Tuesday, December 4, 2007

Drawn and Quartered--Destroying American Business, Quarter by Quarter

We are not so much a fault-finding nation as we are a fault-requiring one. Somebody has to take the heat. In the matter of where our manufacturing base has gone and why, I have a nominee.

Harvardbusinessschool We are not so much a fault-finding nation as we are a fault-requiring one. Somebody has to take the heat. In the matter of where our manufacturing base has gone and why, I have a nominee.

The Harvard Business School. Not to place all the blame in Cambridge, other business schools are of equal guilt, but they all take their cue from Harvard, the granddaddy of the MBA and a cost-cut leader since 1908.

Which is (and was) OK. Cutting costs is certainly a part of any successful business plan and yet something went awry just this side of the Vietnam War, beginning in the late sixties and early seventies. That ‘something’ was an inordinate concentration on financing business entities from the stock market instead of banks.

Wallstreet No one goes to the bank anymore. They issue stock. It’s painless, there’s no stipulated interest or payback date and, like taking cocaine, it’s habit-forming

But unlike a staid old-fashioned bank loan, the money raised today issuing stock can disappear tomorrow in a decline of share price and so (pardon me, while I take another whiff of this white powder) the main job of the CEO is no longer running company affairs, but supporting share value. Share value is almost wholly dependent upon quarterly profit.

Money Money, in the investment game, flows to the highest return. When you hook Universal Widget up to share value instead of bank loans for business expansion, the focus of business turns from sound strategy (new and better widgets) to the wooing of Wall Street. Essentially, you’ve developed a ‘coke’ habit and that hasn't a thing to do with a preference for soft drinks.

Every moment is shadowed by the clock, ticking relentlessly toward the dreaded Quarterly Report. Manipulating accounting practices to massage the quarterly report serves the same metaphor as gulping a couple Viagra pills-- the sure cure for quarterly dysfunction.

Quarterly dysfunction is very common. The Sexiest Businesses Association estimates that 1 in 10 corporations in America have recurring problems with their quarterly reports at some point in their life.

Enronlogo Living and dying by the quarterly sword, the avoidance of being drawn and quartered on Wall Street is why the hired-guns are hired. Money talks, but only the hot-shots can make it sing and dance. The typical CEO under those circumstances is no longer running a company, he’s a sprinter himself, only as good as his ability to beat his last time out.

(Voice over) Return with us now to those thrilling days of yesteryear . . . blue-chip stocks, research and development, steady growth and a fair return on equity . . . The Lone Ranger Rides Again!

Those days are as anachronistic as our cowboy and Indian past. Long-term investments and stock portfolios depended upon—upon what?—upon dependability. Volatility is the word of the lesson-plan in Harvard MBA lingo and it’s hyper-volatility when you connect it to short-term goals such as stock options for meeting growth and profit targets.

Not for productivity, not for market diversification, not for product development—for growth and profit. Growth at all costs, because growth rather than value has become the mantra. Growth above all else, because all else depends upon capital and capital is captive to stock price and stock price is captive to growth and profit, relentless and never ending, always a higher bar, quarter by quarter by quarter.

Uncontrolled growth is a definition of cancer and American business has a malignancy that has staggered its body and from which it may not recover. Courtesy of your MBA program, whatever Ivy League colors it may shake in Jimsurowiecki your face at half-time.

(New Yorker, James Surowiecki April 30, 2007) The increasingly short-term nature of C.E.O.s’ jobs, along with the pressure on them to deliver results quickly, doesn’t help matters. The average C.E.O.’s tenure today is just six years, long enough to see the benefits of downsizing (like a lower payroll) but not long enough to suffer costs that may appear in the long term. And the lack of job security means executives have to worry more about what shareholders and analysts are saying.

While the market as a whole may be skeptical about downsizing, many powerful people on the Street aren’t. Before Citigroup announced its layoffs, for instance, it had to contend with a chorus of critics—including its biggest shareholder—insisting that the company was a bloated giant that needed to get its costs under control. Even if the job cuts didn’t move the stock price, they were at least a sign to those critics that the company was listening.

