Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

But as you will understand, I don't like to post things that mischaracterize and are aimed to mislead.

-- Brad Delong

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Thursday, January 14, 2010

Was the Sarbanes-Oxley Act Harmful to Business? Part 2.1

In Part 2, I mentioned in passing how the short-term view of shareholders can impede the long-range planning of corporate executives.

Here is an elaboration on how hostile market conditions can damage the long range health of a company, and thus influence the decision to go private.  I'll editorialize and say that this is a basic, systemic flaw in free-market capitalism.

But these explanations miss the chief culprit: public markets have become a hostile environment for corporations.

Stocks fall out of bed when companies miss earnings or revenue guidance. Concerns that don’t show enough growth are told either to improve margins (which usually leads to cost cutting, a short-term expedient that simply starves the enterprise) or to rid themselves of mature businesses, no matter how much cash they throw off, so that the remainder will garner a higher earnings multiple. And analysts are even lobbying for changes in areas once considered to be management’s purview, such as pricing, wage levels, and employee benefits, at successful, premium multiple companies.

Companies’ efforts to please the markets have gone to such extremes that they are damaging, not just to individual companies, but also to the economy as a whole.

Many organizations are deferring high-payoff projects simply to bolster current earnings. One example: a telecom cancelled an ad program to promote second phone lines to retail customers. These second lines are one of their most profitable services, and the past campaigns had an 11 month payback. But that isn’t attractive enough in the current environment.


J said...

A better question: why did the GOP and Dems feel the need to pass SOX? (And did so nearly unanimously). Or as a Palast would say, follow the shekels.

SOX benefits the investors and speculators, believe it--the start up's only part of it. It's a type of security insurance--it protects the deep pockets from losing their shirt when the market tumbles, probably via diversifying etc. Corporate welfare, or at least executive welfare.

Jazzbumpa said...

Yeah -

One of my points, though it was buried in the text or comments someplace, was that companies go public to make money for insiders and companies go private to make money for insiders.

A point I didn't make - and I'm glad you brought it up - is that with both parties firmly in the clutches of bid bidnez, anyone who contends that some bit of legislation passed, with huge pluralities, is harmful to corporations really has some big explaining to do.