Just wondering how large corps, esp, can be so short-sighted about decisions for new work and/or finding new markets to save their necks? I guess it’s because the corporate giants dont’ have to give a crap. They got someone paid to crap all over their little employees for them, right? - Jinx
Because their entire management structure are rewarded for quarter-by-quarter results, which in turn is because the share market rewards them for quarter-by-quarter results. No-one gives a flying fuck for anything beyond the end of the next financial year, because there is absolutely no reason to do so on an individual, departmental, or corporate basis.
It’s even worse than that, isn’t it? Isn’t there a legal obligation to “maximize shareholder profit”?
Well that’s not quite right. It is in everyone’s best interests to have a continuous run of good quarters, provided everyone feels that their long term future is tied with the company.
I think what it comes down to is the length of time that the individuals involved will be running the company. If they view it as a short term venture then they will maximise profits in the short term to the detriment of the long term. A CEO who intends to stick with a company for longer will naturally have a long-term focus.
This, coincidently, is a down side of governments that are elected every 3 or 4 years. They are compelled to produce short term results in the hope that they will be re-elected. This does not necessarily result in good decision making.
Corporations, like most large institutions, are very conservative in their outlook. Thinking long term often entails some bit of risk. Basically, betting that the long term payoff will be better than the immediate gain is not the kind of thing that institutions like to do. There are exceptions, of course.
No. Nothing legally prevents a company from having flat profits or requires it to make the value of its stock increase.
Of course, shareholders expect that, and if you don’t, someone is likely the try to take you over, so it is alway a concern that a company increases share value (or pay attractive dividends). But if the company decides to take a course of action that hurts its stock in the short term, there’s nothing illegal about it.
The quarterly reporting is a big issue. If faced with two projects – one that will show results in six months and another that might show results in five years, the six-month project will get priority. Stockholders don’t like spending money that won’t improve the stock price for years, and companies try to make the stockholders (and, more importantly, the stock analysts) happy.
The clear example of this is Enron, but, of course, that’s extreme. But many companies try to manage things much in the same way – to have good news each quarter – so they are not equipped to forego current profits for long-term ones, even if in the long term it will be better for the company.
Big enough brush to paint with?
How large is a “large corporation” in your mind? Why do you believe them to be short-sighted? What makes you believe that they don’t, in fact, seek out new markets?
You people act like companies aren’t in the business to make money. If there is sufficient pressure to do so, a company will seek out new ways to increase profits.
Could you speak in fewer generalities, please.
For every silly, short-sigted decision, there are companies that make long term decisions and have been around for 100 years, paying steady quarterly dividends. And they’ll be around 100 years from now.
And don’t forget that these short-term decisions sometimes turn into real long term profits for companies.
Your post sounds like a parrot wrote it. Is there a particular example you’re upset about?
Corporations make the same sort of short-sighted decisions that people do because they are agglomerations of people.
Simple, wasn’t it?
I was thinking exactly the same thing. Think of the proportion of people that still don’t save for retirement. We all know its comming. Most would rather get a few more toppings on the pizza than save for tomorrow.
Most large corps that are short-sighted many have a lot of combat units but despite their large size lack sufficient recon units
Nowadays, they more often seek out smaller companies who are developing new markets.
Yes, but that does not mean maximizing profit in the next quarter. If a corporation was run with a strategy of taking modest losses over the next few years, with a strong prospect of building up capital or long-term-future profits, that would be completely consistent with maximising shareholder profit.
Actually, you’re supposed to increase shareholder value, i.e., stock price. Profits, many times, have nothing to do with value.
Why shouldn’t they? It makes more sense than starting from scratch and quite often provides a mutual benefit to both companies. Sometimes it doesn’t.
I think what people don’t really get is that a mature business is actually pretty boring. Once all the infrastructure is in place and the deals signed, it’s pretty much just a matter of making sure everything runs fine. A lot of people like small start ups because they have this chaotic sense of excitment that comes with doing everything for the first time (and because they think they will grow with the company). A lot start ups never get any furthur along than that because they can’t settle into the routine of just running a successful business.
Corporations exist for only one reason; to make more money. They are as short-sighted as they need to be to accomplish this goal, by the yardsticks that they have chosen to measure by (i.e. quarterly and yearly profit reports). All decisions are based on this premise and nothing else registers as a consideration. They are like a parasite that consumes and kills its host because all it can do is consume; it has no tools for keeping the host alive to feed it in perpetuity.
Best answer so far. A company is only as smart as the members who make the decisions. Same concept goes for governments, unions, charities, religious sects, associations, think tanks, lobby groups, clubs, etc.
Then why do so many corporations last for generations?
Of course nothing legally prevents a company from having flat profits; they might even, say, go out of business – and legally, too! But I think that’s ignoring (or evading) the point.
I’m not a lawyer and must disclaim that I’m even less familiar with corporate law in particular, but I believe I am correct that there’s at least an issue here (and I’d like to hear from those who know better than I). In particular, we have the following (from the 'Lectric Law Library):
The particular point of concern here is (6). As has been pointed out, a corporation’s sole purpose is to make money. I do not have a grasp on the requisite circumstances, but I’d think that persons with a (large) investment in a corporation could make the legal argument that not “maximizing profit” (in the short term) is a wrongful act. Can anyone supply any legal writings about that either way?
Now, the idea that this is an issue is borne out by this review of a paper by Smith, which says that “maximizing shareholder value” is naught but a norm in the orthodox view. In fact, if I’m reading this right, Smith is arguing that that’s actually not the case, but that the norm is (or should be) “maximizing firm value” instead.
So, it appears that my question as to “legal obligation to ‘maximize shareholder profit’” (which, as has been properly pointed out, should actually read “value”, not “profit”) has been answered with a “no”. However, I’m still not confident in the answer and would like to know more if anyone can provide it.
They’re parasites on a really big host.