
Clayton Christensen: How MBA-driven Profit focus is Killing the U.S. Economy - carterac
http://www.forbes.com/sites/stevedenning/2011/11/18/clayton-christensen-how-pursuit-of-profits-kills-innovation-and-the-us-economy/
======
rayiner
The Keynes quote made me think of something. We have in the U.S. what is
probably best described as an ethical system based on profit. It's literally
pervasive. "The only purpose of corporations is to maximize shareholder
profit." "We should have economic policies that grow the pie." All of these
statements are couched in a normative principle: that the singular pursuit of
profit will lead to maximization of the pie, and thus the greatest overall
welfare.

This normative principle was defensible in the 18th century, though Adam Smith
never took it to quite the extremes that we have today, but is pretty solidly
indefensible based on what we know about economics in 2011. And that's
something I don't think even most economists would dispute today.

Yet, our ethical system is beholden to that principle, though we know it is
based on assumptions we know to be wrong.

What MBA programs need to teach, and I think it is happening recently to some
extent, is that "social responsibility" is not a dirty word. Considering the
social impact of business decisions, something that is considered irrelevant
under the current ethic because of the premise that profit-maximization ==
welfare maximization, is not only not a bad thing, it is an indispensable
obligation of doing business in civilized society.

~~~
dreamdu5t
The ethics of private property aren't based on profit, they're based on the
self-evident fact that one owns his own will and is responsible for his own
actions, and consequently the fruits of his labor.

Social responsibility isn't a dirty word, it's a completely meaningless and
dangerous word used by ideologues of all types to serve their personal vision
of the world. It means something different to everyone you ask.

I don't have responsibilities to obligations I never made.

~~~
rayiner
If you read Adam Smith, his argument is that pursuit of individual gain
produces social good. "By pursuing his own interest he frequently promotes
that of the society more effectually than when he really intends to promote
it." The rhetoric we use today "a rising tide lifts all boats" and the like is
thoroughly rooted in that thinking.

The fact of that matter is that we know this premise to be false. That
knowledge is indeed irrelevant if you conceive of the profit-maximizing
principle as being entirely rooted in an "every man is an island" hyper-
libertarian conceptualization, but that is a relatively modern phenomenon and
a wholly inaccurate description of the underpinnings of modern American
ethics.

As a practical matter, only a few crazies actually believe that people have no
social obligations. A large majority have some social conscience, but because
they fully buy in to Smith's normative principle, they believe that their
business decisions need not be guided by considerations other than profit. To
the extent that this principle is invalid, their behavior is inconsistent with
fostering desirable outcomes.

~~~
dreamdu5t
_"By pursuing his own interest he frequently promotes that of the society more
effectually than when he really intends to promote it." [..] The fact of that
matter is that we know this premise to be false._

I disagree. If someone doesn't pursue their own interests then by logical
necessity they are pursueing interests imposed on them. "Social interest" is
merely a euphamism for State interests. Killing the Jews in gas chambers was a
social interest. Of course, by disagreeing with that you would prove my point
that "social responsibility" is anything but a completely subjective term that
varies (greatly) by each individual, and only has power in the context of the
State.

 _As a practical matter, only a few crazies actually believe that people have
no social obligations._

But what does social obligation mean? If you didn't obligate yourself, then
social obligation really means obligation by force, obligation to the State
and whatever the State deems an obligation. Obligation to a small group's whim
instead of obligation to your own actions, interests, and responsiblities.

~~~
wazoox
You've got to the Godwin point at impressive speed, kudos.

> _If someone doesn't pursue their own interests then by logical necessity
> they are pursueing interests imposed on them._

You fall for the fallacy that you actually _could_ be free of social influence
anyway. This isn't the case; see you've been Ayn-Randed to the bones, for
instance. That makes you believe mad things that work against your own
interest in the long term. See?

