No on the legal cites, but it is possible for shareholders to sue the corporation, and its officers, claiming that they didn’t maximize shareholder value. Kirk Kekorian did just that in 2000 when he tried to unwind the Chrysler-Mercedes Benz deal, claiming that the directors undervalued Chrysler by about $14.5 billion.
Because in many cases, the people who run the company can run it right into the ground, leave with a golden parachute, and get another lucrative job elsewhere. They simply have no reason to care what happens to the corporation.
Didn’t this happen to Texas?
That’s very interesting, thanks. From the linked article:
From what little I could find, it’s not clear to me whether a decision has been reached. However, that certainly leads me to believe that, in practice (if not explicitly in law), there is a legal obligation. Combine that with an (understandable and proper) tendency of individuals investing large amounts of money to being risk-averse, and it seems clear to me that this is indeed one factor in why “large corporations are so short-sighted” (as the OP puts it).
While Enron was mentioned as an “extreme” example of a short-sighted corporation, the actions of the company psychologically mirror that of a person getting “over their head”, finally heading into illegalities.
Enron didn’t start out as a Ponzi scheme - it was a nice, medium-sized player in the natural gas industry, an owner of almost 40,000 miles of pipeline when the two parent companies (Houston Natural Gas & InterNorth, iirc) merged in 1985. The name “Enron” was proposed and accepted in 1986, and the company spent the next few years trying to find an identity… one it found with Jeff Skilling.
Jeff Skilling had a brilliant idea - “banking” and commoditizing natural gas service contracts, essentially creating a commodities market where one never existed before. It was a good idea, one whose time had come, but Skilling - and Enron - first got in over their head when they petitioned the SEC to use “mark-to-market” (mtm) accounting instead of traditional cost-accrual accounting. Mtm accounting essentially allowed you to book future revenues today - if you signed a $20mil contract for 20 years at $1mil/year, mtm accounting would allow you to book $20mil of earnings - even though you only received $1mil in cash. The remaining cash does not show up on future earnings as it was already accounted for in Year 1*.
In the atmosphere of the 1990’s, this change became a killer - if you booked all your revenues every quarter, then you essentially start at $0 when the quarter rolls over. If the analysts expect you to do better every quarter than the last… :eek: !
So it was a pressure cooker. And what happened is natural: Bad deals were made. Other executives spent untold billions trying to bring power to third world countries, only to be in charge of assets worth 1/4 what they paid for them three years prior. People were driven to increase revenues at all costs, resulting in a very competitive, macho environment, the sort that led to the power abuses in California in 2000 (And Enron wasn’t the only player doing that to California - there’s a lot of companies thankful that Enron took the bullet aimed for them as well), the sort that led to lapses in ethical judgements, lapses that became easier and easier the more you did it.
Mtm accounting didn’t bring about Enron’s downfall, however. If needed, they could’ve changed back to cost-accrual and taken some very painful financial hits… but the company would still be around and there wouldn’t have been indictments. (probably. 
)
What got them into trouble, when they crossed the legal edge for good, was in 1997 when Andy Fastow set up a number of Special Purpose Entities (SPE’s) to take “off-book” Enrons rapidly accumulating stock of bad third-world investments. You only have to know one thing about SPE’s - 3% of the money invested has to be by “outside investors”, i.e., people not employed or related to employees of Enron.
The very first SPE had as it’s 3% owner the gay lover of an Enron executive. However, the man was so incapable of understanding the SPE that it is readily apparent that he is nothing but a front for the executive.
While it wasn’t shouted from the rooftops, Arthur Andersen, the Enron Board, Lay/Skilling/etc, all could’ve found out. But they didn’t. And they let the SPE go through. And they let the first one create other SPE’s, all of them designed to take bad assets and debts off Enron’s books so they could make their quarter. Every 3 months.
And again… it wasn’t as if they meant to break the law. The most fascinating thing about the Enron story is that every agency charged with oversight (Enron officers, the Board, Andersen, Moody’s, the SEC, the IRS) assumed that the other people knew what they were doing and were doing it. Andersen approved of stuff because the Board approved, and the Board approved because they thought that Andersen approved. It was, in many way, the Kitty Genovese of corporate bankruptcy’s, where everybody (including government regulators, the IRS, the SEC, the banks, the rating agencies, Enron’s executives, Enron’s rank-and-file, everybody) saw that crimes were occurring but they all deflected responsibility to the other watchdogs who were also watching the victim get pummelled, saying nothing.
