Jamie Dimon and The Business Roundtable recently made
headlines re “shareholder value” and the “purpose” of corporations. Long overdue, but still insufficient.
In 1976, on becoming
an officer of General Mills, I began to be invited to management retreats. I regularly had appeared before the board and
top management as part of the “venture teams” that were indulging in (runaway?)
mergers and acquisitions, taking us into toys and games, specialty retailing,
restaurants and fashion. (GMI has
subsequently divested itself of all of these – but that’s a different
story.) The point is that despite being
a new and very junior officer I was confident and comfortable with top brass
and unrestrained in speaking up.
At that time of increasing rates of inflation, how to set GMI’s
annual goals was a lively issue. Henry
Porter, whom I had in a minor way helped Bo Polk recruit to General Mills, was
our brilliant, hard-charging Treasurer. (It’s an interesting feeling watching
someone younger attain high position before you; in my case, more bemusement
rather than resentment for I acknowledged Henry’s brilliance.) Henry was a crusader for “shareholder value”
as the prime measure of success and the metric of our corporate goals. “Shareholder
value” is a just fancy way of saying stock price.
I along with Bernie Loomis of Kenner and a couple of others
argued, year after year, against this simplistic goal of increasing “shareholder
value” because translated into action it meant focus on quarter-over-quarter
gains in earnings per share at a rate higher than the inflating CPI, and catering to investment analyst lemmings. I was a member of a squad who regularly met
with industry investment analysts; my beat was the Toy and Amusement Industry
gurus, who really didn’t know much more than what they were fed by me and other
company spokespersons as I.
My beef with shareholder value was and is that it rewards
short-term thinking and penalizes investment of energy and capital in long-term
opportunity. I always lost those debates
with Henry; he was the more articulate, had more at stake than did I, and had
the backing of stock-option motivated top management. One evening at such a retreat at a flossy
golf club, Bob Kinney, then President of GMI, and I were relaxing and amusing
ourselves on the putting green. I not
only lost money to Bob but he gently but firmly shut me down as I reprised my
concerns about focus on stock price and market esteem. “Fletch, just put one quarter ahead of the
last and everything else will take care of itself.” Two corporate moves later, at UAL/Westin, CEO Dick Ferris won my respect when he refused to allow release of quarterly
estimates to the market for the same reason of not indulging short-term focus. His reward was the financial markets turning
on him and on our creation of an integrated airline/ hotel/ rental car/
reservation travel company and helping corporate raiders -- Icahn, Trump, the
Basses and finally the Coniston Partners -- to break up UAL.
Now, forty-some years later, comes Jamie Dimon and The
Business Roundtable pronouncing on August 19th that shareholder
value is not enough, that a corporation should adopt as its purpose “to deliver
value to its customers, . . . to invest in its employees, . . . to deal fairly
and ethically with its suppliers, . . . to support the communities in which it
works, . . . and to generate long term value for its shareholders.” The 181 CEOs who signed on were not motivated
by my concern about short-term focus. They were more concerned about the
Elizabeth Warrens and Bernie Sanders of the world who are challenging the very
foundations of corporate rights and structure. And they
are right to be concerned and right to adopt these self-evident and self-servicing
“purposes” (for what sensible business leader other than the con-artist-who-shall-not-be-named would expect to succeed by delivering shoddy value, screwing
his employees, screwing his suppliers, and weakening his community?)
As laudable as is this statement of “stakeholder capitalism”
signed off on by Tim Cook of Apple, Jeff Bezos, Jamie Dimon, Ben and Jerry,
Muilenberg of Boeing and Barra of GM and their 174 compatriots -- it is
insufficient. It won’t help return
long-term thinking to the forefront or encourage investment and opportunity
seeking. And the immediate push-back
from the editors of The Economist and The Council of Institutional Investors
demonstrates that more must change than just anodyne statements of
purpose. Corporate goals and management
incentives must change. Society’s tolerance of privatization and mergers must
change.
Re goals: long-term objectives, strategies, tactics and
annual goals must be set for each “stakeholder” and management held accountable
for performance on each one.
Re management incentives: managers should not be rewarded in
stock. Yes, not; pay management in
cash. The old saw about “aligning
management goals with shareholder interests” is crap, a glib rationalization
for management taking excess rewards.
Shareholders, most of whom are fund managers, have no loyalty to
companies or to its long-term goals.
Their rewards and penalties are today’s price rises and falls and the fees they can collect. Remove
management’s near-sighted dependence on stock awards and options and you will
free them to look up and outward and to become better business developers and
stewards of your investment. Pay them in
cash and you will steadily reduce the compensation gap between them and their
employees. Pay them in cash and you will
deter stock-buybacks and encourage new investment and search for new
opportunities to use capital.
Re privatizations and mergers: we need more corporations, not
fewer. In 1998 there were some 7,300
corporate equites listed on US market exchanges. Today there are around 3,600. Imagine that! In but two decades, at a time
when low yields on bonds drive investors toward equities, your choice of what
to buy has been halved. Little wonder that the bull market continues despite
worries and risks ever more evident; more investors are chasing fewer things to
buy. The FTC and DOJ must change their
permissive stance on mergers and acquisitions.
Privatizations must be constrained. (I have no idea how to do that but
smarter guys than I, young Henry Porter types, ought to be put to work on how to
reduce private equity tale-overs through tax and regulatory constraints.) I repeat: we need more corporations, not
fewer.
Corporations must change themselves or be changed. The fault is not narrow purpose or lack of recognizing
stakeholders. The fault is management
rewards and incentives and inadequate regulation of stock buy-backs, mergers,
acquisitions and privatizations. Stakeholder capitalism is and always has been
the foundation of a healthy, growing, equitable economy, but the way to realize
it is to change management’s goals, rewards and attentions and the rules of the
game they play.
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