> _But what does social obligation mean?_

You're born to some family, speaking some language, walking some road,
sheltering under some roof someone built, lighten by some power that was
brought to you, etc. Are you pretending you don't need anybody else?

~~~
dreamdu5t
> You fall for the fallacy that you actually could be free of social influence
> anyway.

No, I never implied that I was free from the forceful influence of the State.
Social obligation in the context of the post I was responding to is (I
thought) referring to regulation and taxes, the social contract.

> You're born to some family, speaking some language, walking some road,
> sheltering under some roof someone built, lighten by some power that was
> brought to you, etc. Are you pretending you don't need anybody else?

I'm not pretending that I don't need anybody else. I just don't find moral
legitimacy in being compelled to do things by force without my consent.

Private roads aren't allowed to exist, I pay for my own shelter presumably
built by people who were already paid to build it, I pay for my power by the
company that provides it, and language I acquired by picking it up from others
at who provided it freely.

~~~
wazoox
> _I just don't find moral legitimacy in being compelled to do things by force
> without my consent._

By force? Were you subject to violence? You're free to head into the
wilderness, live from your hunting and start your own civilisation on your
own, perfectly free; others did. However it proves more cumbersome and less
pleasant than simply living in our oppressive society.

I'm perfectly happy with paying taxes, and having roads, policemen, garbage
collectors and street lights. What's the opposite stance?

> _Private roads aren't allowed to exist_

How so? The path going across my terrain is as private as possible. However
private roads aren't really practical. It's commonly known that infrastructure
work in general is less efficient when not a monopoly, and so far the only
working monopoly is the state (monopoly of violence most saliently).

~~~
OstiaAntica
Private roads are very, very difficult to build in modern America. The biggest
issue is that people traveling on a private road are not allowed by the
government to sign away their right to sue, and the liability for the private
road operator is enormous.

Other issues are the thicket of regional planning regulations. There's really
not truly private property any more, roadbuilding of any type is subject to
the state and local political process.

~~~
wazoox
I'm afraid you're confusing a symptom (the over-complexity of our society)
with a cause. My advice : read the always fresh and mind-blowing Joseph A.
Tainter's "Collapse of complex societies".

------
cft
The root cause of the problem is the separation of ownership from control.
This lead to the rise of the class of "professional managers", whose interests
are intrinsically short-term. In the times when American wealth was created,
the owners called the companies with their own names: Boeing, Ford, and MBAs
did not exist. Their interests were to pass the earned wealth to their
children. The historical mission of the MBAs and the professional managers is
to dismantle the salvageable assets and sell them to more vibrant economies.

~~~
rprasad
The separation of ownership from control began with the East India Company,
the first known corporate entity. In 1600, the Queen granted a Royal Charter
to EIT for pursuing trade with India. Professional managers have existed just
as long.

The problem is not the managers, or people with MBAs. The problem is that the
Delaware chancery courts, where most American corporations are incorporated,
long ago ruled that the duty of the Board of Directors is to manage the
company to maximize the returns of its shareholders' investments. _They can,
and frequently do, get sued if they do not do this._

~~~
mattmcknight
Yet the timeline upon which they are to do this is unclear. Investors want to
maximize for a decade, temporary holders want to maximize the quarter. The
point Christensen makes is that short term maximization does not always lead
to long term maximization. One thus must blame the shareholders themselves for
not acting as investors, but rather as speculators, frequently not even
participating in board elections, allowing the CEO to pack the board with
allies, just waiting for a bump in the share price so that they can exit their
position.

~~~
wallflower
> temporary holders want to maximize the quarter

Serious question. Did the quarter system come from the agrarian economy? If
not, where did the emphasis on three-month increments come from?

~~~
ars
I don't know, but quarters also match the seasons, and for most of history
manufacturing was directly tied to which season it was.

And a lot still is today. Homes, cars, clothing, [specific] food, it's all
tired to the season.

------
forgottenpaswrd
The Keynes quote is funny, giving the number of people that define their
selves as Keynesians, and being Keynes dead long ago.

As some people had already stated, MBAs are not the problem, if you go to a
good MBA you will have good teachers, and those people have very clear in
their mind all those economic fallacies and more.

Ethics are the problem.

