Eddie Adams from Torrance: That football analogy is completely pants on head retarded.

Companies don't compete one on one.

That's all you got from the article? Yeesh. The analogy is still valid because of the competition aspect. It doesn't matter in the analogy whether a team competes team-on-team, head-to-head, or with every other player as a mob. It's the effort to win, and the betting, that are the focus.

Wow, not a troll headline. Much appreciated.

Terrific read. Really encapsulates a lot of today's market problems.

And the football analogy is apt.

Eddie Adams from Torrance: That football analogy is completely pants on head retarded.

Companies don't compete one on one.

Now if the NFL had every team suit up and take the field at the same time....

I'd like to see that.

Eddie Adams from Torrance: That football analogy is completely pants on head retarded.

Companies don't compete one on one.

Now if the NFL had every team suit up and take the field at the same time....

Well, it depends on the industry, actually.

Intel vs AMD, for example, who else supplies processors for the PC market? Or Airbus versus Boeing for major commercial aircraft. When I worked in manufacturing, there were three companies that made seatbelts for the major automakers. There are only three operating systems that matter in the computer world. Who in the US really competes with Verizon and AT&T for wireless on a national level? You could say Sprint and T-Mobile, but good luck getting signals on their networks traveling cross-country (actually, Verizon is the only carrier that really has good coverage in my opinion).

There are plenty of other examples, those are the ones on the top of my head. So yeah, head to head competition really is not that uncommon, where there is any competition at all. You don't get to choose your utilities, for example. Hell, I moved to my small town specifically to get service from a certain cable company, and between the time we made the offer on the house and the closing, the companies had swapped territory leaving me with Comcast again.

We barely have head to head competition in many markets, much less a general scrum like you envision.

Emphasizing stock-holder value is not a stupid target and is infinitely preferrable to "gaining customers" as a goal, because you can gain customers easily by selling products at a loss. Stock-HOLDER value is something that reflects the strength of the company. Stock-TRADER value is the short-term buy/sell crap that the article is really complaining about.

cefm: Emphasizing stock-holder value is not a stupid target and is infinitely preferrable to "gaining customers" as a goal

Especially since customers need an income commensurate with your price structure.

cefm: Emphasizing stock-holder value is not a stupid target and is infinitely preferrable to "gaining customers" as a goal, because you can gain customers easily by selling products at a loss. Stock-HOLDER value is something that reflects the strength of the company. Stock-TRADER value is the short-term buy/sell crap that the article is really complaining about.

I had several business professors take it one step further and straight-up say "The only thing that matters is stock price."

BolloxReader: Wow, not a troll headline. Much appreciated.

This.

I clicked the article expecting nuclear derp. Instead I got an interesting article.

We should do this more often.

IgG4: Business needs to think more like farmers and less like hunters.

This doesn't really make sense.. any of it.

Business is not about winning and losing, sometimes, many times in business everbody can win, everybody can lose, or a combination.

If you're business is pulling in record profits, it doesn't mean your chief competitor is not as well. Sure businesses can compete head to head in one market space, but often times good competition increases the pie so you can keep the same market share but make more money.

And the comment of maximizing shareholder value is bad, but gaining customers is good... gaining customers increases shareholer value.

The stock price is a reflection of people's confidence in your company. If you're gaining customers, all else being equal, the price goes up.


Then we get into the issue of expectations. Market expectations aren't the same as a point spread. Point spreads aren't a prediction of the game, they are a tool to get people to bet on both sides of the game.

Market expectations are set by reviewing detailed financial info. And just because you always meet expectations does the value of your company skyrocket. Sometimes you're expected to lose money.. if you actually lose less than anticipated, maybe your stock doesn't tank, maybe it'll just go down a little. Who knows. There are lots of factors.

MugzyBrown: Business is not about winning and losing, sometimes, many times in business everbody can win, everybody can lose, or a combination.

