I agree the job of the business is to create shareholder value. It can be created with a long term growth strategy. It can also be created in the short term by limiting investment and stripping assets required for growth out of the company.
The first strategy is difficult to implement. It requires leadership with creative thinking, the courage to take calculated risk, a long term strategic vision, and strong execution. When it works it can both create jobs and create tremendous shareholder value. Apple under Steve Jobs is an example.
The other strategy is that employed by thousands of US companies since the 1980’s. Instead of focusing on customers and product innovation, the CEO’s reduced investment, cut headcount, and dropped the savings to the bottom line. In the short term the strategy improved the return to shareholders. Longer term, by not investing in the human capital and equipment required to realize growth, much less serving customers, the performance of the companies faltered and in many cases the company went away.
Both strategies increase shareholder value. Both strategies potentially reward CEOs and executives with large bonuses. The former creates jobs and long term economic prosperity for the shareholders and the nation. The latter ultimately destroys jobs and shareholder value.
At my former company I once sat in a one day strategy meeting with the top executives at the corporate office. I was invited because my companies were the exception inside the corporation, they were growing sales and earnings while the others were seeing declining performance despite aggressive cost cutting.
At the end of the day I shared my observation with the CEO. In told him we had spent the entire day talking about internal issues — plant closings, offshoring, headcount reduction, selling off divisions, and executive bonus plans. All of the internal discussions were about cutting back, not one minute was spent talking about growth. During the day no time was devoted to talking about customers, products, or competitors. I suggested to the CEO the company should become less focused on cost reduction and more focused on growth. To accomplish this the company would have become externally aggressive, not internally focused. I suggested a need to become intimate with customers, focus on product innovation to grow market share and enter new markets, and invest in modernizing existing capital to reduce production costs instead of offshoring. After that conversation I was told my vision was not in alignment with the organization and my service would no longer be required. I was replaced in my role by another corporate suit. Two years later the profit reported by the divisions I previously managed had dropped $200 million due to loss of market share and leadership in product innovation. I did receive some pleasure in contributing to that deterioration by working to help a competitor, my new employer, grow its business.
I agree companies have no obligation to provide employment. However, it has been my observation that success in business requires the ability to successfully employ human capital as well as financial capital. I’ve seen too many instances when companies lost their competitive edge by firing the creative people because they didn’t “fit”. Many entrepreneurs I’ve known were extremely creative people who could never have survived in most corporations controlled by bean counters. I suspect if Steve Jobs had joined HP for 30 years HP would still be the same failing company it is today while Jobs would have been a highly frustrated middle manager or have been fired for being a flake.
Let me address specifically one of your comments. You said to me, “You are upset that the Corporate officers did their job and increased Shareholder Value. “ The truth is I am upset because the corporate officers stripped my growing companies of investment in order to fund ill advised and failed acquisitions or stock buybacks brought to them by their buddies at Wall Street banks. My operating group consistently earned a 50% return on invested capital while delivering an 18% EBIT and profit growth rate of 12% annually on a billion dollar sales base. The other companies in the corporation averaged a 25% ROIC, EBIT of less than 10%, and growth rate of 2%. To goose performance, my capital spending was reduced and the corporation borrowed $2 billion to fund the acquisition of a company with a 50% ROIC but only a reported 5% growth rate at the time of acquisition. The newly acquired company imploded the year after purchase because the market for the product dropped 20% due to changing consumer tastes. The financial wizards at the corporate office looked only at the numbers when making the decision to buy. No one did the due diligence of talking to customers, employees, competitors, or reviewing the market segmentation data to understand the business they were buying. Given the collapse in earnings of the acquisition (it recorded a large operating loss), the financial wizards at corporate executed a $3 billion dollar stock buyback, a $32 per share with borrowed money. The buyback reduced the number of shares outstanding so the corporate officers could hit their EPS bonus goals (corporate staff was paid bonus on EPS, those of us working in operating units were paid on the performance of our companies). A year later the stock price had fallen to $18, due to the declining operating performance of most divisions, so the focus at corporate became even stronger on internal cost cutting and restricting investment as a way to drive reported performance and shareholder value. Those of us in the operating division were told we would have to increase earnings through massive downsizing to offset the losses at the failed acquisition. It is ironic that several years later the acquisition, which never made money, was divested to a private equity firm. After payments to private equity company to fully fund the pension plan, the corporation netted nothing on the sale and incurred a huge write-off. So much for improving shareholder value.
It has been my experience very few financial executives understand what drives growth in a company. They do not understand product product innovation or the management of the creative thinking of human capital to create innovation. They do not understand customers or how to align the product development capabilities of the company to create proprietary high margin products that capture market share because they create value for the customer. Like many politicians in Congress they look for the quick fix. Few understand the numbers are created by hard work and investment over decades, not a single promotion to load the trade or across the board headcount reduction to reduce expenses.
I infer from your comments that you do not believe companies have obligations to workers other than a paycheck. Here’s another real world example. A corporation I once worked for had a defined benefit pension plan which the founders had instituted. The company was over 80 years old and had a large base of retirees. While the founders were alive the company prospered and faithfully funded the pension plan to ensure the benefits promised to the workers would be paid. About 20 years after the last founder died, professional management ended the defined benefit pension plan. I have no issue with the decision to terminate the plan. Compensation should be up to the discretion of management and management should have the freedom and flexibility to change the plan when warranted by the marketplace.
By law the company was required to keep the plan funded for existing beneficiaries. You may disagree with the law. I agree with it. In my opinion when an employee joins a company, is told he has a pension if he meets the requirements of the job and the plan, and then works for the company faithfully for decades and retires, the company owes the employee the pension. It was a contract between the employee and the company. The pension was effectively part of the employee’s compensation and the company should be legally and morally obligated to fulfill its obligation no matter the current business conditions.
Over the next decade, the financial gurus at the top of the company began draining what was a fully funded pension plan of assets in order to improve the reported bottom line of the company. Then the stock market dropped, further drawing down the assets to the the point the plan was only 60% funded and unless the company began infusing funds into the plan, the plan would in the not too distant future not be able to pay promised benefits (very similar to the situation the country faces with Social Security). To rebuild the plan assets the company would have to infuse several million dollars a year into the plan, reducing its reported earnings and potentially taking a hit on the stock price as a result. The CFO working with the legal department and some Wall Street investment firms looked in vain for a way to rework the plan so it could be spun out without the company infusing more money. Any spinout scheme the could devise would have involved the retired beneficiaries of the plan seeing an immediate reduction in their benefits of 40%. The only reason the restructuring of the pension plan did not occur is federal and state law prevented it. Would you argue that this is government meddling and the corporate officers who raided the pension plan over a decade to benefit the company’s bottom line should have the discretion to take promised benefits from retirees who served the company for decades and contributed to its prosperity? If like me you agree the pension plan assets of the retirees should be protected, without government regulation how would you suggest it be done?
See if you were as good as you claim to be you would have been in charge. You lament that the CEO did this and the CEO did that. Well he did it because the Shareholders put him there and he is responsible to them.
Here's an idea take your fat stacks and start up a business and you run it here in the States and lets us know how it goes. Instead of whining how your Boss did it wrong show us how you do it right with your money on the line. Until then its all talk. "If like me you agree the pension plan assets of the retirees should be protected, without government regulation how would you suggest it be done?"
This is easy I would never institute a pension plan in the first place. And this is the problem right here. Business has got out of the habit of doing business and instead tries to be nannies and "take care of worker's needs".
So called “Free Trade” is not just an economic theory, it is a religion. The left has gloBULL warming. The right has Free Trade. Religions both.