The problem is the fact that somebody could enter a company, increase the
short term benefits, but destroy the company long term, and get out rich, and
nobody going after them. HP(last CEO got at least 5Million) , GM(what are 50
Billion these days anyway?, nobody lost their seat), Golmand Sachs, buying
bankrupt states CDS(enormously profitable while it does not break, the bill is
payed by taxpayers when it breaks)...

E.g if Google decides to "monetize" all the info they have over me overnight
they will increase their profit a lot (x5 or x10), but I will start looking
after other companies search. As everything I use uses their services it will
have to be a slow, progressive change, while the genius MBA graduate could
declare victory and retire rich at 30, but it will make people spit at hearing
the word Google.

Another example, there was a time in witch SCO was a serious software company,
but some guy decided to make himself rich while destroying the company, and
now the name have a different meaning.

~~~
arethuza
"there was a time in witch SCO was a serious software company"

I'm pretty sure the current SCO isn't even the same company as the original
Unix Santa Cruz Operation - they are really what was Caldera who bought part
of SCO (including the rights to UNIX) and then ended up calling themselves
SCO, now TSG.

<http://en.wikipedia.org/wiki/SCO_Group>

~~~
ebiester
There was also a time in which Caldera was a serious open source company. I
remember using their Linux offering in the 90s.

------
danmaz74
I wouldn't say that the problem is "maximizing profits" per se. The problem is
the focus on "maximizing profits in the short term".

Which brings us to another problem: that predicting the effects of a business
decision on profits in the short term is easy enough, while predicting it in
the long term is much more difficult (even impossible, depending on how you
define "predicting").

Simplifying, for the long term you need vision, leadership and entrepreneurs.
For the short term you need formulas, management and MBAs. Quite often the two
needs clash with each other.

A century ago there was a lack of management skills and applying them brought
big results. Now we are probably (well) past the point of diminishing returns
- even negative returns in the long run, and what is missing is vision, both
at the corporate AND at the political level.

------
TDL
This article was a bit odd. My b-school experience was almost the opposite.
IRR was presented as inferior because it could put you in situations where you
are giving up a lot of profit in dollar terms for a smaller dollar profit that
had a higher rate of return.

In the end, one metric was not used as the be all and end all. Using multiple
metrics to help inform an investment decision was the ultimate goal. The
problems with American business are multiple and complex; it's not a matter of
a simple financial metric.

~~~
ShabbyDoo
My MBA is circa 1997, and I shared your experience. A friend with a much
"better" MBA than me (his from Harvard) once remarked, "Modeling is a great
way to determine if a business idea is awful, but it's not going to tell you
if you have a good one." I might argue even further that modeling can lead one
to dismiss profound ideas through the erroneous presumption of a static
future. It was said that the original business justification for Xerox counted
the number of typists in America and multiplied by the number of mimeograph
copies produced from each document. Obviously, the copy machine found many
more purposes once introduced into offices -- a much more dynamic effect than
most could even imagine.

Perhaps Dell's artificially static future was the presumption that shipping a
laptop or desktop with a pre-installed OS would continue to be a viable
business model? What if Steve Jobs had been forced at gunpoint fifteen years
ago to lead Dell? What would the outcome have been? He likely would have
spoken harshly about the elephant in the room -- Dell produces a commodity,
and its future depends on Microsoft's continued prowess. With such an
admission out in the open, what actions could have been taken which would have
been nearly impossible to quantify via traditional B-School modeling
techniques?

~~~
eftpotrm
_What if Steve Jobs had been forced at gunpoint fifteen years ago to lead
Dell? What would the outcome have been? He likely would have spoken harshly
about the elephant in the room -- Dell produces a commodity, and its future
depends on Microsoft's continued prowess._

What if Michael Dell had been forced at gunpoint fifteen years ago to lead
Apple (and not liquidate it)? What would the outcome have been? He likely
would have spoken harshly about the elephant in the room -- Apple produces
bespoke designs to compete against commodities with bigger economies of scale
and network effects, and its future depends on its (arguably not then
demonstrated) ability to, by itself, out innovate both a larger software
provider _and_ several hundred hardware vendors.

