When Will We Stop Pretending that Shareholder Value is All that Matters?

Even back at the dawn of time, when I was in business school, there were plenty of voices arguing that "shareholder value" should be one of management's goals, but not the only one.

Up the road from the University of Chicago, Kellogg professor Gene Lavengood spoke up forcefully for "stakeholder value": the need to maximize value for all those with a stake in the corporation -- shareholders, of course, but also employees, customers, residents of the communities in which the corporation operated, etc.

Still, shareholder value was the rallying cry through the go-go years. Jack Welch, in his General Electric days, was one of the loudest voices in its favor -- although even he later repudiated it, telling the Financial Times in March 2009, "On the face of it, 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." (FT article here)

The banks have apparently decided that their main concern should be salary value.

"Ailing banks favor salaries over shareholders" reports today's New York Times (article by Eric Dash here).

Oh, no, you're thinking: another boring rant about overpaid bankers. Doesn't she know that banks need to pay outrageously high salaries and bonuses in order to attract and keep the best talent?

Well, no, I don't know that. Especially in the current economy, with jobs disappearing right and left -- still -- I think that there are plenty of enormously talented people out there who would work just as hard and just as smartly (maybe more so, given the mess the banks got us into) for a lot less than Wall Street seems to think essential.

But even I was surprised by how little relationship there seems to be between pay and profit (and profit, after all, is supposed to be what shareholders care about, and, remember, corporations are supposed to be all about maximizing shareholder value, right?).

If bankers are paid for profit, then explain this example from Dash's article: "In 2005... Morgan Stanley made a pretax profit of $7.4 billion. That year, compensation at the bank averaged $212,000 for each employee. Last year, Morgan Stanley made about $857 million before taxes. But compensation averaged $235,000 for each employee. In other words, Morgan Stanley employees collected roughly 61 cents out of every dollar the bank made in 2005, and about 94 cents of every dollar last year."

Sounds to me like, Heads I win, tails you lose.

Dash qoutes John Bogle, founder of mutual fund company Vanguard Group: "The investor in America sits at the bottom of the food chain... The financial industry gets paid before their clients, and we get paid whether times are good or bad."

Isn't it time to reexamine the fundamental "truths" that underlie the system: Is shareholder value really what we should care about? And, is price (or salary) really the only way to measure value?

Trust, Once Lost, Is Hard to Regain

Who is it that you trust most? Not, probably, someone you've just met -- it takes time to build a trusting relationship. And if that trust is violated, it will take a very long time to rebuild it.

This is as true for brands and companies as it is for people.

The current issue of the Harvard Business Review has a long, excellent article by Roger Martin on "customer capitalism", which argues that making customer value the highest corporate priority will pay off better for shareholders than does focusing primarily on shareholder value: "...[If] more companies made customers the top priority, the quality of corporate decision making would improve because thinking about the customer forces you to focus on improving your operations and the products and services you provide, rather than on spinning lines to shareholders."

Among the examples Martin uses are Procter & Gamble, and Johnson & Johnson -- making specific reference to J&J's decision in 1982 to pull every Tylenol capsule in the US off the shelves after seven Chicago-area consumers died from tampered Tylenols. At the time, many expressed surprise that a company would (seemingly) throw profit concerns to the winds, but the bet paid off with soaring loyalty to the product and the company.

Martin may well be rethinking his examples now.

As the New York Times's Natasha Singer reported today, McNeil Consumer Healthcare, a J&J division, apparently waited 20 months from receiving its first consumer complaints about moldy-smelling bottles of over-the-counter products to recall batches of such popular medicines as Benadryl, Motrin, Rolaids, and ... Tylenol.

The federal Food and Drug Administation issued a press release on Friday, reporting that McNeil Consumer Healthcare was "voluntarily recalling certain lots of OTC products". The company has set up a website with information on specific lots and on how to return or dispose of the products. The problem has apparently been traced, according to the press release, to "the breakdown of a chemical that is sometimes applied to wood that is used to build wood pallets that transport and store product packaging materials. The health effects of this chemical have not been well studied but no serious events have been documented in the medical literature."

But why did it take so long for the company to take action? Singer quotes a marketing professor from Northwestern's Kellogg School of Management: "The FDA comments on Friday were devastating because they make the company seem to be complacent and sloppy."

As a consumer, I have plenty of generic non-branded choices for pain relief. Unless I have a good reason to trust J&J to provide me with a higher level of product quality, why would I pay extra for Tylenol or Motrin?

And now that I'm asking myself these questions, is there anything J&J can do to rebuild my trust? Maybe not.

As the old saw says, "Fool me once, shame on you; fool me twice, shame on me."

Can You Say, "I Screwed Up and I'm Sorry"? Sure You Can.

Unless, of course, you're a Wall Street banker. In which case there are all kinds of ways not to say, "I'm sorry".

I was thrilled to see this headline today at Yahoo!News: "Bankers apologize for actions that led to crisis." (story, by Jim Kuhnhenn and Daniel Wagner of the Associated Press, here)

But, in fact, there wasn't much real apology.

There was: "We regret the consequences..." from Lloyd Blankfein of Goldman Sachs (Mr. "We're doing God's work", as you no doubt recall).

The closest was, "We did make mistakes" from Jamie Dimon, CEO of JPMorgan Chase -- although he quickly softened that with "there were things we could have done better." Ya think?

And Bank of America CEO Brian Moynihan claimed to "understand the anger felt by many citizens."

