A great example of this is airlines. The best airline, Delta, is a fucking disgrace compared to the 1990s.
In service of shareholders this quarter. Where things went badly wrong was the devastating combination of efficient market hypothesis and Keynes’s big idea that the only moral/ethical responsibility a corporation has is to its shareholders. You combine those two ideas and what you get is ‘anything that makes the stock price go up today is inherently good for the company, and my only responsibility is to share price go up today’.
This, interestingly, is the inverse of what a company actually being run toward generating long term tangible value to the shareholders would look like. The exception that proves this beyond any doubt is Berkshire Hathaway which itself is an incredible test case for the power of running your operation for long term value vs short term share prices.
You gotta realize that the American corporate culture is epitomized by the likes of Goldman Sachs, McKinsey, and Bain Capital. These guys aren’t there to grow the pie they’re there to ‘financially engineer’ it so they can extract the filling and sell the crust for what they bought it for. They look at a stable company with a good defensive balance sheet, happy long tenured employees that are good at their jobs, and a good relationship with their customer base and see waste because why aren’t you levered, why are you spending 17.5% more on labor than you absolutely have to, and why are you overservicing your customers? Also you can totally just take 2/3 of the pension fund balance because it’s over the legally required minimum what are you a child?
Meanwhile Berkshire Hathaway is looking at that same business asking if they would like any more money because the return on invested capital is amazing and they really like the moat they get from the happy customers and basically impossible to replicate employees for an upstart competitor. Because those attributes are a huge part of how they valued the company to start with and what they bought.
And lo and behold Berkshire Hathaway has heavily outperformed the S&P over time. I think a sizable chunk of that is just Warren Buffett not being beholden to hitting his quarterly numbers or else. Also knowing the thing they spent their entire life building isn’t going to be strip mined is pretty attractive to people looking to cash out their large private company. Buffett will let you stay CEO until you’re ready to leave and let you do the job without ever having to worry about hitting a quarterly number again. It’s not as shocking as it seems they get such good deals on valuation.
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I think it’s in short-term service of shareholders, not long-term. I think it’s worked out for shareholders thus far, and I think they’re going to push it to a limit where it doesn’t work anymore and then things should snap back the other way with businesses that offer actual good service because their employees don’t hate every second they spend at work with the passion of a thousand burning suns reaping the benefits.
At the end of the day, I don’t really care whether the free market or government regulation solves the problem. Workers should get paid and I’d prefer some form of capping executive pay and increasing minimum wage.
By the way, executive pay is a great example of corporations not giving a fuck about their fiduciary responsibilities to shareholders. Exorbitant executive pay is not in the best interest of shareholders. It’s all a bunch of wealthy people with the power to do so maximizing their own short-term best interest.
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Haha I typed my response while offline without knowing it, and then your reply popped up after I posted it. Great reply and basically illustrates the same point with a perfect example.
I have some friends who are high up in a wildly successful regional business, that I will leave nameless for obvious reasons. The company is privately held, treats its employees incredibly well, and has grown tremendously due to having a long term vision.
The owner and their family have the company setup so that for the foreseeable future the company will never be allowed to go public, because of what you’re talking about exactly. The second they go public, the company would be gutted and the employees would be treated like shit instead of currently being able to attract the best talent because they’re the clear best place to work in their industry.
Long story short, MBAs have ruined the way businesses are run in this country.
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Isn’t the obsessions with quarters specifically related to US government law requiring quarterly reporting from public companies? Hypothetically if this reporting was a longer interval then decisions might be made with longer timeframes in mind?
OTOH less frequent reporting makes hiding malfeasance easier.
Private ownership by owners who give a shit about how they look and their legacy is frequently a much more ethical way of doing business.
It’s more insidious than just the time frame. The executives making decisions for the company typically make most of their compensation from stock awards that vest at specific times. This creates obvious incentives for them not only to care more about the stock price than the underlying business, but to really only care about the stock price during the window of time when they’ll be cashing out.
The CEO of a publicly traded company has two mandates: first make sure you hit wall streets estimated numbers for every quarter so that you don’t get fired prematurely and second maximize the share price at the exact moment you will be dumping the newly vested shares/options/whatever your company awarded you.
And by and large they do whatever they need to do to make those two mandates happen. Need to make your earnings number for the fourth quarter and projections are showing revenue will go down a touch? Bring in McKinsey to create a powerpoint + spreadsheet showing all the efficiencies you’ll gain from doing the exact amount of layoffs needed to hit earnings. Some of those people will be very costly/painful to replace the following quarter? That’s fine you hit your quarterly number and next quarter is next quarters problem stop overthinking it.
I really can’t overstate how toxic the standard business school solutions that consultants and private equity have spread all over corporate America are. Every single one boils down to ‘rob Peter to pay Paul to make the balloon animal a different shape’. That’s what their ‘innovations’ and ‘efficiencies’ actually are. Take a healthy business suck as much blood out of it as you can and then sell its vulnerable anemic ass to a sucker as fast as humanly possible. Or it’s roll up every business of a certain type in an area to create market control and then use that market control to pay the employees less, do less for the customers, and charge more because what are they going to do about it exactly?
None of these things produce more stuff in the world they just move any value anyone who isn’t the management of the company gets from the people who used to get it (employees, customers, the public at large) to the pockets of management and to a massively lesser extent the shareholders I guess (although I think in the long run it’s actually ruinous to shareholders).
