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.