But what they don't seem to understand is that we Main Street types are not looking for "nuanced regret -- admitting mistakes without accepting blame", as it was called by Andrew Martin and Micheline Maynard in an article in today's New York Times. We are looking for an admission of personal responsibility, a genuine apology, and a realistic attempt at restitution.

Just think about what was going on: Goldman Sachs, as an example, provided clients with "notes" from its fundamental strategies groups with investment ideas -- and "did not always disclose its own positions when it share its trading ideas," according to Andrew Ross Sorkin's piece, also in today's Times.

Sorkin reported that, in an e-mail to select clients, the head of the fundamental strategies group "acknowledged that his unit often provided investment ideas that the firm had already traded on. Sometimes Goldman has even take the opposite approach, betting against particular instruments that the group has recommended."

Can you say, "Complete conflict of interest"? Sure you can.

Doesn't "Full Disclosure" Mean, Well, FULL Disclosure?

Apparently not.

At least not according to Fidelity National Financial, the title insurance company.

Yesterday's New York Times carried an article by Diana Henriques, outlining a series of lawsuits stemming from a mortgage fraud scheme -- litigation which was not disclosed to shareholders until October 2009, three years after the first suits were filed, and two years after the primary wrongdoer had pleaded guilty.

Let's think about this for just a moment. If you were contemplating an investment in Fidelity National (the company is publicly traded), wouldn't you think outstanding suits against the company might be a fact that you would want to calculate into your investment decision? Yeah, me too. Especially as Fidelity's "chairman has said the settled claims [the last round of claims are going to trial shortly] exceed $83 million, before insurance -- a bit more than its latest quarter's profits -- and some of its insurers are balking at the legal bills and losses."

According to regulatory guidelines, companies must disclose "any material pending legal proceedings, other than ordinary routine litigation incidental to the business."

What's your definition of "ordinary routine litigation incidental to the business"?

Henriques quotes Mark Schiffman, Fidelity's senior vp and chief litigation counsel, as saying that the case "presented little risk of damages" and so did not warrant disclosure ... at least until the damages turned out to be pretty substantial.

I vote, instead, with Harvey Pitt, former SEC chairman, who said, "The first thing any corporate director should ask when someone raises credible allegations of wrongdoing against any company is not whether you can win a case, but what if it's true."

Fidelity dismissed the guilty employees more than a year ago, because of poor performance not because of "dishonest or fraudulent conduct," Schiffman said. The plaintiffs' lawyer in the upcoming suit argues that point, "noting that the company is trying to collect under insurance policies meant specifically to protect it from harm by dishonest employees."

Full disclosure -- that is to say really full disclosure -- when the fraud was first uncovered and the guilty party admitted guilt might have saved the company both some dollars and a lot of ugly publicity....

The Ethics of T-Shirts

I'm old enough to have seen ILGWU ads so many times that I can hum along with the workers.



But the battle to keep clothing manufacturing in the US was lost a long time ago. The International Ladies' Garment Workers Unions, which had been one of the most progressive and powerful unions of the '30s and '40s, collapsed in the '90s under the weight of international outsourcing and restrictive labor laws, and in 1995 merged into "Unite Here".

Periodically, reports have surfaced in the mainstream media regarding appalling conditions for workers in overseas (largely Asian) sweatshops that today produce most Americans' clothing. And sometimes, the good guys do win, as I posted back in November (click here for my post about Russell Athletics' agreement with its Honduran laborers and their union, thanks to the considerable efforts of United Students Against Sweatshops). But if you thought that significant progress had been made generally to improve conditions, well, sadly, you were mistaken.

The current issue of Harper's magazine has an excellent piece by Ken Silverstein on "Shopping for Sweat: the human cost of a two-dollar T-shirt" (the first paragraph is available for non-subscribers online here; the rest is behind a pay wall).

Silverstein writes that "apparel buyers, while quite happy to win accolades for doing business in [supposedly sweatshop-free] Cambodia, have remained unwilling to pay much for the privilege."

As a result, "pay for apparel workers in Cambodia has stagnated, according to a 2008 survey, at 33 cents an hour [I have added the emphasis] .... Labor unions are abundant, but most are funded and controlled by employers or by the government, and independent activists have been fired, suspended, sued, and otherwise targeted for repression."

There is some good news in all of this -- as Silverstein notes, "Until the mid-1990s, Western apparel companies didn't even acknowledge that labor rights or fair pay were legitimate issues for discussion." It took a while for that to happen, and the loud protests of many American consumers.

But where do we go from here? Monitoring apparently hasn't worked, especially as most of the monitors seem to be in the pay of the apparel companies rather than in that of the workers. Moreover, there's a regular round of articles from the neoliberal business types who say that a bad job is better than no job in countries like this (which sound to me an awful lot like the arguments at the turn of the last century that child labor wasn't really such a bad thing for the poor).

Silverstein's article ends with a suggestion from Richard Duncan, chief economist of Singapore-based Blackhorse Asset Management: Wages should rise in Asia to a $5-per-day minimum -- "slightly above starting pay in southern China and more than twice the current rate in Bangladesh. Then, Duncan says, the wage could be raised by $1 each year for ten years. Imposing such a scheme would be quite simple to implement, he points out. The United States and the European Union could slap steep tariffs on imports manufactured by workers earning less than the minimum."

"'If you sell a pair of tennis shoes for $101 instead of $100, no consumer in Chicago will notice the difference, but it will totally transform villages in Vietnam,' he said. 'This is not a moral argument.... We are going to have an international depression if we don't figure out a way to create new sources of global demand -- in which case, all those apparel companies are going to go out of business anyway.'"

Actually, Mr. Duncan, it is a moral argument. It just happens to be an economic one, too.