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From the NYT:

Down With Shareholder Value 


Published: August 10, 2012

I’ve been known to say that I was present at the creation of “shareholder value.” 

It’s an exaggeration, of course. But in 1982 — literally half a lifetime ago for me — I wrote an article about the first big takeover attempt by T. Boone Pickens. One of his central justifications for the takeover movement that he helped spawn was that company managements didn’t care enough about the company’s owners, a k a the shareholders. Their cash-based compensation wasn’t properly aligned with the desires of shareholders. Shareholders, he believed, need to assert their primacy — and force executives to start paying attention to the price of their companies’ stock. I later learned that Pickens was not the first person to make this argument — academics had already created the theory that undergirds it. But, at the time, it was still a pretty radical view.

The rise of the theory of shareholder value has been good for shareholders. On August 12, 1982, thirty years ago tomorrow, the Dow Jones Average stood at 776. On August 12, 2012, it stands at 13,208. 
Most of the attention in public discussions of the increase in profitability of big corporations over those 30 years has been about cost-cutting, and rightly so. Yet, very little attention has been paid to the possibility of collusion, which therefore interests me.

(Republished from iSteve by permission of author or representative)
• Tags: Business 
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My new column in Taki’s Magazine:

With Silicon Valley back on top of the world, it’s time to point out a bit of unwelcome history.  

There are two competing narratives about the technology hub’s origins: 

• The famous tale of how William Shockley’s obnoxious management style spun off start-up silicon chipmakers such as Intel; 

• The less-familiar version centering on Stanford professor Frederick Terman and Hewlett-Packard.  

What has almost never been pointed out, however, is that the two rivals for the title of Father of Silicon Valley, Shockley and Terman, had common roots in early 20th century Palo Alto’s scientific and ideological consensus, a now extremely unfashionable worldview that has been driven underground but remains fundamental to how Silicon Valley actually succeeds in the 21st century.

Isn’t the name “Terman” familiar for something else?

Read the whole thing there.

(Republished from iSteve by permission of author or representative)
• Tags: Business, Cold War, IQ 
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From the Washington Post:

With executive pay, rich pull away from rest of America 

It was the 1970s, and the chief executive of a leading U.S. dairy company, Kenneth J. Douglas, lived the good life. He earned the equivalent of about $1 million today. He and his family moved from a three-bedroom home to a four-bedroom home, about a half-mile away, in River Forest, Ill., an upscale Chicago suburb. He joined a country club. The company gave him a Cadillac. The money was good enough, in fact, that he sometimes turned down raises. He said making too much was bad for morale. 

Forty years later, the trappings at the top of Dean Foods, as at most U.S. big companies, are more lavish. The current chief executive, Gregg L. Engles, averages 10 times as much in compensation as Douglas did, or about $10 million in a typical year. He owns a $6 million home in an elite suburb of Dallas and 64 acres near Vail, Colo., an area he frequently visits. He belongs to as many as four golf clubs at a time — two in Texas and two in Colorado. While Douglas’s office sat on the second floor of a milk distribution center, Engles’s stylish new headquarters occupies the top nine floors of a 41-story Dallas office tower. When Engles leaves town, he takes the company’s $10 million Challenger 604 jet, which is largely dedicated to his needs, both business and personal. … 

Other recent research, moreover, indicates that executive compensation at the nation’s largest firms has roughly quadrupled in real terms since the 1970s, even as pay for 90 percent of America has stalled. 

This trend held at Dean Foods. Over the period from the ’70s until today, while pay for Dean Foods chief executives was rising 10 times over, wages for the unionized workers actually declined slightly. The hourly wage rate for the people who process, pasteurize and package the milk at the company’s dairies declined by 9 percent in real terms, according to union contract records. It is now about $23 an hour. … 

While no company over this period of time — from the 1970s to today — can be considered completely typical, Dean Foods offers a better comparison than most because fundamentally it hasn’t changed. 

The dairy business is still the root of the company; it was on the Fortune 500 by the late ’70s and remains there today. It grew then and more recently through acquisition.
Moreover, both chief executives — Douglas and Engles — could boast records of growing the company and profits. 

From 1970 to 1979, while Douglas was the chief executive, sales at Dean Foods tripled and profits increased tenfold, to $9.8 million, according to company records. Similarly, from 2000 to 2009, sales at what would be Dean Foods had roughly doubled, and so had profits, to $228 million. (Engles became chief executive after the company he led bought Dean Foods in 2001 and adopted its name.)

I’m guessing from all this that the CEO’s compensation as a % of corporate profits went up from about 3% in the 1970s to about 4% these days. So, there’s no apparent economy of scale in CEO pay. 
That change from 3 to 4% is not insignificant, but the big change since the 1970s seems to me to be the huge growth in corporate profits. 
And that seems kind of odd. I paid a lot of attention to the business world from, say, 1979 into the early to mid 1990s, but the size of corporate profits these days seems hard to reconcile with economic theory.Adam Smith 101 says that more perfect competition will lead to lower profits.

