Inside Financial Services

A Nutty Plan To Boost Corporate Hiring and Investment

Joe Nocera's proposal makes no sense

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Joe Nocera seems to think the path toward prosperity lies with U.S. companies acting more like European ones. Really!:

The only way [companies will boost investment and hiring], however, is if our society implicitly makes the kind of compact that German society makes explicitly: We have to be willing to allow companies to sacrifice short-term profits for the long-term good of the country. As the leadership expert Michael Useem wrote recently on The Washington Post’s Web site, business needs to make “people a priority, not just earnings.”

What makes that hard for executives is that they’ve spent the last 30 years having it beaten into them that the only thing that matters is delivering “shareholder value.” Over time, this phrase has become code for focusing on short-term profits – and chief executives who have ignored this mantra have often found themselves kicked to the street by impatient investors like Carl Icahn.

Not to sound all 1990s, but if I’m a shareholder–that is, an owner–of one of the companies Nocera says should “sacrifice short-term profits for the long-term good of the country,” I’m having trouble seeing what’s in the deal for me. I’m pro-long-term-good-of-the-country as much as anyone, but don’t see why I should be the one to forgo profits on the off-chance that those lost earnings might somehow, eventually, make the country more prosperous in the long-term. Which they probably won’t.

If Nocera is so hot on individual sacrifice for the sake of the long-term common good, why doesn’t he pick on somebody else? Retirees, maybe! He might propose, say, a cut Social Security benefits in order to finance a cut in the corporate tax rate. That would boost corporate returns and likely lead to a slew of new hiring. A common good if there ever was one! Or perhaps he might offer a scheme to cut Medicare benefits and, while he’s at it, abolish the Departments of Education, Housing and Urban Development, and most of Commerce, and use the savings to pay for an across-the-board payroll tax cut. Everyone benefits! Nothing says “long-term good of the country” like a tax cut for all.

What, you say, none of that is politically doable? You’re right, of course. That’s because retirees and federal employees, to name two groups, are politically favored classes who, no matter how bad the economy gets, aren’t likely to be asked to make the sort of sacrifices Nocera has in mind for corporate shareholders–who usually have to fend for themselves.

Nocera’s soak-the-shareholders plan is idiotic. He’s wrong, first, that the notion of shareholder value is “code” for running the business for the sake of short-term profits. As an actual shareholder (reminder: owner) of a number of companies, I want managements to run those businesses in order to maximize their long-term value. That’s my right. I own the darn business. Short-term earnings are largely beside the point. Second, this notion that one way to spur economic growth is to make companies less profitable in the near-term makes no sense. Finally, asking companies to forgo earnings so they can hire workers for jobs that are inherently uneconomic is no recipe for long-term economic prosperity.

What do you think? Let me know!

16 Responses to “A Nutty Plan To Boost Corporate Hiring and Investment”

  1. Fred de Roode

    Agree with you Tom. If companies are not as profitable as they are today our federal tax coffers would shrink even further. Just another way to avoid the real issues of cutting entitlements, and overspending by the federal government. We all need to wake up and realize we are part of A WORLD ECONOMY and that prices for goods and services and labor in many parts of the world will always be less than what they are in the U.S. Unfortumnately, many items manufactured abroad are the same and or better than what can be manufactured in the U.S. so in effect are interchangeable with U.S. goods and services. It is also true that abroad produces a lot of crap (low quality goods) just like the U.S. manufacturers. Furthermore , no way to create 40 million new jobs in the U.S. without a tremendous amount of immigration coming to the U.S. that would stimulate demand for everything from housing, education, healthcare , food and services. Unfortunately we don’t and can’t use uneducated and poor immigrants. We need immigrants with money in their pockets and educated immigrants. If they appreciate and want freedom then come to the U.S. Maybe sell slots to become citizens. The U.S. also needs to focus on what industries it is the best at in the world and focus on those things that it does well. Education needs to turn to more trade schools and the best and the brightest given opportunities in Engineering and sciences and in areas that would naturally lead to innovations and transformative technologies. The U. S. has a demographic problem, low birthrate, and we need more people to feed the Ponzi scheme that is our social security system, medicare and medicaid systems. Where are the people going to come from and what jobs will they fulfill once they arrive. Let’s collect all taxes owed and all judgments and fines. We have never had a government that shrank in number of employees and or departments and or laws and regulations on the books. What if we had a shrunken

  2. Phillip

    the NY Times is the voice of the Soviet Apparatchiks aka Democrat party.

