I cannot imagine a worse basis on which to steer a company. It makes zero sense. Using a random number generator to pick every decision would result in better results than what we are currently doing.
An example of a company that has completely succumbed to Wall Street is Texas Instruments. They are (or used to be) a tech company. They used to have research. They used to create new products.
But in the past few years they have started committing to "returning 100% of free cash flow to investors" (quoting their own earnings release) via stock buybacks and dividends. They actually put it down in writing: we are committed to NOT reinvesting in employees, NOT doing R&D, NOT creating new products. In every earnings call about how they are still committed to getting all the cash into stock buybacks and dividends. That's it. That's the whole company now.
Wall Street loves Texas Instruments. The shiny bucket of treasure known as stock buybacks + equity based compensation is irresistible. This is going to keep happening until we make it stop happening.
Case in point I was on a call where an executive stated: "We're moving to a subscription model in our product because, to go public, that's what Wall Street is going to want to see". Not because that's where customer demand is, or because it makes sense for the business. But this short sighted rationale to meet a short term goal inorganically. Wall Street and VCs are very much no different than the influencer marketing crowd. They just happen to pretend and purport they're good at growing business, when the real MO is lining pockets.
I have thought about this a bit. Why doesn’t the Bay Area have it’s own stock market/index? It seems incredibly stupid to let financial control over all the innovation that’s happening in the Bay be in the hands of NYCs financial markets. To some extent VCs offer that alternative financial market that doesn’t exist but it’s only for startup funding and such.
There is also LTSE by Eric Reis - https://www.vox.com/recode/2019/5/22/18629621/long-term-stoc...
Curious how this will play out.
I think there are real problems with the combination of stock buybacks and how executives are incentivized, but the currently popular idea that companies shouldn’t return profits to investors, or that this is somehow nefarious, is misguided. This is the entire point of for-profit corporations.
I get that investors want returns for their capital, but expecting employees to take all of the heat while shielding investors from any of it seems quite cynical.
The real argument we should be having is whether workers are getting paid enough, which I think is what you’re getting at. I believe the answer for low- to medium-skill workers is no for a variety of reasons. I have less concern for highly-compensated, high-skill tech employees from IBM or TI.
Also, I think if we made businesses shut off all returns to investors whenever they lay people off, like some seem to be suggesting, we would have many more contractors/short-term employees, with more workers in precarious employment situations. There is some empirical evidence for this in Europe.
Instead of blocking the return of profits, I would instead argue for increased taxation of corporations and middle-/high-income earners in order to provide a stronger social safety net, in the event they are let go they are not destitute and starving. But also happy to hear arguments for other solutions, it’s obviously a complex topic with lots of interconnected pieces.
If you want employees to gain in that situation you need a worker owned coop, there is nothing making such a thing illegal although historically it usually hasn't scaled as well for several reasons and the inaccessibility of the equity to employees and lack of guarantees means the default assessment for that value in new ventures is $0 to the employee.
If you look at their annual report, they are defining free cash as the cash flow from operations minus capital expenditures. This is better than "invest nothing and send it all back". In 2019, their capex / cash flow was about 12%. They certainly don't invest nearly the amount that an Intel or TSMC would invest in their lines - but the products they produce don't really require that.
I'm totally with you on stock buybacks being a big problem.
What you are suggesting is that every company should prioritize growth by reinvesting in itself. It doesn't always make sense to do so though.
You are rewriting the story backward when you say “IBM doesn't do R&D then it makes sense to reallocate the profits”, it's the reallocation which killed the R&D!
> But in the past few years they have started committing to "returning 100% of free cash flow to investors"
I was not commenting on IBM's long term history. They made short sighted decisions, I think everyone can see that. As it stands now, investors don't want to give them any more money to continue along that path.
Companies like Amazon reinvest in themselves with no dividend. Investors encourage this because they believe in what Amazon is investing in.
Just wanted to provide a different perspective on why dividends/distributions are desired by investors in certain scenarios. A common view on here is that Wall Street is ruining things, but it is often a much more nuanced situation.
IBM's next president will be RedHat's former CEO. IBM's next CEO will be a guy who has worked at IBM since 1990.
I hope they do, I make a ton of money selling to them...
She stepped down as President and CEO and retains her position on the Board, while Arvind Khrishna stepped up as IBM CEO and Jim Whitehurst, former CEO of Red Hat, became IBM President.
The speculation (and it is only speculation) is that Jim will spend a year or so as President while being groomed for the CEO job when Arvind retires.
That being said, it will never happen.