Sunday, October 27, 2019

The management class v. the steward class.

Ben Hunt has written an excellent article on pervasive management failure of "pretty much every public company over the past decade."
Public companies are managed today to mortgage the future OVER and OVER and OVER again, for the primary benefit of management shareholders and the secondary benefit of non-management shareholders.[1]
Taking care to grow through innovation and investment in productive assets has not been the watchword of American corporate management. Hunt focuses on one company, Texas Instruments, to show in excruciating detail what short-sighted manipulation and greed have done to the company and says it’s pervasive. Short-term profit and bugger future prospects.[2]

Hunt's definition of "financialization" is worth the price of admission alone. Shades of moving tens of thousands of factories to China as though there were no tomorrow and the only thing that should matter to a corporation is third-world wage rates.

This is truly a must-read piece. Even I, a stock market and business neophyte, wondered at the pervasive practice of share buybacks to goose management compensation based on share price. Surely, I thought, far-sighted managers would take advantage of basement-level loan costs to throw money straight at the core business of the company whether in the form of research or productive assets. But Hunt observes:

The Adam Neumann [WeWorks] story is repeated in a non-infuriating and non-obvious way every day in every S&P 500 company. And it’s been going on for a DECADE.[3]
To understand the reference to Neuman read about his life of grime here.

It's the same with another stellar American company, Boeing, much in the news lately for its troubles with the 737 Max:

Conventional logic says companies buy back stock when they perceive it as the most efficient thing to do with their profits. It’s also an alarm bell warning of unimaginative/poor management. Perhaps the right thing for Boeing to have done in the mid-2010s would have been to invest $10 bln to develop a new modern smaller regional single airliner? Instead Boeing’s bosses went with the bull stock market, stuck some bigger engines on the venerable and increasingly unbalanced B-737 and gave it the snappy Max moniker, while awarding themselves bigger bonuses.

The cost of the Max debacle will far exceed $10 bln and could crush the company. Their failure to invest in the future during times of easy money is the ultimate management failure – failing to ensure the company’s long-term future with new products. Instead they chased a higher stock price and higher bonuses juiced by the buybacks.[4]

To really add to your understanding of the financial realities of our times I can't recommend the movie "The Big Short" enough. It's highly, highly entertaining given what you'd think is a dry-as-dust topic like the functioning of Wall Street.

Bottom line, the American economy is like every single other aspect of Western civilization now: Zero understanding of basics, zero foresight, complete and utter leadership abdication, if not rancid betrayal.

[1] "The Last 10 Years Have Been 'An Unparalled Transfer Of Wealth To The Managerial Class.'" By Ben Hunt, ZeroHedge, 10/25/19.
[2] I don't care much for the notion of "greed" used in connection with "capitalists" or "corporations" as it invariably encompasses profitable activity to contribute something of value by fair means. I'd like nothing better to have a wildly successful company whose profits would enable me to support people I admire and causes I think are worthwhile. However, enriching oneself with no regard for the health of the enterprise or society at large is greed to be sure. Personal benefit with no value added, or even value subtracted.
[3] Hunt, supra.
[4] "Instead Of Buying-Back Billions In Stock, This Is What Boeing Should Have Done." By Bill Blain, ZeroHedge, 10/26/19 (emphasis removed).

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