On top of all this, a C.E.O. is likely to look to layoffs as a solution because that’s what almost everyone else does, too. The word “downsizing” wasn’t even invented until the mid-seventies. The waves of layoffs that began at the end of that decade and peaked after the recession of 1990-91 were largely a response to crisis on the part of manufacturing companies swamped by foreign competitors and stuck with excess capacity. More recently, however, downsizing has become less a response to disaster than a default business strategy, part of an inexorable drive to cut costs.

That’s why Circuit City can proclaim, “Our associates are our greatest assets,” and then lay off veteran salespeople because they earn fifty-one cents an hour too much.

When business invites in a CEO for six years (at $4 million a year), then dangles a stock option worth a hundred million for juicing the stock to a certain pre-agreed price, what can the company reasonably expect?

  • Concentration on new product development? Not hardly, that takes R&D and costs money.
  • Investment in plants, personnel and technology? In your dreams.
  • Training programs, quality circles, support for continuing education? Guess again.
  • Long-range planning? Get serious.

The corporate hired-gun isn’t part of the connective tissue that makes up a company. He is always from the outside, so that allegiance is to the slash and burn tactics of stockholder wealth maximization--a term that has only recently come into the lexicon.

The texts speak for themselves;
    Van Horne: "In this book, we assume that the objective of the firm is to maximize its value to its stockholders;"
    Brealey & Myers: "Success is usually judged by value: Shareholders are made better off by any decision which increases the value of their stake in the firm... The secret of success in financial management is to increase value;"
    Copeland & Weston: "The most important theme is that the objective of the firm is to maximize the wealth of its stockholders;"
    Brigham and Gapenski: "Throughout this book we operate on the assumption that the management's primary goal is stockholder wealth maximization which translates into maximizing the price of the common stock."

Who can wonder why the corporate bathwater has pitched so many babies?

(Surowiecki again) There’s nothing wrong with cost-cutting, and in any dynamic economy layoffs will be necessary. The problem is that too many companies today define workers solely in terms of how much they cost, rather than how much value they create. This is understandable: after downsizing, it’s easier to measure a lower wage bill than it is to see the business the company isn’t getting because it has too few salesmen, or the new products it isn’t inventing because its R. & D. staff is too small. These lost opportunities may be hard to measure, but over time they can have a huge impact on corporate performance. Judging from its reaction to layoff announcements, the stock market understands this. It’s time executives did, too.

Jackwelch The road to success is written in the business schools and its guru, the Burma-Shave sign painter, is Jack Welch, “chainsaw Jack.” Wreck the company, sell off the parts like an automobile chop-shop, pocket the profits and move on. Welch-style wannabe hired guns not only come to town to shoot the sod-busters, they get paid a hundred million dollars to do it.

Where stock-markets were conceived to support business and industry, they have lately been reinvented in such a way that business and industry arguably exist to support stock-markets. Without much success, I might add.

The Dow Jones Average was at 11,750 in January, 2000. It’s gained 1,250 points, a measly ten percent in seven years, during which time the dollar has dropped by half in value. U.S. companies are being bought up today by foreign investors at 50 cents on the dollar and we celebrate that.

Meanwhile, jobs in the country have become so worthless that we rage against Mexican squat labor for taking our jobs. We demand that fences be built to keep out immigrant labor because the mad race to quarterly earnings has reduced us to immigrant labor within our own country.

Thanks, Jack and thank you Harvard Business School as well.

Under the guise of globalization, investors have come in on little cat feet and stolen our vibrant and productive nation from under our noses. Against this scenario, Treasury Secretary Paulson was quoted;

"The global economy is more than sound. It's as strong as I've seen in my business lifetime," Paulson said after meeting Japanese officials in Tokyo.

My old daddy would have called that “whistling past the graveyard.” But daddy knew a crooked deal when it was laid out.