You might think that regional monopolies and oligopolies that allowed higher profits than the risk adjusted cost of capital would have been worn down over the decades by increased competition caused by the huge improvements in shipping, communications, data processing, and globalization. But I don’t see much evidence for that.

I’m not surprised that Apple has very high profit margins on innovative products, but why does, say, P&G do so well these days on toothpaste and detergent?

I mean, sure, we all know that corporate executives have been winning in the struggle with workers over pay. But why hasn’t increased competition between corporations competed away the profits won away from employees?

(Republished from iSteve by permission of author or representative)
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For 20 years, you’ve always heard about how horrible Japan’s economy is. In 2008 you heard over and over about how the worst thing that could happen to America is a Japanese-style Lost Decade. It always sounds like Godzilla, or maybe the B-29s, have come back. 
And yet, Japan doesn’t actually seem to be a post-apocalyptic wasteland. A friend of mine who has lived in Japan since about 1980 said a couple of years ago that although he’s always reading in the English-language press about how badly off Japan is, it doesn’t see so bad when he steps outside. When he first arrived in Japan, the country was full of badly-dressed people and ugly buildings. Now it’s full of well-dressed people and attractive buildings.
I guess I’m just obtuse. It finally dawned on me that the reason you hear about how horrible Japan is all the time is that it has been horrible for financiers since 1990. The Nikkei index is now only one-third what it was in 1990 at the end of a ridiculous real estate bubble in which the grounds of the Imperial Palace in Tokyo were theoretically worth more than all the real estate in California.
The New York Times runs a contrarian article about how you can make a lot of money investing in Japan because all investors hate Japan:
Japan’s government finances are on the verge of collapse, and its economy has floundered for two decades.  …

“Japan is by far one of the cheapest markets in the world,“ said Charles de Vaulx of International Value Advisers, a New York-based investment firm. “It’s so universally hated, yet it might be one of the world’s best-performing markets over the next five years.” 

 Or, then, again, it might not. But the point is that all investors hate Japan.

“So many Japanese companies are well managed from an industrial standpoint,“ he said. 

Yeah, but who cares about that?

… An attraction for the bulls is the fire-sale prices. Although the benchmark Nikkei recently hit a nearly 10-month high, it is still more than two-thirds off its peak before Japan’s real estate and stock market bubble burst in 1990.

Shares in Tokyo are also about 20 percent off their levels before the financial crisis hit in 2008 — one of the few major markets that have yet to rebound. …

Certainly Japan can still give investors reasons for doubt — like the long-term effects of the government’s high debt and aging population. There is also the paltry profitability of companies like Sony, which has averaged a 3 percent return on equity over the last five years while its Korean rival, Samsung Electronics, has surpassed 13 percent by the same measure….

More Japanese companies have also tried to counter investors’ longstanding complaints that companies here hoard too much cash, instead of investing it or returning it to shareholders. 

…Some activist investors, meanwhile, are trying to coax Japanese companies into creating more value for shareholders, rekindling an issue that ignited contentious battles between foreign investors and Japanese management in the mid-2000s.

(Republished from iSteve by permission of author or representative)
• Tags: Business 
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Much of the progress in improved efficiency in the last 50 years has come from reducing inventory. Holding inventory is expensive. You can’t earn interest or dividends on goods you own. Plus, you have to pay to store it, keep track of it, find it, etc.

The Just-in-Time manufacturing process made famous by Toyota focuses on cutting work-in-process inventory — parts get delivered to assembly line stations just before they’re needed. Similarly, containerized shipping has reduced the inventory tied up in transportation because it can be loaded and unloaded faster. At the retail end, Wal-Mart and Costco have radically cut inventory held by retailers through a plethora of techniques, such as using UPC scanners to measure sales and compare them against shipments to keep track of inventory and reorder automatically. (By the way, is “plethora” an inherently comic word and thus should be reserved only for facetious uses?)

The retailers, in fact, have shoved a lot of their old inventory holding costs onto consumers by, for example, selling them cases rather than individual items. Part of the demand for bigger houses and bigger vehicles that has proven so expensive to us as a society comes from consumers taking on more of the burden of storing and transporting goods.

While there has been enormous systematic progress at improving inventory management in the commercial world, there has been very little progress toward Just-in-Time practices in the domestic world. Just as it was fifty years ago, some householders are good at it, some are bad at it. (I’m one of the very, very bad ones, so I notice this lack more). There’s just a lot more inventory of household goods to manage today than there was back then, so the need for more advanced household logistics is much greater.

I can’t in good conscience advise anybody to make a career in this field because I fear it won’t take off for a long time, but it will take off eventually.

(Republished from iSteve by permission of author or representative)
• Category: Economics • Tags: Business 
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One of the great accomplishments of the business world in recent decades has been to make the supply chain leaner, whether Toyota’s just-in-time parts delivery system or Wal-Mart’s minimization of inventory.

Retailers, in particular, have become vastly more efficient, greatly lowering the mark-up. If you pay $100 to a manufacturer on January 1, but the merchandise sits around in various warehouses until you sell it on July 1, and if your cost of capital is, say, 10%, the financing costs alone added 5% or $5. But, if you can sell it by February 1, you’ve saved over 4%.