It was the unravelling of the first SPE that finally drove Enron into bankruptcy, when it was determined that the 3% outside equity holder wasn’t really “outside enough”, putting all the debt and losses again on Enron’s books, making the company essentially worthless. We’re talking about close to $40 billion in debt here, enough to sink almost any company.
So Enron displayed all the classic signs of a person going over their head in debt. Bad decisions lead to pressure and stress which leads to even worse decisions. It’s a cycle that hard to break out of, almost impossible when you have such powerful and seductive ennablers on your side (oddly enough, the ennabler for both the family and Enron are credit-extending banks and institutions. ).
*There are certain industries where this is a valid accounting method - but Enron wasn’t one of them!
Thanks for that, John. Very interesting read.
Why do you post this nonsense?
That doesn’t even make sense as a metaphor. What you’re saying is preposterous; you don’t really think all corporations are governed solely to maximize extremely short term profits?
If that were true, no corporation would ever last longer than a year. The logical way to maximize profits this year would be to fire everyone and sell everything before the fiscal year ends.
In the real world, virtually all successful corporations (and most of the unsuccessful ones, too) have long term plans.
Why do you read it?
Actually, you’re right - the parasite analogy is not valid. Corporations are very skilled at keeping their customers alive so that they can continue to suck their money out of them.
I am watching with extreme curiosity to see what the oil-and-gas companies do in the next couple decades as the easily-accessible oil runs out.
featherlou, does this not strike you as an extreme position to take?
To begin with, there are differing kinds of corporate structures.
Most notably, there are corporations that are legally non-profit corporations. By definition, they certainly don’t exist for the purposes of making money, and exist generally for charitable purposes.
There are also condominium corporations. They exist as the operating body of a condominium complex, and is comprised of owners of condo units. They don’t exist for profit-generation, but for the efficient operation of the condominium. (Okay, and I think some would say for the purposes of harassing some innocent condo unit owners. I swear I"ve read threads here about that. )
There are also closely held corporations, essentially family businesses that have incorporated, and in Canada today this often includes the family farm. Incorporations in these situations happens for a number of reasons which may well be financial, but in the context of overall financial planning and the survival of the business.
There are Crown corporations. I seem to recall, you grew up in Saskatchewan so you should be well familiar with Crown corporations. In Saskatchewan there are Treasury Board corporations, who do not exist for commercial purposes, and CIC (Crown Investment Corporation) corporations who do exist for commercial purposes. The CIC Crown are obligated to fulfill a public mandate in addition to having commercial objectives, and ultimately also return funds to the public coffers. The Crown corporations in Saskatchewan have been key drivers for the Saskatchewan economy for decades.
Even turning to the private commercial corporations, I think to state the situation, even as you later modified it, is rather strong. Yes there are the Enrons of the world. There are also corporations who take social responsibility quite seriously, and have it as an objective together with their commercial motives.
In my view, one can argue that too many (not all) publicly listed major corporations are short-term profit driven and are blind, uncaring or indifferent to the long term implications for themselves and for society without painting nearly broad a brush. I’d be willing to make that argument for one and I’ve noted others in the thread do so as well.
I think it is reasonable to expect a profit motive in a corporation that operates ethically within the bounds of the law. I don’t mean to be flippant, but firstly I’d expect that you expect to get compensated for the goods and services that you provide in a commercial context and I expect that you would also want your employer to stay in business so that you could continue to derive payment for your goods and services; and secondarily, what’s the alternative in a capitalist (even Canada-style) system?
Every time I re-enter IMHO, I read the thread title as “Why are large cops so short-sighted?”. Startles me time and again.
Because based on the statement posted below the title of this message board, I generally assume what I am about to read won’t be ignorant. In this case I was wrong.
And that goes for the OP as well. It is a fairly uninformed and incorrect statement to say that companies are short-sighted and do not focus on long term goals. I can just as easily point to the opposite extreme - all the hundreds of dot-coms that focused on some future success while failing to make payroll.
