How the cult of shareholder value wrecked American business

[Midpack]

While contemplating the often discussed views on today's work environment, I ran into this article, and thought it was worth reading.

Many people have a low opinion of employers today, indeed it drives many here to pursue FIRE. But how did it happen, employers didn't just quit valuing employees out of the blue. Nor did a generation (largely boomers) just wake up greedier than preceding generations.

In another thread, a member was lamenting the good old days when corporations cared about their employees (promotions, benefits, training, good wages). But why is that, employers weren't simply kinder or more generous in the good old days (the early years of union formation just one past counter example).

I have my views as to the underlying reasons for the historical ebb and flow of employee relations, involving at it's core the desire to pursue wealth from top to bottom - we've all had a hand in it even if most choose to believe otherwise. Beyond that I'll leave it for comment, and just offer the future "punch line" from the articles author - with the pendulum swinging at least in part toward employees once again.

How the cult of shareholder value wrecked American business

My guess is that it will be a new generation of employees that finally frees the American corporation from the *shareholder-value straightjacket. Young people — particularly those with skills that are in high demand — today are drawn to work that not only pays well but also has meaning and social value. As the economy improves and the baby boom generation retires, companies that have reputations as ruthless maximizers of short-term profits will find themselves on the losing end of the global competition for talent. In an era of plentiful capital, it will be skills, knowledge, creativity and experience that will be in short supply, with those who have it setting the norms of corporate behavior.

 

[imoldernu]

The subject has been a sideline hobby of mine since the mid 1980's. Too much to discuss here, but the underlying premise of an intellectual group, looking to the future.
Offered as key words here, for anyone interested in the subject of a different kind of government/employer/employee relationship

CESJ Center for Economic and Social Justice
Just Third Way
Binary Economics Louis Kelso
Capital Homesteading
Capitalist Manifesto (exactly germaine to the subject)

 

[Options]

My thoughts in red:

...

Many people have a low opinion of employers today

...

The average employee does not have a low or suspicious enough opinion of his employer IMO, after everything I've seen. today, employees are an expense. reducing that expense in the most expeditious manner possible is the game.

...

indeed it drives many here to pursue FIRE.

most definitely.

But how did it happen, employers didn't just quit valuing employees out of the blue. Nor did a generation (largely boomers) just wake up greedier than preceding generations.

....

many reasons. a big contributor is since the 1980's outside consultants in all fields (business, reorganization, finance, HR, etc) realized there was big money in researching and teaching organizations how to maiximize their returns on every aspect of their business. this includes reducing/minimizing their investment in employees.

...

In another thread, a member was lamenting the good old days when corporations cared about their employees (promotions, benefits, training, good wages). But why is that, employers weren't simply kinder or more generous in the good old days (the early years of union formation just one past counter example).

....

I would advise anyone wanting "the old days" to get over it. those days are gone for at least the next couple of lifetimes. there is a global glut of labor. it's a simple case of supply and demand with labor on the losing side.

...

I have my views as to the underlying reasons for the historical ebb and flow of employee relations, involving at it's core the desire to pursue wealth from top to bottom - we've all had a hand in it even if most choose to believe otherwise.

...

bingo on both counts. who were these consulting organizations staffed by? boomers. not boomer-bashing here (i'm one), but a major transformation has taken place in organizations going back to the 1960's when boomers took the helm of all organizations. in my own case, until only the last few years i was too stupid to see that I was part of the machine.

...

Beyond that I'll leave it for comment, and just offer the future "punch line" from the articles author - with the pendulum swinging at least in part toward employees once again.

...

not in the next couple of lifetimes. the world of work will continue to get worse for workers as the change is structural, akin to the change brought on by the industrial revolution. cause is globalism, robotics, immigration, among other things. we are in a winner takes all economy and there is no going back

...

Agreed this is yet another reason.

How the cult of shareholder value wrecked American business

 

[CCdaCE]

To me, this long term trend is punctuated with short term actions which are reinforcing the lack of intelligent long term behavior. But, is it the chicken or the egg?

