Thursday, June 27, 2013

Thematic Thursdays: Don't Blame the CEO

Shareholder value - the force that drives the self preservation instinct as well as the animal spirits in virtually every corporate leader - is the scheme by which corporate chieftains and activist "investors" can extract lots of money via the stock market under the guise of improving corporate performance (mainly profitability)*. The structure of the scheme is fairly straightforward: an activist "investor" targets an underperforming (usually) publicly-traded company and threatens to upset the sleepy apple cart primarily via cost cutting, which usually involves lots of firings, benefits reductions, facility closures, outsourcing, and, (uh oh) often includes firing existing senior management**.

Now, one doesn't need the activist investor to actually take action to bring about the desired result. Merely the possibility of such action is often enough to get existing corporate management to toe the shareholder value line. Then there's the pressure on (and from) traditional institutional investors who, while not necessarily soiling their hands by directly engaging in corporate activism (wink wink), are well aware of shareholder value's attributes and advocate for its outcomes. After all, higher market values is the name of their game, too.

Of course, for those more enlightened CEO's and other senior managers, higher stock market values and the ability to reap the enormous benefits via virtually risk-free stock options (with price resets, if needed) is an personal finance aphrodisiac too powerful to resist. And in the process, the longer term suffers for the short term. For the reality is that in today's capital markets shortermism is the name of the game.

So, where is the governor, the moderator, the protector of society at-large and the working man and woman (who just happen to be consumers in all this)? Where's the bigger picture perspective, one that takes into consideration the larger socioeconomic effects of higher unemployment rates, worker displacements, and stagnant real incomes that shareholder value facilitates? Well, that would be none other than our trusty elected officials. But when a system is constructed whereby the levers of power can (almost) only be achieved by spending large sums of money, then those who rise to positions of executive, legislative, and regulatory power are logically beholden NOT to those who pulled the voting machine levers BUT to those who helped persuade those who pulled the voting machine levers. Hence, the money game in politics. A political Svengali act if there ever was one.

Is this a Scalia-like rant, a rage against the machine? Nope. It's merely a dispassionate assessment of how things are - not how they should be, for that would require a whole new socioeconomic compact, something that a tiny handful of individuals and institutions dream will one day become a reality. And while dreams can come true, the reality is that we live in a world where a famous dead idealist who once said "I have a dream" has morphed into a world where a self preservation politician now says "I have a drone".

Investment Strategy Implications

New England Patriots' head coach, Bill Belichik, is famous for his expression "Do your job", exhorting his players to focus on the task at hand. And doing their job is exactly what today's CEO and other senior corporate management staff do when it comes to what and how they run their businesses. Self preservation melds with self interests in the act of maximizing corporate profitability which begets an increased shareholder value which begets mucho dinaro for some.

Oh, sure there are lots of flowery Obamaesque language about being a solid corporate citizen with token gestures made to that imagery. But the reality is that (a) all such efforts are done with the thought as to what it means to the top and bottom lines of a business, as a good image is almost always good for business (unless you're a bottom feeding, Madonna Ciccone/Lady Gogo/Keith Richards/being skanky-is-my-style type) and (b) it's largely inconsequential in the total scheme of things ("the scraps from Longshanks table", says William Wallace).

This is a complicated, tangled web of factors that will not be reversed until such time when the scheme runs its course and pushes the global economy over the edge. And when that day occurs, then an extreme response will likely be the successor. Until then, don't blame the CEO. He/she is just doing their job.

*It is also a scheme by which pubic policy is impacted (tax policy, for example), a topic that would be far too extensive to be covered here.

**The justification for the scheme is straightforward, too: the financial markets are efficient and, therefore, represent the true risk and reward of a company's business. Accordingly, any improvement in the financial circumstances of a publicly-traded company will be reflected in its stock price. Ipso facto. Of course, this neglects the facto that a publicly-traded company's stock price is impacted by a myriad of factos, many of which have nothing to do with or under the direct control of corporate management. By why let a few pesky factos get in the way of a fantastical money making scheme.


Thematic Thursdays is a product of Blue Marble Research Advisory and focuses on important global trends and themes impacting the global economy and markets and an integral part of the three-legged stool approach of Blue Marble Research.

On average, thematic issues are longer term in nature, transcending the business cycle in time and economic sector categorizations. However, many shorter term players in the financial markets use trends and themes as a staple of their investment strategy. Understanding how to incorporate thematic analysis - along with fundamental and technical analyses - is an integral part of the process that forms the three-legged stool of the analytical approach employed by Blue Marble Research Advisory.

To learn more about Blue Marble Research Advisory and its integrated approach to investment strategy and decision-making, click here!

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