(Which is a slightly artificial way to make the point, but I don't for one
minute think Apple's past - or indeed future - success was even slightly
guaranteed. Their position is remarkably precarious, IMHO.)

------
bmccormack
Professor Christensen gave this talk (or one very similar) at Business of
Software this year. He was phenomenal.

One thing I like a lot about the culture in younger companies, especially in
tech, is that while we are conscious of the appropriate financial ratios,
we're not _driven_ by them. For example, Fog Creek, while profitable, isn't
driven _only_ by profit, and happens to be passionate about giving developers
a great place to work and helping developers create better software (among
other things).

~~~
ShabbyDoo
"isn't driven only by profit"

I will argue that establishing such a reputation, even at the expense of
short-term profits, likely is profit maximizing. So, you are profit driven --
just in a way which also happens ot feel good ;)

~~~
SoftwareMaven
That is mixing up causality. Just because significant profit comes your way
does not mean you are in any way driven by it.

------
betterlabs
Its unbelievable how business (school) buzzwords and tactics tend to overlook
the most important aspects of a particular industry / problem / scenario that
are non-financial in nature. There is an important strategic perspective(s)
which cannot be accounted for in IRR, RONA or any of the other hundred such
terms. Loved the quote from the founder of TSMC.

It is also surprising to see that most Asian conglomerates ( in India, Japan,
Korea, Taiwan, China etc.) seem to have strong vertically integrated
businesses where are they continuing to build and expand expertise in the core
areas, while letting the west become their marketing managers.

------
Atropos
I don't know, the general theory of "Companies outsourcing themselves to
death" sounds fine, but somehow the examples are never convincing. I mean if
you compare the development of Dell vs. Asustek in GoogleFinance, it really
doesn't seem that Asustek is better off. Is it really such a tragedy if Dell
isn't in the dying pc-manufacturing business anymore?

~~~
cturner
Exactly. How many Dell-like companies have we seen die off over the last
fifteen years because they were stuck in their ways. The PC companies that
have survived are those that made it in to services work - HP, IBM, Dell.
Oracle has worked hard to get into the sector. Plenty of names that come to
mind for great-computer companies who got squashed - Compaq, Digital, Gateway,
Olivetti, Sun, SGI.

------
01PH
Not really sure in how far this is a new insight. Based on Drucker's old
mantra _Business has only two basic functions - marketing and innovation_ it
is pretty obvious that in production based industries manufacturing and
innovation are stronger related.

But it is great to see that influential business academics like him
increasingly promote the fact that business success is not (only) about
juggling numbers. Or to quote from my favorite paper by Christensen:

 _And all data are subjective. Each form of data is a higher-level abstraction
from a much more complex reality_

(2004 Carlile & Christensen - The Cycles of Theory Building in Management
Research)

------
dade_
Financial metrics are great to measure the health of a company, but I don't
think anyone ever intended companies to be run by financial metrics. This
isn't just happening in business though, these ideas were also brought into
the public sector, police forces and military. Each are an ongoing disaster.
John Raulston Saul has written many great books on the subject including
Voltaire's Bastards, and The Unconscious Civilization.

------
flacon
I really like this quote: "The way we measure profitability is in ‘tons of
money’."

I couldn't help but hear a loud 'cha-ching' in my head when reading this. I
makes sense though, having a lot of money in the bank enables a business to
make bold moves. I think its a delicate balance between making more sums of
money and being more profitable.

Silly side note and stupid metaphor warning - if someone is right-handed, they
never think to cut off their left hand just because they get less return or
use out of it. Only when someone if forced to choose between the hands would
they ever say, ok cut off my left hand and save my dominate hand. Thats like
an extreme situation!

But in business, these companies make extreme moves like this, exiting whole
biz sectors/markets, eliminating depts, segmentation etc. Add to this, that
the bar is continuously raised, so if the factory quota for last year was x
this year its x + 10. Thus 5-10 years later the exec's are surprised when the
factory is not meeting "quota" and shutter it in the name of profitability.

Profitability is one issue, but I think the trend toward over optimization and
greater year-over-year ROI is also to blame.

------
wedesoft
The same thing has been going on in European countries for several decades.
Manufacturing is cheaper in Asia where the workers can be forced to do their
job for low salaries and no healthcare. The solution is to massively increase
VAT (and lower income tax). The other possibility is that our (average) living
standard will drop until we are able to compete again.

------
Duff
I see this as a complement to a recent Planet Money podcast "How Money Got
Weird"... about the rise of financialization in america.

[http://www.npr.org/blogs/money/2011/09/30/140954343/the-
frid...](http://www.npr.org/blogs/money/2011/09/30/140954343/the-friday-
podcast-how-money-got-weird)

The validity of a particular metric is irrelevant. The point is, on a broad
scale, we're collectively worshiping on an altar of financial indicators
instead of managing businesses.

I've worked at a bunch of places where people who are utterly clueless about
the business make really lousy decisions by applying magic formulas. Sometimes
they are MBAs, other times they are wannabes that read Deloitte magazine on an
airplane. In either case, because they are clueless, they have no way of
assessing the validity of the metrics they are using to run the business. The
right formula with the wrong inputs yields the wrong answer.