How Investors May Be Getting Fooled by Buybacks - ABC News

Partial quote:

Companies have been spending big on buybacks since the 1990s. What's new is the way buybacks have exaggerated the health of many companies, suggesting through EPS that they are much better at generating profits than they actually are. The distortion is ironic. Critics say the obsessive focus on buybacks has led companies to put off replacing plant and equipment, funding research and development, and generally doing the kind of spending needed to produce rising EPS for the long run.

-CC

 

[robnplunder]

This is from my perspective of being a management in high tech/Sillycon Belly for the last xx years. Generalizing a bit ....

During high tech boom in 2000, Silicon Valley (entire high tech market) were woefully short of qualified engineers. Companies had no choice but to treat employees like kings (at least, like family members). I was a hiring manager at the time and had to use every management skill to hire and retain engineers. Some employees have abused this situation, job hopping every 6 - 12 months to increase their salary level without meaningfully contributing to a company's longer term success. The dot.com bust then completely changed the picture - 180 degree fashion. The change was fast and furious, with so many companies reducing or going out of business, with company stock price going down the toilet, .... Company powers to be are now using all their brain power to cut cost and the largest (and easiest) opportunity to "cut" were the employees and their benefits. Often, it came down to a few people (CEOs and their staff, board of directors) with huge stock options making these calls in the name of defending stockholder value. All they were doing, IMO, were defending their stock options that can disappear before they can cash them in.

 

[eytonxav]

Seems like "how the cult of CEO greed wrecked American business" would have been a better title

 

[Midpack]

But why did CEO's, BOD's, employers, managers, consultants (or who ever you choose) change - just by chance?

 

[robnplunder]

But why did CEO's, BOD's, employers, managers, consultants (or who ever you choose) change - just by chance?

Perhaps, onset of on-line stock trading, internet (company quarterly report became easily accessible along with other info), 24x7 business news channels, ... , contributed? Then, the rest were left to people's greed and selfishness. IMHO.

 

[samclem]

I recall there was talk in some companies of allowing CEOs to cash out their stock options only after they were 10 years old. That seems like a good step.

Are there share classes with disincentives for short-term trading? That would seem to encourage investors who have a long-term approach, and would free the company to do the same.

The changes in the company/employee relationship seems to me to be a not entirely related issue to the problem of corporate short-term focus in decisionmaking. When labor is tight (e.g. US after WW-II), companies will institute programs to keep folks on board long term (e.g. back-loaded DB pension plans).

 

[Chuckanut]

I recall there was talk in some companies of allowing CEOs to cash out their stock options only after they were 10 years old.

No wonder this is so much immaturity at the executive levels. The CEO is a grade school kid!

 

[Midpack]

How about a focus on short term results, and globalization to name just two reasons. Why?

• The main source of the problem is the continuing pressure on public companies from financial markets to maximize short-term results. When/why/how did that start? Were MegaCorp's always fixated on the short term - quarterly results?
• Some executives have managed to ignore this pressure, but it’s unrealistic to expect corporate leaders to do so over time without stronger support from investors themselves. A crucial breakthrough would occur if the major players in the market, particularly the big asset owners.
• The world’s largest asset owners include pension funds, insurance firms, sovereign wealth funds, and mutual funds (which collect individual investors’ money directly or through products like 401(k) plans). They invest on behalf of long-term savers, taxpayers, and investors. Today they own 73% of the top 1,000 companies in the U.S., versus 47% in 1973. So they should have both the scale and the time horizon to focus capital on the long term.
• What role do individual investors play?

 

[eytonxav]

What about CEO objectives that were by no means stretch objectives to achieve, or when outright fabrication occurs so they achieve them.

Hand picked BODs made up of reciprocal directors, as well as Compensation Committees that allow CEOs to point the finger at them when a CEO is challenged over their compensation.

 

[38Chevy454]

I am certainly no expert, and being an engineer I tend to look at things logically and not get caught up in the emotional aspects as much.

