31 March 2004
No Stock Market Discipline of Management
The Securities and Exchange Commission is considering adopting a rule that would make the Boards of Directors of regulated corporations into vehicles for shareholder control of management. The role of Boards in assuring proper governance of publicly-owned enterprises has historically been a consultative one. It has been their responsibility to diligently provide good judgment to corporations’ managements. Their nomination and selection, according to by-laws of each corporation, has often been assigned to management and major shareholders.
Ultimately, shareholder control over management has traditionally been exerted through the discipline of the stock market. Corporate Boards of Directors have helped management to anticipate those shareholders’ decisions to buy or sell the company’s stock. Management has generally benefited from their counsel. The relationship has been a symbiotic one, not adversarial.
Now, the government’s principal regulatory authority is moving towards enlisting Boards as instruments of its control over corporate managements. Why does the stock market no longer perform this function efficiently? Perhaps it has to do with the infection of the shareholding public with the greed that certain corporate executives have allowed to drive their operating decisions. Shareholders go along with executives who seem to be able to play the markets so as to maximize the value of their own shareholdings and options, even if it means ignoring the long-term health of those corporations.
Markets do not take a long view. While stock ownership is broader than ever, the dominance of funds managed by professionals has made trading the key skill determining their success. When stock ownership was primarily in the hands of individual investors, small and large, the long run return on individual stocks was more important. Now, it’s the long-run return on the portfolio of stocks held by mutual funds that compels individual investors. Thus, corporations have seen their attractiveness to investors change from bringing long-term returns to presenting good plays to traders. Profits and dividends have yielded the stage to capital gains as the platform on which traders and executives both earn their rewards.
The Securities and Exchange Commission is considering adopting a rule that would make the Boards of Directors of regulated corporations into vehicles for shareholder control of management. The role of Boards in assuring proper governance of publicly-owned enterprises has historically been a consultative one. It has been their responsibility to diligently provide good judgment to corporations’ managements. Their nomination and selection, according to by-laws of each corporation, has often been assigned to management and major shareholders.
Ultimately, shareholder control over management has traditionally been exerted through the discipline of the stock market. Corporate Boards of Directors have helped management to anticipate those shareholders’ decisions to buy or sell the company’s stock. Management has generally benefited from their counsel. The relationship has been a symbiotic one, not adversarial.
Now, the government’s principal regulatory authority is moving towards enlisting Boards as instruments of its control over corporate managements. Why does the stock market no longer perform this function efficiently? Perhaps it has to do with the infection of the shareholding public with the greed that certain corporate executives have allowed to drive their operating decisions. Shareholders go along with executives who seem to be able to play the markets so as to maximize the value of their own shareholdings and options, even if it means ignoring the long-term health of those corporations.
Markets do not take a long view. While stock ownership is broader than ever, the dominance of funds managed by professionals has made trading the key skill determining their success. When stock ownership was primarily in the hands of individual investors, small and large, the long run return on individual stocks was more important. Now, it’s the long-run return on the portfolio of stocks held by mutual funds that compels individual investors. Thus, corporations have seen their attractiveness to investors change from bringing long-term returns to presenting good plays to traders. Profits and dividends have yielded the stage to capital gains as the platform on which traders and executives both earn their rewards.
Outsourcing and Economic Growth
Certain factors of production, like capital, technology, and labor, can be exported from country to country. Others, like innovation, are not so easy. They are driven by more ephemeral links to their end-use markets than prices, or supply and demand. Wealthy consumer markets communicate their requirements for new products, techniques, services through less transparent media than the stock exchange. Responding effectively with adaptation and invention requires proximity to those consumers, and interaction with them.
The fundamental question about the relationship of outsourcing to economic growth is how flexible a country’s society is – how quickly can it shift human resources from the outsourced activity to a newly innovated one? to the process of innovation itself? If there is a cost for making this shift, who will pay? Who will finance it? To be successful at this game, a society has to be adept at investing in such transformations.
The funds needed to finance these transformations are created, in part, by savings made possible by the lower price of goods and services that is caused by outsourcing their production. The U.S. has for a long time depended on other countries for a large portion of the capital required by its innovation. In fact, the U.S. is an entrepot for the capital resources of the rest of the world. The inflow of these funds from abroad balances capital markets by keeping interest rates low, and encourages more innovation for continued economic growth. It also makes affordable the interest-rate-sensitive sectors of the American economy, like home-ownership and education that raise its standard of living and its ability to innovate.
Protectionism in commodities trade was shown to be disruptive to world peace and well-being in the 1930s. Similarly, artificial barriers to free access to the means of production, like labor, across borders will only generate irrepressible displacement that ultimately will upset the welfare of all nations (cf. the visionary 1973 novel by Jean Raspail, Le Camp des Saints). Thus, outplacement is integral to our personal as well as national economic health.
Certain factors of production, like capital, technology, and labor, can be exported from country to country. Others, like innovation, are not so easy. They are driven by more ephemeral links to their end-use markets than prices, or supply and demand. Wealthy consumer markets communicate their requirements for new products, techniques, services through less transparent media than the stock exchange. Responding effectively with adaptation and invention requires proximity to those consumers, and interaction with them.
The fundamental question about the relationship of outsourcing to economic growth is how flexible a country’s society is – how quickly can it shift human resources from the outsourced activity to a newly innovated one? to the process of innovation itself? If there is a cost for making this shift, who will pay? Who will finance it? To be successful at this game, a society has to be adept at investing in such transformations.
