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So we are driving company decision making based on the needs of synthetic fake financial instruments? Is there any other way to run a company that is more stupid than striving to fulfill the needs of someone else's derivative product?

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.




From startups to stalwarts - this is the norm. Wall Street / Investors first. Infinite and ridiculous QoQ / YoY growth expectations and a lot of really dumb approaches to achieve this. And executive pay that's way out of line. I just read "The Infinite Game" [0] and while a lot of the book rehashes many oft heard stories amidst well known companies and people as examples it makes the clear point that given our hyper focus on short term profits we pay the price in the long run. I don't disagree and I've been in roughly eight different tech companies over the last 12 years. From startups to companies that do more than a billion annually. They're all doing the same thing. The executives can't even hear themselves admit it, which is the really interesting part.

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.

[0] https://www.goodreads.com/book/show/38390751-the-infinite-ga...


What can you do? Wall St has become incredibly efficient in “nudging” execs into doing what Wall St wants: by influencing the stock price, on which executive compensation is based. Only founders or execs who have more than just a financial interest in the company would buckle the trend.

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.


Hopefully Carta will be able to shake things up and help solve this? https://www.ft.com/content/d52b0487-b13c-4bae-bf27-770518ff0...

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.


Wall St is the de facto government of the US, and in many ways the only employer of note.


I’m sympathetic to your criticisms (especially about making decisions based on inclusion in a financial index), but returning 100% free cash flow doesn’t mean there is $0 spending on R&D or CAPEX. It means returning the money that’s left after you do all the spending and investing. This is money that would otherwise just pile up in the bank account of the company. When money piles up, managers tend to waste it on empire building, pointless acquisitions, etc.

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.


Or in this case, the money could end up in the bank accounts of all the employees they are letting go instead. That doesn't sound like a bad plan to me.

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.


Right so my comment was just in the context of GP’s argument against returning 100% FCF to investors, because any money given to employees as wages or severance wouldn’t be a part of FCF I’m the first place.

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.


That isn't the employee's money by definition - when it was sold as equity it became the shareholders. Just giving it away would be embezzlement just as much as if the CEO decided to have it resting in their account. Thus there needs some sort of purpose for the spending. Without any sort of equity based compensation the relationship with employees is inherently transactional - only getting more money if they think there is some sort of return from it be it reduced turnover, better performance, or as a way to attract new talent.

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.


I was going to go into the idea of employee-owned co-ops as a possible solution, but my post got too long. I think this is on the right track. It doesn’t have to be a binary choice between either 100% investor-owned or 100% employee-owned. You could have a for-profit corporation with profit-sharing, where employees are entitled to maybe 25% of the profits, etc.


With that said, TI is still doing R&D and is investing in new facilities. They announced a new 300mm fab recently which will be several billion dollars in capex.

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.


There is another way of looking at this. IBM isn't what it used to be, it is essentially a consulting company rather than an R&D powerhouse. Investors are not particularly excited about its growth prospects and do not think it should invest a bunch of money to grow. It may be more efficient for the economy as a whole for IBM to distribute its profits so that money could be allocated to companies where growth makes more sense.

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.


It didn't become so by magic though: IBM used to be a R&D giant, and they have been moving away from it for the aforementioned reasons.

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!


I am replying to a comment which stated:

> 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.


Is it really? My recollection is that IBM was already not an R&D powerhouse when the IBM PC came out in 1981, hence them building it out of commodity supplies and outsourcing the OS to Microsoft. As late as 2011 (20 years after IBM's transformation into a services company), the dividend yield was 1.5%, rather than the current 5%.


I wouldn't call them consulting. More along the way of Hays. They have staff. But it seems like it's not enough. And they don't hire...


Dividends aren't fake financial instruments. Dividends are real because they represent real cash paid to the shareholders. The tax systems aren't nice to dividends which is why other companies try fake financial instruments. We need to encourage more dividend paying.


It's not like IBM actually makes anything anymore, though. They've become a vampiric global services and consulting company, Cognizant or TCS with borrowed respectability from their past.


Wait, we're talking about the same company that now owns RedHat, and whose next CEO will be RedHat's CEO, right? The same RedHat that has been the number one contributor to the Linux kernel, Gnome, and many other projects for over 2 decades?


> that now owns RedHat, and whose next CEO will be RedHat's CEO, right?

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.


Maybe there is some hope that they can turn things around, but the last decade has all been about spinning off and selling out any real hardware or software divisions, chasing failed cloud services and overhyped AI buzzwords, and shedding every highly-paid legacy US employee they can get rid of.

I hope they do, I make a ton of money selling to them...


Wait, Redhat CEO will become IBM CEO? I was pretty certain that it would be the other way around. But that’s good news, both for us and for the company.


Ginni Rometty was simultaneously the IBM CEO, President, and Head of the Board of Directors until recently.

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.


IBM still make the Z line of mainframes most major insurance credit card etc companies still rely on them.


You are correct it needs to happen and it is pretty simple. Just ban the C-suite, VPs and BoD from being compensated in stock. Now the only way to keep the gravy train running is to build a solid company and not spend all quarter jerking the numbers around to make the disclosures look good.

That being said, it will never happen.


That was exactly how it was before. The whole equity compensation was the answer to the problem of CEOs that never grew the company. That was why all the leveraged buyouts happened in the 80s and 90s. They didn’t want CEOs who just stayed around collecting a fat paycheck so instead they gave them equity to compel them to grow the company. Rarely is there a single solution that completely solves a problem for good. Solutions often create problems of their own. People have to decide what problems they would rather have.


How does that work? If you pay them in cash, then there is an incentive to juice the cash flow in the short term at the expense of long term. Stock that vests at various periods over future decades would be more long term oriented.


Maybe they should be compensated as most workers with cash for the value they provide? And rate them subjectecly instead of with metrics.


If that were possible, it would already be happening. Determining the subjective value (or even objective) value one provides is a pretty much impossible exercise.


I'd say dividends are the one thing that makes stocks feel like a real investment vehicle.


You make it sound like TI has disappeared and now is worthless. But it’s trading at a price higher than the 2000~ bubble. So maybe they are not taking over the world but they are doing quite well and still generating revenue.


Valeant Pharmaceuticals is the same way, but in a far more socially insidious context.

https://www.vanityfair.com/news/2016/06/the-valeant-meltdown...




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