Needless to say from this calculus if you’re a CEO and you’re deciding whether to invest 100M in long term projects that actually grow the companies business or do 100M in share buybacks the share buybacks are nearly always going to make more sense. The investment is risky and will probably pay out long after you’ve cashed out, there’s actually no value to you the CEO in approving that project unless it’s such a staggeringly obvious (read the bare minimum) move that not doing it could get you in trouble. Otherwise you should either hold the cash to do future share buybacks because the timing for you personally is wrong and the share price is at an acceptable level, or you do the buyback to raise earnings per share and protect your job.
The difference between WB and these guys performance over time is I genuinely think 90%+ that WB doesn’t give a fuck about this quarters numbers and is fine with them landing whereever they land as long as BRK is prioritizing growing the underlying value of the company. They do share buybacks when they think their own stock is cheap not because they’re trying to push the stock to all time highs at the right time for WB’s personal bottom line… and that’s something you get when the guy running the company essentially started it, is the 2nd-5th richest guy on earth, has the best investment track record since Nathan Rothschild, and because of the previous points is entirely untouchable and will die on the job.
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The extent to which this is true is dependent on the industry/product/culture. I’d say it’s pretty much not true at all for a sweatshop in Bangladesh.
I think the existence of PE/HFs is taking this shit to a new level too. Boomers who, rightfully, want to retire are being made offers they can’t refuse to sell their business to a PE fund or public company. They then roll it up with a bunch of other similar businesses, talk about synergies etc., and meanwhile they’re just stripping it for parts and the quickest and best exit via IPO or selling it to another fund.
I worked for my mom, and I didn’t want to take over her business because the overhead run rate was $1m+ per year and going up each year. She ended up selling it to PE and I stayed on, now as a part of a bigger company, and I continue to treat our specific clients well; however, as soon as I leave they’ll just start doing the same dumb shit they do in all their other markets.
Secondly, my cousin sold his business to a public company for $100m+ and they immediately gutted it. They laid off a ton of employees, including my uncle, and immediately shut down some departments they didn’t want. They pretty much bought him out just for the supplier relationships and nuked everything else.
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Right, but we’re not really discussing sweatshops in Bangladesh, we’re discussing the pressure on US companies to cut costs and pass on shittier service to consumers. If you want to get into like clothing and say well that’s what they’re doing, I’d say they’re passing on a shittier product, and if the shittier product gets shitty enough then once again that would be bad for the company.
I bet privately owned sweatshops in Bangladesh are more cognizant of the costs of replacing high performing workers than most S&P 500 CEO’s. The sweatshop owner in Bangladesh is running a pretty standard private business. The economics of the business and the local labor market obviously impact what the optimal way to deal with your workers is, but it’s not uncommon for developing countries to see double digit well in advance of GDP growth wage increases year over year for decades straight. That still results in them being much cheaper than higher PPP countries like the US…
But just about the happiest news I have for all of you is that foreign labor is starting to be expensive enough, in almost all cases, that it no longer is a big enough factor to make up for the cost of international container shipping. Also the US government has been going around to companies telling them to get out of China/Asia and relocate their production to Canada/Mexico/USA.
And we’re starting to see the beginning of that change with LA port volumes right now. They’re very low right now… and one of the things that has been helping the economy stay up has been the construction and staffing of new factories.
The go to the dirt road to the edge of the jungle, and pay the locals peanuts to strip the local raw materials for you trade is really starting to end. There’s a little bit of that left to be done in Africa, but there we have real competition from the Chinese which will make it less lucrative than previous cycles.
In the future we’re going to see a more normal global economy where most stuff is produced fairly close to where it is consumed with expensive regional specialties being the major trade goods. It’s already trending that way, but the inevitable carbon taxes in 5-10 years is pretty much the deadline.
Has this been reported or…?
Combo of our very overt trade policies and rumors about what people are being told by Gina Raimondo in private. Also it’s what basically every manufacturer is doing so it doesn’t particularly matter. This is one of those ‘the why is way less important than the fact that it is happening in rather dramatic fashion in real time’ situations.
Yeah the trade policies I figured were motivating companies to reshore but it’s a pretty big deal if they’re being told that by Raimondo in private. I mean, that’s tradeable.
I would argue it’s less short term / this quarter thinking than it is a massive validation of the milligram experiments. Basically people know it’s inherently wrong to make 500x the people actually doing the work but there is an army of economics professors, compensation consultants and paid sycophants telling powerful people it is their duty to pay themselves all the money.
Weird the “fiduciary duty” never applies to executive pay. And they have cleverly stacked the Delaware court of chancery to hear every possible legal dispute. A court that magically never has a problem with any amount of executive pay or egregious board conduct.
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Is there any easily accessible stat for comparing between companies something like what percent of a companies total compensation goes to top 5 highest paid people vs the total to rest of employees?
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Scrolled through don’t think it really addresses for example what percent of Walmarts total payroll goes to CEO vs all the other workers combined. Would be curious to see how that number varies by company.
A CEOs only job, with rare exceptions, is to keep their job. And the way you keep your job is make the board loyal to you. And the way to keep them loyal to you is to pay them a shit load of money for not much work. An actually independent board member is a very bad thing for a CEO, so boards are deliberately stacked with yes men and women who often derive most of their income from being on boards. Is someone making $200k a year for 4 meetings, plus stock often in the millions, who isn’t independently super rich, ever going to question the CEO? Lol.
Here is the board that approves objectively awful CEO David Zaslav’s pay. Take a look at the “independent” directors. Not a single actual titan to be found:
https://ir.corporate.discovery.com/governance/board-of-directors/default.aspx
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