Not to mention that the entire notion of transactions were to facilitate a method of trade wherein all concerned got value instead of giving the whole dinner basket to the stabbiest bastard in the alley. Commerce is the antithesis of crime.

MugzyBrown: Then we get into the issue of expectations. Market expectations aren't the same as a point spread. Point spreads aren't a prediction of the game, they are a tool to get people to bet on both sides of the game.

Perhaps they are, but it doesn't stop it from being a forecast of a possible outcome.

The exact same thing could be said about earnings...hit or miss the stock will go up or down and that gets people to bet on either side based on that forecast.

The exact same thing could be said about earnings...hit or miss the stock will go up or down and that gets people to bet on either side based on that forecast.

It's not a bet. A company can miss their estimate and the stock can still go up.

The comparison is nonsense.

MugzyBrown: Business is not about winning and losing, sometimes, many times in business everbody can win, everybody can lose, or a combination.

I think you're not reading the football analogy closely enough or reading too much into it. He's not talking about the competition aspect, but measuring success based on performance (football: win; companies: products/customers) versus expectation (football: covering the point spread; companies: meeting or beating expectations).

It would be ludicrous to say my team "won" if all it did was beat the spread by not losing the game by that much; in the same way, a company isn't a "success" just because it has a high stock price and it beats expectations. His point is that the current state of affairs rewards companies for beating the spread, even if at their core they are a losing franchise.

tricycleracer: cefm: Emphasizing stock-holder value is not a stupid target and is infinitely preferrable to "gaining customers" as a goal, because you can gain customers easily by selling products at a loss. Stock-HOLDER value is something that reflects the strength of the company. Stock-TRADER value is the short-term buy/sell crap that the article is really complaining about.

I had several business professors take it one step further and straight-up say "The only thing that matters is stock price."

They're right if the stock price represents actual expectations of future cash flows and earnings. The problem arises when management makes decisions to affect the stock price that do not change expected future cash flows. Well, part of the problem is managers but the other part is investors who react contrary to long-term expectations of cash flows and earnings. If cutting an underperforming division truly improves long-term earnings, then the stock price should reflect it.

All the other stuff in the article is beside the point, and the football analogy is ridiculous.

Angry Drunk Bureaucrat: MugzyBrown: Business is not about winning and losing, sometimes, many times in business everbody can win, everybody can lose, or a combination.

I think you're not reading the football analogy closely enough or reading too much into it. He's not talking about the competition aspect, but measuring success based on performance (football: win; companies: products/customers) versus expectation (football: covering the point spread; companies: meeting or beating expectations).

It would be ludicrous to say my team "won" if all it did was beat the spread by not losing the game by that much; in the same way, a company isn't a "success" just because it has a high stock price and it beats expectations. His point is that the current state of affairs rewards companies for beating the spread, even if at their core they are a losing franchise.

The higher stock price should be reflective of changes in expectations. I make 10 cents a share each quarter and suddenly it increases to 15 cents a share, the stock price would appropriately reflect that, relative to where it was previously.

(supply and demand)

"You give ME goose you catch Oog, or me kill you!"

"Oog give you goose. Oog no want to die for lousy goose. How about you give Oog wood for goose, though?"

"I no need give Oog wood. ME seriously stabby sumb*tch."

"But then Oog have fire and live through night. No die in cold. You can steal many goose from Oog, then."

"Work for me, Oog. Here wood."

(inevestment)

"You hunt goose today?"

"No, me go see Oog. Oog have great fire and ROAST goose. Goose ready to east. Tasty, too."

(the killer app)

"Me go take all Oog's goose! He say I can!"

"Bad idea. Many people love Oog roast goose and guard his cave and fire. Stabby sumb*tches, too. You lose ass."

"I bring Oog more wood, then. He trade for ROAST goose."

(the free market)

[random f*ck] - "I dunno. I hear Oog f*ck his sister."

"We ALL f*ck Oog sister! She seriously hot piece of skirt."