Two things I have observed in my working life:
1) Every paycheck the company considers the balance paid up and equal. They owe you nothing once paid, start over for the next pay period. There is no company loyalty to the employee. In fact many view employees as a liability, rather than an asset.
2) The quickest and easiest way for a company to make money is with a guillotine. Chopping heads and therefore labor cost is the easiest way to cut costs for most companies.

Given 1 and 2 above, any wonder why employees now are so skeptical of their employers? I think this is more related to large companies, but of course they get the most news and are the ones we talk about with stocks.

 

[aja8888]

Whoever thought employees were an asset never saw the expense side of the P&L statement.

 

[Midpack]

I am certainly no expert, and being an engineer I tend to look at things logically and not get caught up in the emotional aspects as much.

Two things I have observed in my working life:
1) Every paycheck the company considers the balance paid up and equal. They owe you nothing once paid, start over for the next pay period. There is no company loyalty to the employee. In fact many view employees as a liability, rather than an asset.
2) The quickest and easiest way for a company to make money is with a guillotine. Chopping heads and therefore labor cost is the easiest way to cut costs for most companies.

Given 1 and 2 above, any wonder why employees now are so skeptical of their employers? I think this is more related to large companies, but of course they get the most news and are the ones we talk about with stocks.

Most would agree with your observations, and I'm not suggesting otherwise.

But have companies always viewed employees as you describe above (indicative of short term-ism)?
If not, what changed exactly (the good old days vs present norms)?

As an engineer (me too), I suspect you'd agree that to solve a problem, you have to really understand the problem. Attacking the symptoms isn't effective, understanding the cause(s) is usually the most effective place to start.

 

[ERD50]

I'd say the entire OP is based on a false premise. I'll see if I can get this quote right from a previous post (lack of nested quote option makes this difficult):

My thoughts in red:

In another thread, a member was lamenting the good old days when corporations cared about their employees (promotions, benefits, training, good wages). But why is that, employers weren't simply kinder or more generous in the good old days (the early years of union formation just one past counter example).

....

I would advise anyone wanting "the old days" to get over it. those days are gone for at least the next couple of lifetimes. there is a global glut of labor. it's a simple case of supply and demand with labor on the losing side.

So the old bosses of the coal mines and slaughterhouses 'cared about their employees (promotions, benefits, training, good wages)'? Can you say 'revisionist history'?

Scores of boys worked at the Breaker Pennsylvania Co. coal mine before child labor was finally outlawed in 1938.

I think you'll find that the 'good old days' for employees was when their labor was in high demand (post WWII)?

I agree with Options, it is simply supply/demand. There was a time when in-demand engineers were 'job-hopping' every few years for 30% or more raises. Did those job-hoppers 'care' about their employers or do each shop for the best deal?

-ERD50

 

[38Chevy454]

Most would agree with your observations, and I'm not suggesting otherwise.

But have companies always viewed employees as you describe above (indicative of short term-ism)?
If not, what changed exactly (the good old days vs present norms)?

As an engineer (me too), I suspect you'd agree that to solve a problem, you have to really understand the problem. Attacking the symptoms isn't effective, understanding the cause(s) is usually the most effective place to start.

Agree with your comment about you must understand root cause in order to put an effective corrective action into place. One of my biggest recommendatiosn to younger engrs is to keep asking why, until you reach the end of the questions process. That is your root cause and at that point you can develop corrective action plan.

My orig post was merely stating observations. I was not trying to solve the problem, or even to really try and identify the problem. Just a couple observations that seemed to support the contention that short-term focus has changed the company-worker relationship.

I wish that we could get away from the short-term, quarter-to-quarter focus. I do not think it benefits a company for long term success if you are shifting focus to the short-term.

I am not sure where the transition occurred. I do think that the move to 401k/403b plans with company matching funds vs the old defined benefit pension plans was a major step in this direction of short-term focus. This supports my orig number 1: once paychecks are issued the balance slate is clean and start over again.

I also would contend that the availability of instant information, especially with company information good or bad, has exacerbated the reactions of stock price for a given company. It increased volatility of the market as a whole, and made it a lot easier to be short-term focused, and subsequently reactionary actions by investors.