~~~
stfu
From my experience it is often a mixed bag. People use those metrics that
support their subjective ideas/gut feelings. If these turn out wrong they can
always fall back to some "its all the numbers fault" or "Deloitte said so"
explanation.

In my opinion the whole Consulting industry strives substantially on the fact,
that they provide management with a third external authority. This is an ideal
constellation for a manager since first the consulting firm's suggestions
don't have to be implemented if they are not representing his/her interest.
But if they are in line with the personal view, they give additional weight to
that position. Moreover afterwards if the project is a success the manager can
still take the credit for for the project but if it fails it was all the
consulting firm's fault.

------
powertower
What killed the economy is lack of demand, what killed lack-of-demand is a
bleak outlook on future and lack of funds, and what has produced this is
_efficiency_ itself...

We are now at a time where technology and domain knowledge are stripping
existing jobs while creating only a few new jobs.

Welcome to the new world people. It’s going to be a bumpy ride.

------
orky56
I'm a little disappointed by the fact that the Op needed to change the title,
perhaps to artificially drum up more attention. It doesn't take an MBA to know
that businesses seek profits. Also, NPS (Net Promoter Score), which the author
argues for over IRR & RONA, also <shock> gets taught in business school. It's
up to the individual student to apply his/her craft correctly. If industry is
demanding a certain way of thinking, it would seem pretty straightforward that
business schools would like to incorporate that into its ciriculum so students
can be prepared to work at those companies.

A business focused on profits? It is a business after all. Product
development, R&D, and long-term profits are nice, but only when you can at
least get through the short-term. Just my perspective on the situation.

~~~
Vivtek
Well, given that this title is a pretty decent summary of the first sentence
of the article, I think it's not really artificially drumming up more
attention so much as accurately characterizing the content.

------
mathattack
Multiples of Money is actually another way of saying IRR - it's just adding
the dimension of time.

Christensen is ripping on the slaving devotion to single metrics that some
firms follow. This is very true. Any individual metric can be gamed. If you
focus on IRR only, people will game it. Same with NPV. Same even with the Net
Promoter Score that the article pushes. (Easier to delight customers if you
aren't worried about profit.)

The challenge of management is balancing these measurements, and minimizing
sub-optimization. In short term there are conflicts between them, but firms
with a longer term focus find profitability goes hand in hand with net
promoter score. But in many ways it's long term versus short.

------
wmougayar
The key point of this article is that when you make decisions that are meant
to optimize profits and lower costs, you're mortgaging your future. The money
quote is that companies forget about the knowledge that's lost forever which
prevents companies from further innovations in the future. But the argument
can be made that companies can re-use the savings and re-invest in innovation.
Look at Apple: they manufacture where it's cheap (China), but they keep design
and innovation in the US.

------
refurb
I think that's a fair article, but it doesn't really say a whole lot that
isn't already taught in a lot of MBA programs.

I think the key here is to realize that IRR, NPV are imperfect measures of
profitability. In addition, the impact of decisions on factors that can't be
measured: R&D productivity, ability to respond to technological changes, can
have serious consequences.

I think the article makes some excellent points, but very few people in
business aren't aware of them.

------
Havoc
I find it difficult to believe that this isn't taught in a proper MBA course.

Hell we were taught in 2nd year undergrad that IRR sucks for decision making,
but if you absolutely must then at least use the modified IRR.
[http://en.wikipedia.org/wiki/Modified_internal_rate_of_retur...](http://en.wikipedia.org/wiki/Modified_internal_rate_of_return)

------
Zakharov
The first section of the article seems like a good argument for why firms
should focus primarily on absolute long-term profit. Then the author ignores
this and starts talking about "customer delight", without any justification
for its importance.