"Maybe, but Oog very bad for it!" I hear he spit on goose before roasting."

(politics)

"You go to Oog's today for goose?"

"No, Erf invent dandy Ronco Goosemaster 1000! Everybody have roast goose in own cave, now!"

(technology)

"Oog hear from Erf that goosemaster replace his roast goose concession, but also hear he need much wood. Oog leverage his wood stockpiles for part of Goosemaster profits!"

(asymmetrical information)

*stabby bastard returns, trades Goosemaster factory for 700 flimsy goose hunting spears, forms conglomerate, militarizes people who traded for goose spears, hands out matching fur hats, makes flags, takes over all goose related commerce, diversifies into arms, goose liver patè, custom skins and hats, sends stabby assassins to kill competitors.*

(corporations)

Oh, how we've manage to evolve since then.

Debeo Summa Credo: The higher stock price should be reflective of changes in expectations. I make 10 cents a share each quarter and suddenly it increases to 15 cents a share, the stock price would appropriately reflect that, relative to where it was previously.

Right. The question is whether you made your expectations by improving product and/or increasing your customer base, or raiding your pension fund to make up for a loss. One is a good, long term way to do business; the other is not.

What on earth are American corporations supposed to do with millions of literate, educated people capable of critical thinking? You start sh*t like that and pretty soon, people catch on. Bad idea. Vote no on the oppressive, communist school levy.

MugzyBrown: The exact same thing could be said about earnings...hit or miss the stock will go up or down and that gets people to bet on either side based on that forecast.

It's not a bet. A company can miss their estimate and the stock can still go up.

The comparison is nonsense.

It's not a bet because the company can miss and still go up? Talk about nonsense.

Both are putting money based on a forecast. Up, down, sideways, whatever. Doesn't matter. Still a bet.

Wall St., like it or not, is essentially a bookie joint.

Oh, and when the bookies get paid, either way, why give a sh*t about what the issue of the wager is?

It's not a bet because the company can miss and still go up? Talk about nonsense.

Both are putting money based on a forecast. Up, down, sideways, whatever. Doesn't matter. Still a bet.

There is no similarity between the two at all. If I bet on the Packers - 10 vs Chicago, and the Packers win by 3, I lose my money.

When people invest in GE, it's not about the next quarter earning estimates, it's about believing the company in the long or short run will go up in value. If GE misses estimates, that doesn't mean I made a bad investment.. I could even make money. There is nothing linking the estimate to the stock price.

As I said before, GE could miss their estimate by 10 cents, but the price could still jump 15% because the earnings that came out showed good reasons why they missed the estimate and how they're positioned to grow in the future.

I can't go to the window with my Green Bay ticket and say.. well they play Indy next week, so they should win by a lot next week.

If it comes to executive compensation (which really is the root of the problem) I would prefer axing stock option for grand bonuses based off of maintain/increase market share and profit margin rate as the metric for short term performance. Both goals will fight against each other and a maximization will be best for the investor and consumer. And then 2ndary long term goals on growing the business.

/I actually get a kick out of reading the releases from the corp I work for. We would have seen a profit/share of A if we had not bought X,Y and Z compnay and invested (ungodly sum) in capitol investments..... and still make record profits with those costs.

MugzyBrown: There is nothing linking the estimate to the stock price.

I fail to see why there needs to be. A bet is an agreement between 2 parties that has to do with an incorrect prediction about an uncertain outcome.

MugzyBrown
As I said before, GE could miss their estimate by 10 cents, but the price could still jump 15% because the earnings that came out showed good reasons why they missed the estimate and how they're positioned to grow in the future.

Jack Welch was famous for, among other things, being true to his word. In the sense that if he said earnings would be 10%, then earnings would be 10%.

Not 9%, not 11%, but gentlemen if you invest in GE you can get damn near a promise of 10%.

So yes, had the earnings received an unexpected boost it would have benefited the stockholders more. However it would also call into question Welch's estimation abilities.