The funds needed to finance these transformations are created, in part, by savings made possible by the lower price of goods and services that is caused by outsourcing their production. The U.S. has for a long time depended on other countries for a large portion of the capital required by its innovation. In fact, the U.S. is an entrepot for the capital resources of the rest of the world. The inflow of these funds from abroad balances capital markets by keeping interest rates low, and encourages more innovation for continued economic growth. It also makes affordable the interest-rate-sensitive sectors of the American economy, like home-ownership and education that raise its standard of living and its ability to innovate.
Protectionism in commodities trade was shown to be disruptive to world peace and well-being in the 1930s. Similarly, artificial barriers to free access to the means of production, like labor, across borders will only generate irrepressible displacement that ultimately will upset the welfare of all nations (cf. the visionary 1973 novel by Jean Raspail, Le Camp des Saints). Thus, outplacement is integral to our personal as well as national economic health.
18 March 2004
A Cowardly Measure of Control
The Spanish populace has fallen dangerously into a conspiracy with international religious fundamentalists that attempts to control the unilateralism of the world’s sole superpower with terror. If the Jihadist radicals are to be believed, their objective is to eliminate the stranglehold on the expression of their beliefs that is held by America and its Western materialist dependencies. It is easier for them to create this change through terror than through the procedures characteristic of liberal democracies (elections, transparent policy formulation, etc.). Those procedures are the same ones that govern the operation of the U.N. They are also the procedures that have ruled Spain’s political culture since the fall of Franco.
The effect of terror in Spain, and in Iraq, has been to make it more costly in personal terms to defend the tenets of liberal democracy. This is precisely the purpose that Islamist radicals seek to achieve. Unfortunately, it is easier for Spanish citizens, not to mention U.N. officials, to rely on exogenous agents to control the perceived transgressions of the world’s superpower than to engage in the hard work of strategic, economic, or public diplomacy.
The same is true, of course, for domestic opponents of unilateralism in America’s foreign policy. It is lot more dignified to dedicate resources and hard work to changing the political direction of the country than to abandon our liberal democratic principles in the face of arm-twisting by a band of uncivilized nihilists.
The Spanish populace has fallen dangerously into a conspiracy with international religious fundamentalists that attempts to control the unilateralism of the world’s sole superpower with terror. If the Jihadist radicals are to be believed, their objective is to eliminate the stranglehold on the expression of their beliefs that is held by America and its Western materialist dependencies. It is easier for them to create this change through terror than through the procedures characteristic of liberal democracies (elections, transparent policy formulation, etc.). Those procedures are the same ones that govern the operation of the U.N. They are also the procedures that have ruled Spain’s political culture since the fall of Franco.
The effect of terror in Spain, and in Iraq, has been to make it more costly in personal terms to defend the tenets of liberal democracy. This is precisely the purpose that Islamist radicals seek to achieve. Unfortunately, it is easier for Spanish citizens, not to mention U.N. officials, to rely on exogenous agents to control the perceived transgressions of the world’s superpower than to engage in the hard work of strategic, economic, or public diplomacy.
The same is true, of course, for domestic opponents of unilateralism in America’s foreign policy. It is lot more dignified to dedicate resources and hard work to changing the political direction of the country than to abandon our liberal democratic principles in the face of arm-twisting by a band of uncivilized nihilists.
03 March 2004
Capital Spending -- P&L or Investment?
The Wall Street Journal seems to interpret accounting rules according to the need to make its headlines scintillating. On the evening of March 2, one of its writers, Deborah Solomon, appeared on the PBS Newshour declaiming how WorldCom had deceived its shareholders by moving $11 billion of expenses to its capital accounts in order to make its profits appear larger. In the Journal of March 3, Ms. Fuhrmans and Ms. Kranhold state that hospitals' plans to boost capital spending "could sqeeze many hospital systems' already thin profits."
Isn't investment in new facitilties, equipment and information systems a capital expenditure, not chargeable to profits but paid for out of retained earnings or the proceeds of financing? If so, the squeeze on hospitals' operations comes in the form of pressure to be more profitable, rather than a reduction of reportedly thin profit margins. That's what good hospital administrators should be striving for anyway. And not necessarily at the cost of excellent health care.
Bernard Ebbers and his cohorts defined their business objectives as increasing the company's market valuation. That was what drove them to stretch accounting rules. Hospitals are realizing that they are in a competitive marketplace, where the quality of the healthcare they deliver is tied, at least in part, to their efficiency and, ultimately, their profitability. Rather than reducing profit margins, capital spending is needed to increase hospitals' effectiveness and financial success. This is what hospital administrators should be reaching for anyway
The Wall Street Journal seems to interpret accounting rules according to the need to make its headlines scintillating. On the evening of March 2, one of its writers, Deborah Solomon, appeared on the PBS Newshour declaiming how WorldCom had deceived its shareholders by moving $11 billion of expenses to its capital accounts in order to make its profits appear larger. In the Journal of March 3, Ms. Fuhrmans and Ms. Kranhold state that hospitals' plans to boost capital spending "could sqeeze many hospital systems' already thin profits."
Isn't investment in new facitilties, equipment and information systems a capital expenditure, not chargeable to profits but paid for out of retained earnings or the proceeds of financing? If so, the squeeze on hospitals' operations comes in the form of pressure to be more profitable, rather than a reduction of reportedly thin profit margins. That's what good hospital administrators should be striving for anyway. And not necessarily at the cost of excellent health care.
Bernard Ebbers and his cohorts defined their business objectives as increasing the company's market valuation. That was what drove them to stretch accounting rules. Hospitals are realizing that they are in a competitive marketplace, where the quality of the healthcare they deliver is tied, at least in part, to their efficiency and, ultimately, their profitability. Rather than reducing profit margins, capital spending is needed to increase hospitals' effectiveness and financial success. This is what hospital administrators should be reaching for anyway
