late 1980s, while working for a large American pharmaceutical company, I was having lunch with a colleague who was director of investor relations. I asked him about his job. He said his primary role was to make sure "the market" was never surprised at anything happening in our company that might impact quarterly financial results.
He went on to explain that ownership of most large, publicly traded companies' stocks was highly concentrated among relatively few institutional owners. In our company, he said 96 percent of the stock was owned by only 4 percent of all shareholders. And these large entities were "the market" he spent all of his time ensuring no surprises.
It was no accident our company had record sales and earnings every single quarter for my entire 30 year career! It was what "the market" wanted. It was also interesting that every person in this company with the title of manager or above had, as part of his/her compensation plan, stock options that only had value if the stock price went higher. The higher one ranked in the organization, the greater the potential value of stock price increases became for personal rewards.
Today, institutional investor managers also have very powerful computers. This makes it quite easy to instantly factor in any news that might affect financial performance for any company whose shares they own, and then make immediate, responsive buy/sell decisions. They also constantly track the actions of all other large funds and the economy as a whole. So when another institutional investor enters a larger-than-normal sell/buy order, or a new government report of interest to the market is made public, they all jump on the bandwagon. This often triggers massive swings in the stock market. A good recent example is the stock market decline on June 20 when Ben Bernanke announced the future possibility of reduced quantitative easing.
The negative changes in the way most corporations view employees is simply a side effect of short-term thinking by corporate executives. During earlier times, the leaders of most large corporations seemed to take a longer-range view of their businesses. Thus, long-term relationships with experienced employees were often desired and highly valued.
Today, employees are mostly seen as expensive and expendable tools. Any opportunities to improve subpar short-term earnings by reducing staffing expenses are usually exercised. And as soon as a large company announces a planned reduction in workforce, the next financial headlines will usually announce both the planned staff reductions and a corresponding increase in the staff-reducing entity's stock price on the same day.
Such short-term thinking by corporate leaders has led to the elimination of millions of American jobs, and even entire industries, over the past few decades. And it has certainly contributed to the jobless recovery we are still experiencing.
Have institutional owners, demanding a company's quarterly financial goals are met, caused short-term management thinking? Or have executives become so adept at pulling the various triggers available to meet these short-term goals that they have given up on the much harder work of long-term planning?
Was the coupling of executive compensation to short-term stock price growth driven by the institutional owners to ensure executives would stay focused on actions most likely to lead to short-term stock value appreciation? Or did the executives connect the dots between tactics driving short-term stock price increases and their own compensation plans? Perhaps both!
It really doesn't matter who started it. The facts speak for themselves because this collective short-term thinking, while serving institutional owners' desires, has grievously harmed significant numbers of ordinary Americans and our nation as a whole.
As Gordon Gekko in the movie "Wall Street" said, "Greed is good." If so, then instant greed maximization has been nirvana for both the institutional investment firms that control most of Americas corporate stocks, and the corporate executives who work for them. Any negative side effects for other Americans they must view as simply collateral damage.
Our federally elected officials are supposed to protect our citizens from the foreseeable harmful side effects of too-greedy capitalists. However, they have all been too busy trying to remain in power by doing the bidding of the special interests to even consider their original reason for being.
These are my opinions. What do you think?
Mike Tower
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