The man made a very smart move by taking the uncertainty out of a risky venture. You'd be an idiot to not give GE your money.

The football analogy isn't perfect but the author used it to show that we as a country changed the rules for the better to curb the negative aspects involved with expectation gaming in football. He argues we should do the same in business.

Current accounting rules are predicated on the idea that companies exist to make shareholders money. The author argues that the premise is flawed and accounting rules should be modified.

Well, if we were smart, CEOs would get paid on how well the company was doing 5 years later. Also, we'd tax pubilcly traded companies based on their total market capitalization, which would, among other things, put an end to this constant obsession about keeping the current share price high.

NewWorldDan: Well, if we were smart, CEOs would get paid on how well the company was doing 5 years later. Also, we'd tax pubilcly traded companies based on their total market capitalization, which would, among other things, put an end to this constant obsession about keeping the current share price high.

I'm on board.

Too often companies are not beholden to the shareholders, but only the top shareholders. CEO's also shouldn't be allowed also serve on other companies BOD's. The incestuous voting up of salaries and compensation packages is directly correlated to CEO/BOD being one gigantic Ivy League reunion circle jerk. It's also skimming off the top money that really should be reinvested into the business or given to shareholders.

It's far to easy to go into a company, sell off whats profitable, cost cut whats left and bail with millions in the bank. Hell, it's that asshole Romneys version of "Job creation" to a T.

"A pervasive emphasis on the expectations market," writes Martin, "has reduced shareholder value, created misplaced and ill-advised incentives, generated inauthenticity in our executives, and introduced parasitic market players. The moral authority of business diminishes with each passing year, as customers, employees, and average citizens grow increasingly appalled by the behavior of business and the seeming greed of its leaders. At the same time, the period between market meltdowns is shrinking, Capital markets-and the whole of the American capitalist system-hang in the balance."

This exact passage is why during my entire MBA education, I kept thinking to myself, "Ya, this is what the book says on how to do this the "right" way, but what companies/managers are actually doing this and being successful?

Also, I understand the need for and usefulness of the stock markets, but the insanity of quarter over quarter management is sending us down an ever steeper slope, and the abrupt stop at the end will be incredibly painful.

Saiga410: If it comes to executive compensation (which really is the root of the problem) I would prefer axing stock option for grand bonuses based off of maintain/increase market share and profit margin rate as the metric for short term performance.

My thought was 'net total profit' with a modifying factor for capital investment.

IE if the company nets $500M, but the executive sunk that $500M into capital improvements - buying a new factory, perhaps, then he still gets paid the $500M bonus.

On the other hand, let's say that he closes a factory - the $250M the old factory was sold for doesn't count as profit.

Case A: $500M in profit, CEO gets bonus for $500M
Case B: $500M profit, CEO bought $500M factory - bonus for $500M still paid
Case C: $500M in profit, CEO sells $250M factor, so 'profit' that year is $750M. CEO still only gets $500M bonus. He'll probably get more next year from lower expenses, if he can still meet needs such that the company still gets their revenues, but has $5M less in expenses.

That way capital investment is encouraged(the CEO isn't penalized for it), selling assets is discouraged(doesn't count as profit), etc...

Of course, the exact formulas and methods used to determine the above depends on the business.

Firethorn: Saiga410: If it comes to executive compensation (which really is the root of the problem) I would prefer axing stock option for grand bonuses based off of maintain/increase market share and profit margin rate as the metric for short term performance.

My thought was 'net total profit' with a modifying factor for capital investment.

IE if the company nets $500M, but the executive sunk that $500M into capital improvements - buying a new factory, perhaps, then he still gets paid the $500M bonus.

On the other hand, let's say that he closes a factory - the $250M the old factory was sold for doesn't count as profit.

Case A: $500M in profit, CEO gets bonus for $500M
Case B: $500M profit, CEO bought $500M factory - bonus for $500M still paid
Case C: $500M in profit, CEO sells $250M factor, so 'profit' that year is $750M. CEO still only gets $500M bonus. He'll probably get more next year from lower expenses, if he can still meet needs such that the company still gets their revenues, but has $5M less in expenses.

