The Fallacy of Stock Price and Other Disturbing Things

“When you have some spare time, read this.” [piece in the Harvard Business Review]  That was May of 2017 and the request was from… a VIP-  I should have responded sooner.  25 revisions later the topic is still stuck in my head.

Screen Shot 2020-11-22 at 9.18.08 AM

Broad Themes

A few themes of the piece (editorialized by me):
-Stock price is a grossly overweighted indicator of success, and many large companies now make shortsighted decisions to gain favor in some aspect of the market.
-Capitalism is good at comparing the prices of goods & services and at valuing risk. It is bad at assessing the value to people (both employees and society), especially over time.
-The dominant financial system disproportionally rewards anonymous investors, but that anonymity throttles the information that investors might want to use to represent their interests in the market.
-That same anonymity creates a slippery slope of moral hazards that neither investors or managers are well suited to navigate. Some cultural norms have made it even harder for individuals as investors, or as actors in corporations, to make clear judgements about ethical behavior.
-Laws are poor substitutes for good judgement and ethical behavior.
-Corporate personhood as we currently have it, fails to account for the difference in lifespan and in needs that actual people have. Corporations can live forever so long as they can excrete profit.
-Real leadership requires a unique blend of passion, moxie, and humility that isn’t easily taught in your local MBA program.

Broader Responses

The most important role of corporations in society is to make incredible things happen. Corporations enable leaps forward in technology (and subsequently quality of life) to which no other paths exist.  We remember Ford for interchangeable parts, and Google for making the internet useful. Corporations ostensibly bring people and knowledge together to solve really hard problems and share the rewards (somewhat) in proportion to their labors. This can be a great thing, but many improvements are needed to properly account for the associated social and environmental costs (among others) and ensure equitable renumeration. We, as non-corporate people, also have to understand that that markets will never be perfect, and that government (or society at large) has some role in assigning costs that cannot otherwise be assessed. It’s easy to miss the range of functions that corporations perform simultaneously. If nothing else re-prioritizing some of the more societal functions will make organizations more attractive to talent.

As an engineer, I tend to focus more on the technical specifics of what a business does. My dominant view is that “the product” is the most important aspect of a business.  Most of this article got me thinking about how different running a business is from just doing cool stuff that people want to buy. You can’t do cool stuff if you don’t have any capital, aren’t making any money, or don’t have structures in place to organize the effort.

This piece did not especially help me understand a different question I’ve been thinking about since I stopped doing manual labor for a living: “why do we get paid what we get paid for what we do?*”  Modern capitalism perpetuates some bizarre inequalities between occupations that don’t make sense to me. Many occupations that are highly compensated return low value to society- and many functions that provide essential social value are poorly compensated (like teachers). I’ll keep looking for this one…

I can’t read this article and not think about leadership on an intensely personal level. We follow the people because we believe in the vision they see- to the top of a mountain, or the top of an earnings statement. The responsibility in following someone lies on each of us to make sure that those leaders can actually get us there. Do they have knowledge and experience and some scars to inform that vision? Or do they just talk louder, promise bigger, and blame someone else when it goes wrong? We follow leaders because we’ve seen them take a little more share of the blame and a little less of the credit than they deserve**.

I spent most of the summer reading “Basic Economics” by Thomas Sowell. It’s an excellent explanation of how pure capitalism is supposed to work. Supply vs demand, price signals, invisible hand… helpful to understand, but fails to tell the whole story.  Particularly now, as stock prices have already recovered from a bear market but millions of people and businesses are insolvent, it is clear that shareholder value does not tell the whole story. As we consider other looming “major disruptors” like climate change or unprecedented wealth inequality, the rest of the story is yet to be told.  It’s clear to me that the societal functions & impacts of corporation decision-making need a lot more consideration.

Standout Quotes

If you don’t read the piece, these are the direct quotes that stood out to me.

“…and that many chief financial officers are willing to forgo investments in projects expected to be profitable in the longer term in order to meet analysts’ quarterly earnings estimates. According to surveys by the Aspen Institute, many business school graduates regard maximizing shareholder value as their top responsibility.”

“As a result, managers are under increasing pressure to deliver ever faster and more predictable returns and to curtail riskier investments aimed at meeting future needs and finding creative solutions to the problems facing people around the world.”

“Moreover, the fact that they can hedge or immediately sell their shares and avoid exposure to the longer-term effects of that vote makes it difficult to regard them as proprietors of the company in any customary sense.”

“In a well-ordered economy, rights and responsibilities go together. ”

“prioritizing high returns on invested capital for initiatives at GrowthCo, and introducing more shareholder-­friendly governance, including tighter alignment between executive compensation and returns to shareholders. The plan would effectively dismantle DuPont and cap its future in return for an anticipated doubling in share price.” (I think this is called killing the golden goose)

“Such a model would start by recognizing that corporations are independent entities endowed by law with the potential for indefinite life. With the right leadership, they can be managed to serve markets and society over long periods of time.”

——

*One of my favorites from working in Missoula and not making a lot of money
**not my line. Credit to Seth Godin, I believe.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s