The fact of the matter is that companies do have long term strategies but those strategies are worthless if they can’t pay their employees and vendors. They don’t have endless capital to invest on every whim.
Well, no, they aren’t. No corporation I can think of has any significant control over their customer base’s incomes. Even Wal-Mart is beholden to the income level of its customer base, and can’t really do anything about it. A corporation controls the incomes of its employees, of course, but obviously it’s not possible to survive if your only customers are your employees.
Sorry, but your metaphor was absurd. If you don’t know anything about business, don’t make up analogies about it.
You’re absolutely right. I think for the purposes of this discussion we have all been assuming that we’re talking about profit-driven, publicly-traded corporations. I know that’s what I’m talking about.
Good point - I had forgotten about the Crown corporations. They’re not really what we’re talking about either, since as far as I know they are government corporations, not private.
I truly believe that large, publicly-traded corporations are indeed blind, uncaring and indifferent to their impact on the world. My problem is not with corporations making a profit; my difficulty with them is that they are driven to always make more profit, and I believe this is where the problems lie. A 5% profit might be very comfortable and sustainable, and allow a corporation to benefit everyone involved in it as well as being responsible to its immediate community and the larger community of the world. Corporations are not content with 5% profit, though. A corporation that makes only 5% every year would be considered failing, because it’s not increasing its profit. Once you run out of clean ways to make more profit, you start on the dirty ways (cut jobs, cut salaries, cut benefits, cut quality, cut environmental cleanliness, etc.)
Actually, they’re not indifferent to their impact; it is my belief that they just put making more profit ahead of any other consideration.
You’re saying that not all corporations are like that? Yeah, I guess you are correct. I will give you that. Far, far too many are, though.
A better way than the Capitalist system? I wish I knew. I know when something’s broken by its results, but I don’t necessarily know how to fix it. More personal responsibility for the shareholders of corporations? Have people making the decisions take the fallout for them? Limit how much money any one corporation or person can have? Limit the size of corporations? Don’t allow corporations to cross national borders?
Of course they don’t control their customers’ incomes. They do their best to keep customers coming in their doors and buying things, though. That’s what I meant by keeping them alive.
Just because you misunderstood my analogy doesn’t mean it was absurd or that I don’t know anything about business. I’m willing to let the analogy drop if you are, though.
Actually, many companies would be glad with a 5% profit margin - Wal Mart, for one, would be thrilled with a 5% margin!
The problem, Featherlou, is that when a company reaches a certain size, they can’t be as picky as they were in regards to employees (this includes Google, btw). So standards slacken, less competent people are hired, and in 20-40 years you end up with a company full of people who say things like this.
So, that’s the problem: when people who give a shit have to hire and promote people who don’t give a shit, then the corporation as a whole stops giving a shit. It’s a pretty standard dilemma.
If I understand you correctly, you are saying that employees with bad attitudes are what are causing corporations to make short-sighted decisions?
Actually, a corporation can afford to earn a 5% profit margin on revenues year-over-year. For some (Wal-Mart, most grocery chains), this would be Nirvana. For others (Microsoft), this would be dire. A corporation does not need to earn 5% one year, 5.25% the next, etc.
What the mature corporation needs to do is to increase revenues (top line of the income statement). Assuming that total stock outstanding remains relatively flat, increasing sales while keeping profit margins steady, then share value will grow. Illustratively, if you sell $1,000 worth of goods in Year 1, have a 2% profit margin, and have 100 shares outstanding, then every share has earned $0.20. If next year, you increase sales to $1,200, all else remaining equal, then each share has earned $0.24.
If you are talking about increasing share value at 5% per annum, it sounds…horrible. Besides killing off tens of thousands of actuarial assumptions, it would mean that every corporation has to collude with one another to ensure only a 5% return. If ABC Co. is increasing its share value by 5% per annum while its main competitor, XYZ Corp. is increasing by 6%, then ABC will eventually find itself out of business. It will continue to lose market share, while XYZ increases its ability to enter new markets and increase sales year-over-year.
The OP is typical of someone who has never sat down in a room with CEOs and CFOs of companies, otherwise s/he would know that most of them have both current results and future results on their minds at all times. This is not to say that there are no thieves or boneheads sitting in executive offices. However, if they were the norm, our economy would have collapsed long ago.