At the risk of being politically incorrect, I would like to address the US economy from a rarely discussed perspective. The stock market had more responsibility for the economic crisis than you may think.
While the latest mortgage fiasco was very damaging to the US
economy, it is only part of the story told by the media. An equally dangerous
practice was taking its toll on businesses: publicly traded companies buying
back shares of their own stock in excess to drive stock appreciation.
In some cases, buy-backs can be beneficial. For instance, if
the market significantly undervalues a corporation’s stock and management knows
they have winning products and services in the pipeline, it could make sense
for them to buy back shares of their stock. It is a way for a company to invest
in itself and reward shareholders.
On the other hand, the practice can serve to over inflate a
company’s earnings. Buying back stock drives up the price and gives the
appearance of greater performance. Consequently, more investors will be willing
to purchase the stock. It ends up working much like a pyramid scheme. For
example, the average investor sees a company buying back shares at $50 in 2007,
gets excited for that company’s prospects, and eventually the stock rises to
$70 on little more than false confidence. The company then looks like its
performing well and investing in itself.
What happens, however, is that the corporation then has a
lot of its money tied up in stocks. So when the market tanks and that stock
that was worth $50 a share is now down to $10, the company has lost a huge part
of its investment until they can drive the price back to $50. The organization
will then have to make up for that loss by cutting back in R&D, laying off
employees, and finding ways of cutting expenses.
As a community of customers, investors, vendors and
government, we have to start questioning management’s decisions of buying back
shares instead of investing in innovative products and services that benefit
society. If a business’ intention is only to do financial reengineering, we
have to wonder if it is still relevant to society. Apple Computer has done an
extraordinary job of benefiting stakeholders by reinvesting their money in
R&D.
My biggest fear is that we have management teams who have so
much cash that they do not know what to do with it. This is a sign of
incompetence. Leadership’s job is to build a perpetual company that provides
value to stakeholders. While shareholders are important, if there are no
customers, the business will soon cease to exist.
It is time we the people take a stand and demand value from
enterprises. It is time we stand for leadership to make choices that benefit
the whole and demand organizations uncover alternatives to laying off
employees. Without people, there is no company. If we refuse to take this
stand, we will go through continuous cycles of severe crashes. It is easy to assume we are witnessing
greed. It has more to do with what society accepts. Our tolerance and
integrity is built into the training of all leaders. Take a stand and demand
more from yourself and leadership will follow.
I welcome your thoughts below.
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