Charlie Price's  Instablog

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Alan von Altendorf Comments (1559)
 
I found Haque's thesis shallow and skewed. He wrote:

>Bankers didn't care about the loans they issued. Boards didn't care about bankers. Shareholders didn't care about boards. Markets didn't care about shareholders. Communities didn't care about markets. Society didn't care about communities. No one cared much about society.

Note the universals: all bankers, all boards, no one

Worse, he conflates human agents and impersonal aggregates ("Markets didn't care"). It's absurd, disingenuous, deliberately blowing smoke to claim that no one cared about society during the Bush years, by smuggled implication.

I'm glad you brought this to my attention, Charlie. Another reason to question anything and everything coming from Harvard.
28 Feb 2010, 10:41 AM Reply Like

Charlie Price Comments (1992)
 
I agree his thesis is shallow, but from my experience, some of his observations are true and I think he prompts some relevant questions, even if he doesn't have the answers.
1 Mar 2010, 07:36 AM Reply Like

Jeep Comments (1771)
 

We didn't care? If Mr. Haque would like to tell us what he did during the last half decade for others, I'd be interested in hearing it. You know, things like how much time he spent working at soup kitchens or how much of his salary he gave to help those folks who really can't help themselves.

Usually, though, I find that people--and especially academics--who talk like this do very little themselves. It's the rest of us who they want to do things.
28 Feb 2010, 07:18 PM Reply Like

Charlie Price Comments (1992)
 
In my view we lost something over the last half century, rather than half decade. We gained a lot else, but we did lose something. Society will keep on changing, someways for the better, someways not.

You are right to be suspicious but the article made me think a bit about my own values.
1 Mar 2010, 07:47 AM Reply Like

bob adamson Comments (4492)
 
For the purposes of this comment the focus is on management practices that are not subject to criminal prosecution or civil liability. Rather, the focus is on practices that are quite legal, are in the narrow short term interests of the shareholders and senior management but are ‘selfish’ in the sense that the longer term interests of others who count on the corporation are ignored or knowingly prejudiced.

When we see practices that are harmful to employees, customers, the community and even the long term interest of the corporations they manage followed generally by senior management of corporations, it is natural to
(a) ask whether senior managers, as individuals, are taking all practical steps to avoid following these practices, and
(b) hold these individuals ethically accountable where it is evident that they are not actively trying to avoid such practices.
While this is appropriate, it is not sufficient if the general standard of conduct is to be raised. Further, simply focusing coercive sanctions in the individual senior managers who are found to have followed such objectionable practices would probably have a limited and disappointing net benefit to the larger interests mentioned in the first paragraph above. The real need is to address the underlying causes that foster the bad practices in question.

What is the context in which the typical CEO now operates and how has that context changer from an earlier time? The answer suggested below is undoubtedly an oversimplification but, arguably, broadly relevant and, even where a particular corporation is not directly changed in the ways to be described, the practices within that corporation will be modified because of the practices adopted by its competitors and because of the expectations of the shareholders and other managers in the corporation.

Over the past half century there has been an accelerating shift away from debt and into equity as the vehicle for financing corporate growth and, insofar as debt is incurred, this is increasingly done on a short term basis. At the same time, shareholders are increasingly divorced from issues related to the management of the corporations within which the hold shares and shareholder focus is increasingly narrowed to questions of short term stock value appreciation within a diversified portfolio rather than on the long term development of a corporation with which they identify. The boards of corporations increasingly reflect the narrow short term interests of shareholders as just described. This leaves the typical senior management team of a corporation largely autonomous to set management policy but very vulnerable should they fail to ‘maximize shareholder value’ as measured quarterly.

In the environment just described, the short term advantage of the leveraged buy-out, the closing of profitable domestic plants to take advantage of potentially even more profitable off-shore or outsource opportunities, the now discredited mortgage and consumer lending practices that almost brought down the banking system, (fill in your further examples of questionable short term ploys for quick profit) all have an added allure or are seen as a regrettable necessity if one or one’s corporation is to stay in the game.
In summary, the corporate culture has changed with ownership becoming increasingly divorced from management and with both owners and senior managers increasingly focused on narrow short term interest and, with this change, the incentive and seeming justification for senior management to adopt and follow ‘bad’ practices as discussed grows apace as does the penalty perceived by many senior managers if they resist the adoption of these practices.

It is true that many small businesses, particularly start-ups involving young professionals in ‘new’ industries exhibit high levels of employee and manager equity holding and ‘flat’ management and decision-making structures and high levels of community involvement etc. Unfortunately, many of these qualities are lost or compromised as such businesses grow.

The forgoing is long on critique and, unfortunately, short on suggestions for improvement.
1 Mar 2010, 11:46 PM Reply Like

Charlie Price Comments (1992)
 
Bob, to identify solutions, you first have to define the problem. I think that you are right to identify this as one of the problems. I agree that management and ownership have become increasingly separated and, partly as a result of this, short term motives take priority over long term ones.

As for solutions, I'm not sure. Arguably there are things that you can do with taxation of long, or short term capital gains and regulation around corporate governance; but I would always prefer to let the market find an answer, once we are sure that any perverse incentives have been removed.

BTW I think you might have meant "accelerating shift away from equity and into debt" rather than the reverse.
2 Mar 2010, 09:11 AM Reply Like

bob adamson Comments (4492)
 
Charlie –

On the shift between debt and equity matter, I actually meant what I said but your response illustrates how complex this aspect of the pattern really is.

My earlier point was that in an earlier pattern of Capitalism the ownership of corporations tended to remain in the hands of a continuing coalition of stockholders who held their controlling interest for the long term. To prevent dilution of their control corporate borrowing rather than a further common stock issue was the preferred way of raising money for expansion. The preference for issuing preferred shares also reflected that desire to maintain control. Clearly there could be downsides to such patterns of control but, at least, there was a controlling group having the long term interests of the corporation (albeit as defined by them in terms, often, of their narrow interests).

You are quite correct to observe that in the era of the leveraged buy out it is often in the narrow interest of the management team installed by the successful raider to dilute equity or strip asset value by imposing debt arrangements on the acquired corporation that severely weaken that corporation’s long term prospects. Poison pill strategies and an excessive focus on the quarterly report can also prompt the acquisition of debt on terms that are not in the longer term interest of the corporation. The use of short term stock options to reward senior management is a related issue.

Underlying all this is a tendency to expect and even welcome short term expediency in support of the immediate interests of both senior management and shareholders neither of whom plans to remain associated with the corporation in question for more than a short while.
2 Mar 2010, 01:15 PM Reply Like

Al-USA Comments (699)
 
The problem is capitalism... There now that its out in the open, something can be done to fix it. More on this later.
3 Mar 2010, 05:53 AM Reply Like