  3. Greg

    How do we get Tom Brown added to the Joint Select Committee on Deficit Reduction?

  4. pfriend

    If any corporation adopted this approach the stockholders would dump the shares in an instant. The share price would plunge as shareholders invested in competitors and other assets. If more US corporations adopted this the negative wealth effect in the US from shareholder losses would harm the economy more than the “patriotic” corporations would help it. Foreign companies would compete more effectively for the business and the US would suffer from this craziness, including higher unemployment. Unintended consequences always get ya.

  5. anotherguywithanopinion

    Tom,
    I didn’t see much reasoning behind your dismissal of this idea. all i read was sarcasm and some random preposterous alternatives.

    Let’s look at it this way. corporations are sitting on record amounts of cash. Some benefit from a tax system geared to deal with priorities that suit them. senior management, in the quest for maximizing profits is actually incentivized to increase productivity and returns, which for manufacturing companies takes the form of shifting jobs to overseas workers. The entire mechanism of wall street is about rewarding maximum profits, usually at the expense of another constituency, like workers. Nocera is trying to address this issue, but there aren’t a lot of living examples of a new model to modify incentives to encourage companies to keep jobs here. There also aren’t a lot of ideas. I’d like you to put your mind to a solution, instead of making fun of the problem.

  6. anotherguywithanopinion

    Tom,
    I didn’t see much reasoning behind your dismissal of this idea. all i read was sarcasm and some random preposterous alternatives.

    Let’s look at it this way. corporations are sitting on record amounts of cash. Some benefit from a tax system geared to deal with priorities that suit them. senior management, in the quest for maximizing profits is actually incentivized to increase productivity and returns, which for manufacturing companies takes the form of shifting jobs to overseas workers. The entire mechanism of wall street is about rewarding maximum profits, usually at the expense of another constituency, like workers. Nocera is trying to address this issue, but there aren’t a lot of living examples of a new model to modify incentives to encourage companies to keep jobs here. There also aren’t a lot of ideas. I’d like you to put your mind to a solution, instead of making fun of the problem.

  7. ACEMAN

    The unasked question is what are we going to get in the next year or two: Inflation or deflation?When we know which, only then might we know what the right approach might be. otherwise, as investors we are merely trying to keep above water. My other thought is how do we really value the proposals now on the table by the president and the opposition. Is there some sort of official cost-benefit analysis to review?

    ACEMAN

  8. Larry Horan former Smith Barney colleague

    Anyone writing on economic issues should be educated in economics. Otherwise, they will appear to be blithering idiots like Nocera.

  9. anotherguywithanopinion

    Tom,
    I didn’t see much reasoning behind your dismissal of this idea. all i read was sarcasm and some random preposterous alternatives.

    Let’s look at it this way. corporations are sitting on record amounts of cash. Some benefit from a tax system geared to deal with priorities that suit them. senior management, in the quest for maximizing profits is actually incentivized to increase productivity and returns, which for manufacturing companies takes the form of shifting jobs to overseas workers. The entire mechanism of wall street is about rewarding maximum profits, usually at the expense of another constituency, like workers. Nocera is trying to address this issue, but there aren’t a lot of living examples of a new model to modify incentives to encourage companies to keep jobs here. There also aren’t a lot of ideas. I’d like you to put your mind to a solution, instead of making fun of the problem.

  10. First Marbleheader

    Tom – is that a small position I see for Second Curve has in First Marblehead? No, it can’t be. But if it is, will you share your reasoning for revisiting a stock that has caused you much pain and loss?

  11. JRG

    The banking industry is a classic example of how a focus on short term profits and growth has been a disaterous strategy. Over the last thirty years we have seen one credit crisis after the other caused by excessive risk taking by banks of all sizes. All done under the justification of chasing quarterly profit growth. The few banks that have been disiplined and take a longer term view are now reaping the benefits of this disipline. What we saw in the most recent crisis is banks originating sub prime, HELOCS and commercial real estate in an atempt to meet their 10% quarterly earnings targets and ending with disasterous results.When a bank cant find sound growth opportunitiesthe, right thing to do is not grow.

  12. anotherguywithanopinion

    Tom,
    I didn’t see much reasoning behind your dismissal of this idea. all i read was sarcasm and some random preposterous alternatives.

