In
1963 Alan Greenspan said,
“Capitalism
is based on self-interest and self-esteem; it holds integrity and
trustworthiness as cardinal virtues and makes them pay off in the
marketplace, thus demanding that men survive by means of virtue, not
vices. It is this superlatively moral system that the welfare
statists propose to improve upon by means of preventative law,
snooping bureaucrats, and the chronic goad of fear.” (1)
What
I hear Mr. Greenspan, a devout follower of the Ayn Rand god, saying
is that if government (the inherent evil) would just leave the
capitalists alone, their virtues, not vices would prevail and their
companies would succeed. Of course per AynRandism if corporations
succeed everyone would benefit (all boats rise...yada yada). Well,
Saint Greenspan would be in for a shock in 2008. But let's not get
ahead of ourselves.
Some
excerpts from an article from "I, Cringely" (3)
“In
American business, especially, one key theory says that the purpose
of corporate enterprise is to “maximize shareholder value.” Some
take this even further and claim that such value maximization is the
only reason a corporation exists.”
“It’s
not even a very old theory, in fact, only dating back to 1976. That’s
when Michael Jensen and William Meckling of the University of
Rochester published in the Journal of Financial Economics their paper
Theory of the Firm: Managerial Behavior, Agency Costs and Ownership
Structure. (3)”
“Their
theory, in a nutshell, said there was an inherent conflict in
business between owners (shareholders) and managers, that this
conflict had to be resolved in favor of the owners, who after all
owned the business, and the best way to do that was to find a way to
align those interests by linking managerial compensation to owner
success. Link executive compensation primarily to the stock price,
the economists argued, and this terrible conflict would be resolved,
making business somehow, well, better.” (3)
Link
management compensation to stock price and all will be good, right?
We all know that stock prices are a direct reflection of the strength
of the company, right? Not really. Managers are masters of
manipulating their companies stock prices and know full well how to
personally profit from those actions.
Back
to the article:
“Maximizing
shareholder return has given us our corporate malaise of today when
profits are high (but are they real?) stocks are high, but few
investors, managers, or workers are really happy or secure.
Maximizing shareholder return is bad policy both for public companies
and for our society in general. That’s what Jack Welch told the
Financial Times in 2009, once Welch was safely out of the day-to-day
earnings grind at General Electric: “On the face of it,” said
Welch, “shareholder value is the dumbest idea in the world.
Shareholder value is a result, not a strategy… your main
constituencies are your employees, your customers, and your products.
Managers and investors should not set share-price increases as their
overarching goal. … Short-term profits should be allied with an
increase in the long-term value of a company.” “(3)
But
the problem is that if you take the suggestions of Jensen and
Meckling to the end, you get corruption when -
“management
just cooks the books and lies. And so shareholder value maximization
gave us companies like Enron (Jeffrey Skilling in prison), Tyco
International (Dennis Kozlowski in prison), and WorldCom (Bernie
Ebbers in prison). “(3)
So
where are we. In 2008 “Alan Greenspan, former chairman of the
Federal Reserve, finally took some responsibility (sort of) for the
crisis. He told Congress:
"Those
of us who have looked to the self-interest of lending institutions to
protect shareholder's equity – myself especially – are in a state
of shocked disbelief…”
Translated,
in my opinion he means he did not think bank bosses (or corporate
CEO's) were so greedy as to drive their companies into bankruptcy for
personal gain, but he admits he was wrong. Ayn Rand's John Gault was
just a fantasy.
And
whether irony or just corrupt stupidity, in 2008 those that worshiped
Ayn Rand and demanded that the government stay out of their
businesses, were begging for a bail out. If Ms. Rand were truly a
god, lightening would have struck these weasels that thought they
were the mighty capitalist John Gault. They had to bow to the gods
of socialism and accept their hand-outs.
(1)
The Assault on Integrity, 1963
(2)
http://www.independent.co.uk/news/business/analysis-and-features/quotes-of-2008-we-are-in-a-state-of-shocked-disbelief-1220057.html
(3)
http://www.cringely.com/2015/06/24/the-u-s-computer-industry-is-dying-and-ill-tell-you-exactly-who-is-killing-it-and-why/