 

[Midpack]

Many people have a low opinion of employers today, indeed it drives many here to pursue FIRE. But how did it happen, employers didn't just quit valuing employees out of the blue. Nor did a generation (largely boomers) just wake up greedier than preceding generations.

In another thread, a member was lamenting the good old days when corporations cared about their employees (promotions, benefits, training, good wages). But why is that, employers weren't simply kinder or more generous in the good old days (the early years of union formation just one past counter example).

I'd say the entire OP is based on a false premise. I'll see if I can get this quote right from a previous post (lack of nested quote option makes this difficult):

So the old bosses of the coal mines and slaughterhouses 'cared about their employees (promotions, benefits, training, good wages)'? Can you say 'revisionist history'?

My statement in blue was precisely to point out the 'good old days' doesn't look back far enough. The workplace has gone from awful, to much better, and less so again. I suspect you'd both agree with most that the workplace has generally become less employee friendly over our (boomer) lifetimes, the fundamental question was why (in our lifetimes)?

I agree with Options, it is simply supply/demand. There was a time when in-demand engineers were 'job-hopping' every few years for 30% or more raises. Did those job-hoppers 'care' about their employers or do each shop for the best deal?

No question (job) supply & (employee) demand is a significant factor among several. But you don't think the fixation on very short term earnings/results by public corporations (unlike a few generations ago) and globalization have played a role?

 

[ziggy29]

Whoever thought employees were an asset never saw the expense side of the P&L statement.

Like Costco?

And for what it's worth, adding value for shareholders is not, itself, "wrecking" American business. The overemphasis on *this* quarter's earnings, even to the detriment of longer term growth prospects, the fixation on Wall Street's demands to "hit the numbers" this quarter and EVERY quarter, well, THAT is (IMO) a big part of the problem. Privately held companies not only have the luxury of treating employees better if they choose (no Wall Streeters to demand they slash wages and issue pink slips), but they can also manage with an eye on a much longer period of time than obsessing about *this* quarter. It's not an accident that more and more of the "best places to work" on the prominent lists each year are privately held.

 

[Walt34]

A few years ago we went on a short history tour of the southern part of WV where the "coal mine wars" started. The working conditions were something that are considered "brutal third world" in the U.S. now, and probably not much different than get people aghast at China and North Korea now.

It was an enlightening and interesting history lesson. 12-year-old boys were considered expendable fodder for the mines. While there have since been excesses on the part of unions, there is left little doubt that they were needed in that time and place.

So the old bosses of the coal mines and slaughterhouses 'cared about their employees (promotions, benefits, training, good wages)'? Can you say 'revisionist history'?

Scores of boys worked at the Breaker Pennsylvania Co. coal mine before child labor was finally outlawed in 1938.

-ERD50

 

[ERD50]

... No question (job) supply & (employee) demand is a significant factor among several. But you don't think the fixation on very short term earnings/results by public corporations (unlike a few generations ago) and globalization have played a role?

Well, I have no data to back it up, but it seems reasonable that short term thinking (driven by the speed of the internet, CEOs getting short term rewards from their BOD friends, etc) has played a role. I'd say that globalization is just a factor in supply/demand.

I suspect you'd both agree with most that the workplace has generally become less employee friendly over our (boomer) lifetimes, the fundamental question was why (in our lifetimes)?

Hmmmmm, ...... undecided.

I stared work at MegaCorp in the mid 70's. Many jobs were considered 'women's work'. A few years later, 'diversity' programs were started, and while I might disagree with how they were done, I think I'd agree that there was a valid reason for them. Would a person with some physical handicaps have been accommodated? It's different - better or worse may depend on lots of things.

Also, In the 2000's, I was not the same person nor at the same level as I was in the 1970's. Comparisons are difficult, we come from a different perspective. Though I'll say that email and 2-way pagers and cell phones sped things up, and that could cause a lot of stress. But they also relieve stress (hey, with a call/click I can find out that was taken care of - relax!).


I'll go back to the supply/demand thing as the main driver, along with short-term thinking. And I guess, the time's (and each of us) they are a-changing.