And yet, much of what retailers like Costco are doing is handing the problem of inventory management off to customers. Costco is operating on a just-in-time inventory system, but you aren’t. If you buy a giant jar containing a six month’s supply of pickels, instead of a one month supply, you’ve handed Costco five months worth of your money.

And, of course, your Corolla isn’t big enough to haul around a full shopping trip worth of giant products from Costco, so you trade it in for an SUV.

And then, you stick your giant jar of pickels in your refrigerator and after a few months, while it’s still half full, you bring home some other giant jar and you have to throw something old out of the refrigerator to squeeze the latest Deal of the Century in. So, you look around, decide you’re sick of pickels, and who knows if they are still good? They are pickels, so they should last a long time, but it’s hard to remember when you got them it was so long ago. And they don’t look very appetizing. So, out they go, half-consumed.

Eventually, it occurs to you that you’re wasting money throwing out old food to squeeze in new food, so the only solution is to get one of those enormous Viking refrigerators. But to do that you’ll have to enlarge your kitchen and, while you are at it, put in granite countertops. Fortunately, everybody knows that home prices will go up forever, so you just take out a new mortgage on your house, with one of these adjustable rate mortgages with a super low rate for the first two years.

What could possibly go wrong?

And that’s not all, because most consumers have only the most rudimentary inventory management skills.

Products come in such large quantities now that you can’t get in an old-fashioned rhythm like “Buy a one pound can of X every week.” That’s easy to remember, whereas remembering to “Buy a three kilo vat of X every month and a half” is hopeless.

They have so much stuff around the house that they can’t find the thing they are look for, so they go buy another one, which only makes finding stuff even worse.

And there’s no easy way to keep track of what you need, so you tend to overbuy some products and forget to buy others.

The good news is that the basic technology businesses to track inventory, such as UPC scanners, Radio Frequency Identification tags to find goods you’ve already bought, wi-fi networks, the Internet, PCs and printers to generate shopping lists are mature.

On the downside, it’s a giant systems integration problem, and there are lot of chicken and egg problems involved.

For example, better supply chain management could include home delivery of groceries triggered automatically by analysis of consumption rates and supply on hand. Home delivery based on customers laboriously picking from menus has been tried ever since the mid-1990s, but if you have the time to hang around the house waiting for the deliveryman to show up so you can put your food away in the refrigerator before it spoils, you probably have time to go shopping yourself. What you would need is indoor-outdoor access to a refrigerator, like old-fashioned coal bins had an outside door for the deliveryman and an inside door for the resident so deliveries could be made even when nobody was home. But nobody is going to rebuild their house for that purpose until all the other parts are in place, but will all the other parts be profitable to put into place until all the parts are in place?

So, I assume most businesses who invest in these systems will lose money for the next decade or two, but a generation from now, I expect that millions of American homes will be equipped with sophisticated inventory management systems.

(Republished from iSteve by permission of author or representative)
• Tags: Business 
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I never have any money-making ideas, but here’s a vague concept that somebody might be able to profitably apply.

One reason cell phones are so popular around the world is because, unlike old-fashioned land line technology, they don’t require the kind of disinterested organizational ability that Northwest Europeans and Northeast Asians have but that almost nobody else displays. Land-lines tend toward being a natural monopoly — it’s silly to string multiple phone lines into your house to choose among competitors — so phone companies used to be either government agencies or regulated monopolies. And that meant that most of the world had bad phone service. It wasn’t just the Third World — Italy was notorious for the years you had to wait to get hooked up. Italians are terrific at small scale businesses that react instantly to the latest fashions, but their big bureaucracies are disastrous.

In contrast, cell phones aren’t natural monopolies, so they thrive in less civic-minded cultures. The most extreme example was Somalia during the recent decade and a half when it didn’t have any central government at all, but it had lots of prospering cell phone providers. (There are costs to anarchy, though — one Somalian cell phone company I read about had 800 employees, 500 to do the work, 300 to carry guns to protect them.)

The point is that most of the world is a little closer to Somalia than to Sweden when it comes to the civic virtues, so products that don’t require large scale cooperation and disinterested diligence will thrive more than those that do.

(Republished from iSteve by permission of author or representative)
• Tags: Business 
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From Mahalanobis on energy trader genius Brian Hunter, who lost $6 billion betting on natural gas for Amaranth:

As he lost $6B, one would think that is punishment enough, but he does seem to be getting away with murder, in that he put on a really large calendar spread on oil, bet big and personally pocketed around $75mm in 2005, then lost $6B and got no bonus the next year on the same dumb trade. That annualizes at $37.5mm/year, not bad. As a further reward, some Middle Eastern investors are giving him $650mm for his next venture (he lost $6B? Brilliant!).

This seems to reflect a general tendency among incentive structures for the extremely well-paid, whether Wall Streeters, CEOs, movie stars, or athletes: heads you win, tails you don’t lose.

• Tags: Business 
Steve Sailer
About Steve Sailer

Steve Sailer is a journalist, movie critic for Taki's Magazine, columnist, and founder of the Human Biodiversity discussion group for top scientists and public intellectuals.

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