~~~
umarmung
Yes, I noticed that semi-dichotomy too.

It is like this Forbes author "Steve Denning" is trying to piggy-back his own
ideas on Clayton Christensen's central thesis.

------
andreash
What Clayton says about the focus on "learning about your customer" seems very
similar to Eric Ries term "Innovation Accounting" in "The Lean Startup".

Have we been steering our companies using the wrong metrics for the last
century?

~~~
mbesto
Gary Vaynerchuk also calls this "relationship capital":

 _"In the future, companies with tremendous "relationship capital" will be the
ones to succeed. Society is creating an ecosystem that rewards good manners,
high touch, honesty, and integrity. Ten years from now, every company will
have a Chief Culture Officer on staff, and if big enough, a team dedicated to
scaling one-to-one relationships."_ [1]

[1] - [http://www.amazon.com/Thank-You-Economy-Gary-
Vaynerchuk/dp/0...](http://www.amazon.com/Thank-You-Economy-Gary-
Vaynerchuk/dp/0061914185/ref=sr_1_1?ie=UTF8&qid=1321783548&sr=8-1)

------
RobPfeifer
This is similar logic to PE and VC funds who actually look at Multiples of
Money rather than IRRs. At the end of the day, turning $100mm into $700mm is
meaningful even if timelines differ by a couple years.

------
meric
>> “Practical men, who believe themselves to be quite exempt

>> from any intellectual influence, are usually the slaves of

>> some defunct economist.”

>> John Maynard Keynes

Oh, the irony.

------
viandante
I don't get it. The Chinese guy says they measure "tonnes of money". But if I
have an OI of 30%, it will take 100 of sales to make 30 of profit. If I have
an OI of 10%, it will take 300 of sales to make 30 of profit.

It looks like the Chinese have problem in making good investments. And I
understand that, somebody should always remember that the Chinese is an
extremely controlled economy. Maybe that's why they are happy with low ROIs,
maybe that's the only thing they can do.

Apparently, my hairdresser understand finance better than those guys.

~~~
ww520
You missed the essence of his quote. He said don't just emphasize on the
ratio, "Americans measure profitability by a ratio." The basis (tons of money)
that the ratio is measuring is more important.

Your hairdresser could have a fantastic ROI of 50%, but 50% of $1000/year is
miniscule when compared to 10% ROI of a company making $100M/year revenue. If
you pursue just the ROI in spite of everything else, your great ROI economy is
only $1000, while the other lower ROI economy is $100M.

It's the same question of a small percentage of a big pie vs a big percentage
of a small pie. Apparently they like a big pie better despite having a lower
ROI. May be it has to do with more people are benefited with a big pie.

~~~
viandante
Yes, but still it doesn't make sense. If you invest money, you try to get as
much as possible from it. Only reason not to do it is State control.

Also, you apparently didn't read my example, which is quite the reason why
measuring the percentage is also (also) important.

I still think you guys are missing the point.