-ERD50

 

[M Paquette]

View attachment 18371

 

[aja8888]

Like Costco?

And for what it's worth, adding value for shareholders is not, itself, "wrecking" American business. The overemphasis on *this* quarter's earnings, even to the detriment of longer term growth prospects, the fixation on Wall Street's demands to "hit the numbers" this quarter and EVERY quarter, well, THAT is (IMO) a big part of the problem. Privately held companies not only have the luxury of treating employees better if they choose (no Wall Streeters to demand they slash wages and issue pink slips), but they can also manage with an eye on a much longer period of time than obsessing about *this* quarter. It's not an accident that more and more of the "best places to work" on the prominent lists each year are privately held.

I have to agree that privately held companies are probably the best places to work these days, and I have worked for one over a decade in the past and it was not all peaches and cream.

In profitable ones, greed can set in and the owner (or small group of owners) can make life tough on the employees and do so with minimal Board intervention or any regulatory scrutiny. Situations created by management could include micro managing, compromised decision making, setting people up for failure, favoritism etc.

Some smaller, privately held companies can also suffer from what's called the "founder's dilemma" which could stagnate growth and become a deterrent to business expansion, etc.

A good read:

The Founder's Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup (Kauffman Foundation Series on Innovation and Entrepreneurship): Noam Wasserman: 9780691149134: Amazon.com: Books

 

[daylatedollarshort]

U.S. workers work the most hours of any country in the world, and have less vacation time than medieval peasants -

Why a medieval peasant got more vacation time than you | The Great Debate

"Go back 200, 300 or 400 years and you find that most people did not work very long hours at all. In addition to relaxing during long holidays, the medieval peasant took his sweet time eating meals, and the day often included time for an afternoon snooze. “The tempo of life was slow, even leisurely; the pace of work relaxed,” notes Shor. “Our ancestors may not have been rich, but they had an abundance of leisure.” Fast-forward to the 21st century, and the U.S. is the only advanced country with no national vacation policy whatsoever. Many American workers must keep on working through public holidays, and vacation days often go unused."

It is no wonder this forum is so popular!

I'd much prefer more free time over working for some corporation that had a manager like the guy in the latest Cadillac commercial -

http://www.huffingtonpost.com/2014/02/26/this-commercial-sums-up-e_n_4859040.html

 

[clifp]

ERD said most of what I was going to say about the good old days not being as good as we might remember them..

I also disagree that big companies any more short term oriented now than there were 10,20, or 30 years ago. In fact I'd argue that the most successful companies have incredibly long term view more so than anytime in the past.

Now I think all firms probably practice earning tricks, but short term to me means sacrifice big long-term gains for small quarterly gains. Firing works doesn't count, scrimping on safety or environmental issues, canceling R&D, and not investing in new factories, maintenance. I don't think most big Oil (BP probably is/was the exception) companies are very short term oriented. They have tons of projects which will take 5,10 even 20 years to make money. Railroad companies invested record amounts this year in infrastructure and rolling stock.

Dow companies, like Disney, 3M, JNJ, GE, Walmart all have mutli-year R&D or new facilities scheduled who's pay off is until 5, 10 or even longer. Clearly if there were obsessed with quarterly return they would skimp on these projects, but I really don't see evidence that do considering their long term track record.
Obviously Warren Buffett is the classic long term investors, with his ideal holding period being forever.

But what really impresses me is the late 90s and 2000 era tech entrepreneurs. Amazon very seldom makes money, That is because Bezo is constantly investing all the money he makes selling books etc. into Warehouse, new product lines,and wacky ideas like drones for delivery of orders. The Google guys are upfront with their investors, telling them they are investing for the long term,and don't care about short term results. Looking at Google Labs it is pretty clear they have some long term projects. Facebook is maybe not so long term focused, but don't seem to be obsessed with hitting the numbers. There are some tech companies like Zynga which are very short term focus, but they seem to be dying.

Finally you have Elon Musk, who companies have really short term goals like, electrifying transportation in the world, and colonizing Mars..