    Let’s look at it this way. corporations are sitting on record amounts of cash. Some benefit from a tax system geared to deal with priorities that suit them. senior management, in the quest for maximizing profits is actually incentivized to increase productivity and returns, which for manufacturing companies takes the form of shifting jobs to overseas workers. The entire mechanism of wall street is about rewarding maximum profits, usually at the expense of another constituency, like workers. Nocera is trying to address this issue, but there aren’t a lot of living examples of a new model to modify incentives to encourage companies to keep jobs here. There also aren’t a lot of ideas. I’d like you to put your mind to a solution, instead of making fun of the problem.

  13. Charlie Munger

    Good grief, Brown. While I know it’s not your intent to do so, you appear to be endorsing all the short-term chicanery and short cuts that got us into this mess in the first place. All the perverse and asymmetrical incentives ( especially, cost-free, unaccounted-for stock options ) that encouraged managers to roll the dice on insanely complex derivatives and Chuck Prince’s cavalier “when they play the music, ya gotta dance” attitude toward OPM are logical consequences of casino thinking. The truly great companies are managed with decade-long thinking and pay no attention to 30-year old sell-side analysts who think they’re more qualified to run ExxonMobil than Tillerson. The European practice of reporting only annual results and paying annual dividends stands in stark contrast to the idiotic American quarterly stupidity. I’ve happily owned Nestlé and Roche for fifteen years for the simple reason that their managers don’t engage in the kind of crap that American short-termism produces.

  14. Pissed off Middle Class

    Short-term, quarter to quarter thinking, by our CEOs has simply benefited traders, rich investors, and Hedge Funds. If you really want to help the country and the great middle class of investors, then it is well thought out long term strategies that work the best. But this is only one of a number of problems facing our country. Since the Great Depression, our government has slowly turned our country into an entitlement giving society. Ask not what you can do for your country, ask what your country can do for you. This is what we have become. I heard that 40% of our population get government entitlement, or entitlements funded by the rest of the 60% of us. If you want to keep Social Security and Medicare, then hand it over to an Independent Commission with actuarial premiums that would ensure that it is properly funded going forward. And pass laws to prevent our Government from raiding those funds. Put all Federal, State, and City Government employees on defined contribution plans and/or 401k plans so that the playing field is leveled with all other private and corporate workers. Pass a law requiring a balanced federal budget. Change the electorial process whereby politicians would only get one six year term. They might actually do some work for a change instead of traveling around giving boring speaches with their hands out for money from special interest groups. Make lobbying an illegal activity. Put limits on our safety net for the unfortunate, and if they still cannot function in our society, put them in orange jump suits and have them clean our streets. Reform our horrible legal/tort system, the most inefficient, unproductive system that really seeks to protect the guilty from needed prosecution. Spend a day in jury duty and you know what I am talking about. You get the first random 11 people on your jury. If they are good enough to drive and vote, they are good enough to be considered a jury of our peers. If not, get them off our roads and v

  15. Pissed off Middle Class

    Short-term, quarter to quarter thinking, by our CEOs has simply benefited traders, rich investors, and Hedge Funds. If you really want to help the country and the great middle class of investors, then it is well thought out long term strategies that work the best. But this is only one of a number of problems facing our country. Since the Great Depression, our government has slowly turned our country into an entitlement giving society. Ask not what you can do for your country, ask what your country can do for you. This is what we have become. I heard that 40% of our population get government entitlement, or entitlements funded by the rest of the 60% of us. If you want to keep Social Security and Medicare, then hand it over to an Independent Commission with actuarial premiums that would ensure that it is properly funded going forward. And pass laws to prevent our Government from raiding those funds. Put all Federal, State, and City Government employees on defined contribution plans and/or 401k plans so that the playing field is leveled with all other private and corporate workers. Pass a law requiring a balanced federal budget. Change the electorial process whereby politicians would only get one six year term. They might actually do some work for a change instead of traveling around giving boring speaches with their hands out for money from special interest groups. Make lobbying an illegal activity. Put limits on our safety net for the unfortunate, and if they still cannot function in our society, put them in orange jump suits and have them clean our streets. Reform our horrible legal/tort system, the most inefficient, unproductive system that really seeks to protect the guilty from needed prosecution. Spend a day in jury duty and you know what I am talking about. You get the first random 11 people on your jury. If they are good enough to drive and vote, they are good enough to be considered a jury of our peers. If not, get them off our roads and v

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