~~~
ww520
I really don't want to go into a piss contest with you, but:

\- What you advocate is the problem Clayton's article tries to address. Your
approach will kill the goose that lays the golden eggs.

\- You emphasize the wrong thing, the return ratio, while other people prefer
to measure it in the amount of money returned. That's what get the U.S. auto
industry in trouble, as one executive put it clearly: "we spent all the
efforts in the bottom line in cost cutting but ignored the top line revenue
expansion. It got good ROI in the short term but destroyed the industry in the
long term."

\- You also missed his other quote, "use the return on assets ratio if cash is
scarce. But if there is actually a lot of cash, ... economize on something
that is abundant." Think about that for a moment in how to grow a business and
why founders raise VC money in return for a lower return rate on their part.

\- I am not their guys, as you implied in "you guys."

\- Your fascination with State control system has no bearing in this
discussion since the Chinese companies in discussion are in Taiwan. If your
intent is to prove the Chinese economic system is inferior, you are barking up
the wrong tree.

\- Even U.S. has government managed economy - the Fed manages the economy via
various monetary policies. And the Fed's mandate is not highest ROI. It's to
have a robust economy that provides good employment.

\- I read your example aplenty. What you don't understand is there're many
ways to make money. Having the highest ROI is not the one rule to rules them
all. Supermarkets have terrible ROI with razor thin margin yet they make lots
of money for their owners. From your rational, everyone should become a
hairdresser for its high ROI but no one would create the supermarket business.

Anyway, I've spent more than enough time on this and that's the end of my part
of the discussion.

------
umarmung
Key characteristics of _Anglo-American capitalism_ , i.e. capitalism created
and mainly employed by American and British companies, is built around an
"unholy alliance" of three things:

1\. Professional manager class.

2\. Principle of "shareholder value maximisation", mainly benefitting free-
floating shareholders (including professional managers).

3\. Leverage.

The primary industrial consequence of this triangle of factors is _reduced
corporate investment_.

Other key consequences are:

a. a _feedback loop_ occurs between the factors, i.e. they are inherently
destablizing, particularly so in the face of ever increasing financial capital
market efficiency;

b. the erosion of capital creates a system _prone to shocks_ , both internal
and external, and from the real economy or the financial economy;

c. _productivity improvements are capped_ due to merely reducing headline
numbers and making minimum incremental improvements to infrastructure and
technology. No incentive for workers or employers to invest in company-
specific skills or retraining;

d. gross increase in use of "excess" capital for _share buybacks_ and other
financial equity maximising techniques instead of investment or holding, even
during boom times;

e. makes _central bankers management of monetary supply harder_ due to the
additional leverage use and other factors acting as a strong accelerator
during cyclical upturns and a strong decelerator during cyclical downturns;

f. strong social impacts:

f.i. increasing _wealth inequality_ between those who can benefit from the
alliance and those who cannot. This is both from the asset side (shares) and
liability side (borrowing);

f.ii. the easiest way to maximise profit today is to _reduce expenditure_
instead of increasing revenues, so jobs are cut, wages and wage growth is
minimised, work intensity and hours rise resulting in more errors, worker
tiredness, forced imbalance of work/life.

When combined with globalisation, the efficiency of the global capital markets
with its own problems (Too Big To Fail entities), tax and regulatory
arbitrage, and capital flight, the above factors can be devastating to any
economy no matter how advanced and results in global inefficiencies that
produce sub-par growth and high instability.

These and other historical reasons are why most advanced countries outside of
the Anglo-American world reduce the influence of free-floating shareholders
and maintain a group of long-term stakeholders (including some shareholders)
through formal and informal means. In addition, _corporate_ leverage is
usually more difficult to obtain.

What I find especially interesting is that a select few of the most globally
successful American companies are well known for NOT partaking in this Unholy
Alliance, specifically Apple, Google and to a lesser extent Microsoft are
incredibly cash-rich companies! Other companies should learn something from
these leaders.

Finally, there's a reason why Jack Welch, the long-time chairman of General
Electric (GE), who is often credited with creating the term "shareholder
value" in a speech in 1981 also denounced it in 2009 as probably the "
_dumbest idea in the world_ ".