That way capital investment is encouraged(the CEO isn't penalized for it), selling assets is discouraged(doesn't count as profit), etc...

Of course, the exact formulas and methods used to determine the above depends on the business.

For instance, a method that realizes that selling a factory for $250m doesn't increase income for the year by $250m unless the factory's carrying value was $0 and the company isn't a taxpayer.

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.

You'd think after Jack Welsh said it, and after Steve Jobs pretty much said the same thing, that people would get it.

I've just finished some months at a large UK retailer, and everything is short term. They don't want to spend money on anything that doesn't pay back in a year. The result is that the sort of things that take long-term strategy like building an e-commerce platform and iPhone apps are done as short-term, inflexible developments using companies in the Phillipines that write brittle code. The apps are horrible, unable to change quickly (outsourcing is always horrible for rapid changes) and as a result, the people who went for the long-term are killing them.

roc6783: "A pervasive emphasis on the expectations market," writes Martin, "has reduced shareholder value, created misplaced and ill-advised incentives, generated inauthenticity in our executives, and introduced parasitic market players. The moral authority of business diminishes with each passing year, as customers, employees, and average citizens grow increasingly appalled by the behavior of business and the seeming greed of its leaders. At the same time, the period between market meltdowns is shrinking, Capital markets-and the whole of the American capitalist system-hang in the balance."

This exact passage is why during my entire MBA education, I kept thinking to myself, "Ya, this is what the book says on how to do this the "right" way, but what companies/managers are actually doing this and being successful?

Also, I understand the need for and usefulness of the stock markets, but the insanity of quarter over quarter management is sending us down an ever steeper slope, and the abrupt stop at the end will be incredibly painful.

Wallstreet is installing a billion dollar new fiber directly to London just to get a 10ms jump on trading. The factions of cents, over years and millions of trades will be penny pinching almost a trillion dollars over 10 years. I'm surprised companies haven't tried paying workers to the millisecond yet too.

Get used to all that and more. It's a race to the (cost control) bottom.

ZAZ: I thought that stock was a good way to reward management so I bought the guy's book to see why he thinks I'm wrong. From the Forbes article it seems the problem may not be the concept of stock so much as the people who trade stock looking for a tenth of a penny gain on a series of transactions that are over in a millisecond. A tiny tax on trades might calm that attitude. Or if there is a tax already, a bigger tax. Skimming .1% off the top should reduce volatility.

Much of the volatility is from computer trading. It should be made illegal to place a trade or blokc of trades without a qualified human analyst reviewing it and clicking the send button.

Remember that legitimate crash in early 10' (or was it late 09) where they stopped trading because of a "error"? The "wrong people" lost money, Wallstreet wiped trading on that day effectively making it a "do over" then send out a Friday news dump basically saying they couldn't find an error, or any improper trading, so it was a real run. A lot of legitimate people ended up having their decisions overturned because wallstreet didn't like the outcome on who won and who lost. No one in the justice department has reviewed it, and everyone's just about forgotten it by now.

And there's people who tell us Social Security would be better served by trading in that marketplace rather than being backed by the treasury. Heh.

bunner: (supply and demand)

"You give ME goose you catch Oog, or me kill you!"

"Oog give you goose. Oog no want to die for lousy goose. How about you give Oog wood for goose, though?"

"I no need give Oog wood. ME seriously stabby sumb*tch."

"But then Oog have fire and live through night. No die in cold. You can steal many goose from Oog, then."

"Work for me, Oog. Here wood."

(inevestment)

"You hunt goose today?"

"No, me go see Oog. Oog have great fire and ROAST goose. Goose ready to east. Tasty, too."

(the killer app)

"Me go take all Oog's goose! He say I can!"