------
algoshift
These easy definitions always bother me. "The only purpose of corporations is
to maximize shareholder profit." Really? The only purpose? Shareholder profit
or value is a side effect of producing products or services that people want.
The purpose of a corporation is to focus on what it does and do it well.
Shareholders benefit from this activity.

Anyone who starts or runs a company and says "My only purpose is to increase
shareholder profit" is probably going to fail to deliver.

The other one is this issue of "corporate greed" or this idea of outsourcing
to lower cost manufacturing centers in order to make more money. As someone
who has the scars to show for it, I can tell you that "greed" is never a part
of it.

Imagine, if you will. That you are making widget A in the US or Europe. You
are doing well. Everything is manufactured in house or locally. Profits are
good.

Now, imagine that a competitor decides that they can beat you at your own game
and make widget A for less money if they outsource their manufacturing to,
say, China.

Their list price is now lower than yours by a bunch. You don't want to loose
market share, so you lower your list price. Only to discover that now your
profits can't support your US-based operations. Just can't do it.

What are your choices? You can't automate your way out of the problem because
you are already as efficient as you can be. You could leave the market
altogether and move on. Lay off everyone in that division and lick your
wounds.

Or, as it is more often the case than not, you can follow-suit and find your
own manufacturing solution in China. Now you can lower your prices to match or
improve upon your competitors's pricing and you've restored balance to the
force.

Or so you thought. At this point nobody is making as much money as they used
to. But, a race to the bottom ensues. Very soon Asian manufacturers enter the
fray. Not only are they the beneficiaries of low-cost manufacturing, they also
benefit from a far lower regulatory burden as well as not having to deal with
progress-killing unionized labor and their ridiculous rules and costs.

The race to be bottom continues. Only that you and your local competitors are
now at a serious disadvantage with respect to your Asian competitors.

What to do? Well, again, you could leave the segment, fire everyone and move
on. Maybe you license IP and life is grand. Or, you could take it a step
further and become a brand behind a product that you barely touch. Sure, you
have to slim down the ranks but the business continues to exist in some form.

At no point in this slippery-slope is anyone thinking about getting rich. In
fact, the effect can be quite the opposite. Profits become thin and the
business suffers for it. You've taught your competitors how to make your
products and have very little more than a brand to use as an advantage over
them. You can't make anything any more and simply don't have the equipment,
facilities, process, skill-set, network and people to even attempt to compete
with anyone.

And life goes on.

To say that these corporations are "greedy" and that their "only purpose" is
to provide shareholder value is, in my never-humble opinion, to be utterly
ignorant of the day-to-day realities they have to face.

The reality of the situation is that, over the last 50 years, we have
collectively opened Pandora's box. Consumers have voted with their buying
power to overwhelmingly favor product that can only be manufactured in places
like China due to cost structures. Given this, closing Pandora's box is as
close to impossible as you can get.

MBA's and corporations cannot force consumers to behave altruistically and
support locally made --higher cost-- product when they can drive over to
Walmart and overdose on product at much lower price points and, yes, very good
quality in most cases.

There's that scene the "Outsourced" movie that kind of encapsulates the whole
phenomenon: A caller wants to buy a bald eagle statue but complains that it is
made in China. The operator indicates that they have US-made versions and
she'd be happy to sell him one. Only that the US-made version is over $200
when the Chinese version is $20. The caller goes with the Chinese version.

Attention Walmart shoppers: You reap what you sow.

------
101010010
You could argue that unlike in earlier generations, MBA's have less or even no
skin in the game.

If it is more or less a given that they will move from company to company to
company in the course of their career, why should they care if a particular
firm does not survive _long-term_? If the shareholders want short-term
results, then they are just doing their job to deliver them.

If they can improve things for a company in the short-term, their job is done.
They themselves can lead "successful" careers and live comfortable lives with
that approach. And leave wealth to their heirs. No long-term survival of the
company is necessary.