"Bad idea. Many people love Oog roast goose and guard his cave and fire. Stabby sumb*tches, too. You lose ass."

"I bring Oog more wood, then. He trade for ROAST goose."

(the free market)

[random f*ck] - "I dunno. I hear Oog f*ck his sister."

"We ALL f*ck Oog sister! She seriously hot piece of skirt."

"Maybe, but Oog very bad for it!" I hear he spit on goose before roasting."

(politics)

"You go to Oog's today for goose?"

"No, Erf invent dandy Ronco Goosemaster 1000! Everybody have roast goose in own cave, now!"

(technology)

"Oog hear from Erf that goosemaster replace his roast goose concession, but also hear he need much wood. Oog leverage his wood stockpiles for part of Goosemaster profits!"

(asymmetrical information)

*stabby bastard returns, trades Goosemaster factory for 700 flimsy goose hunting spears, forms conglomerate, militarizes people who traded for goose spears, hands out matching fur hats, makes flags, takes over all goose related commerce, diversifies into arms, goose liver patè, custom skins and hats, sends stabby assassins to kill competitors.*

(corporations)

Oh, how we've manage to evolve since then.

LuLz!

Reminded me of Paul and Storm's Me Make Fire.

Firethorn: Saiga410: If it comes to executive compensation (which really is the root of the problem) I would prefer axing stock option for grand bonuses based off of maintain/increase market share and profit margin rate as the metric for short term performance.

My thought was 'net total profit' with a modifying factor for capital investment.

IE if the company nets $500M, but the executive sunk that $500M into capital improvements - buying a new factory, perhaps, then he still gets paid the $500M bonus.

On the other hand, let's say that he closes a factory - the $250M the old factory was sold for doesn't count as profit.

Case A: $500M in profit, CEO gets bonus for $500M
Case B: $500M profit, CEO bought $500M factory - bonus for $500M still paid
Case C: $500M in profit, CEO sells $250M factor, so 'profit' that year is $750M. CEO still only gets $500M bonus. He'll probably get more next year from lower expenses, if he can still meet needs such that the company still gets their revenues, but has $5M less in expenses.

That way capital investment is encouraged(the CEO isn't penalized for it), selling assets is discouraged(doesn't count as profit), etc...

Of course, the exact formulas and methods used to determine the above depends on the business.

CEOs taking 100% of profits! Wow and I thought real world companies were bad. Yours is ridiculous.

Fark shareholders.
not serious

Debeo Summa Credo: For instance, a method that realizes that selling a factory for $250m doesn't increase income for the year by $250m unless the factory's carrying value was $0 and the company isn't a taxpayer.

I agree, thus the way I phrased it. It can be a prudent and profitable move - Let's say the CEO arranged to buy a bigger, more efficient $500M factory and sold the old, now surplus for $250M. But getting rid of the old factory decreases continuing costs, so is still a good move.

Axel_Gear: CEOs taking 100% of profits! Wow and I thought real world companies were bad. Yours is ridiculous.

Lots of typos in my post, *shudder*. I meant more 'the previously agreed bonus for $500M of net profit', which wouldn't actually be $500M.

The problem is that Wall St today equates shareholder value with stock price. Mutual fund and hedge fund managers make fortunes if they beat their benchmarks on an annual basis, and lose their jobs if they underperform. It happens because we as retail investors pour our 401K money into the hottest funds chasing performance. They buy and sell millions of shares, so corporate boards cater to the fund managers demands to make the stock price move significantly THIS year by structuring CEO pay packages around short term performance.

If you want long term performance you'd give the CEO some shares with the restriction he can't sell them for at least 5 years. Do that and he'll manage the company so that those shares are worth more in the future. If you want short term performance you do what corporate boards do today; give them stock options that expire in 6-9 months and are worth substancially more if the stock price goes higher. CEOs today aren't paid to increase the assets and profits of the company, they're paid to drive up the stock price by year end regardless of what impact it has 5 years down the road.

great article, thanks subby