The stock market is a very complicated place where many people gamble while thinking they are investing! Enron and Tyco are the tip of the iceberg.
Public companies for the most part are run by hired managers. The board of directors hires the top managers. Often the very top manager, the Chief Executive Officer (CEO), not only sits on the board, but is its chairman as well. Add to that the fact that many CEO’s sit on the boards of other companies and you can see that there just might be a problem. I doubt that many actually have a conversation like “Well Joe if you vote for my big pay raise and bonus while sitting on my board, I’ll vote for yours when I sit on your board.” Things like that need not be said; it’s all part of the understanding. How else could you explain that CEO’s get big raises and bonuses while their companies lose money and stockholders take a beating in the market? My point is that hired managers are working for a salary, not for the stockholders.
A plan that backfired was to make managers owners by granting stock options. The logic sounds good: make the manager a part owner and how well the place is managed affects the managers’ personal wealth. If you get managers working for themselves as owners, then they are working for all owners, right? That turns out not to be true unfortunately. There are a million legal ways to make things look better then they really are so that the stock price can rise artificially when the manager wants to sell some stock. The GAAP (generally accepted accounting principles) are not the Ten Commandments. They allow a variety of ways to handle figures on companies’ income statements and balance sheets.
That begs another question: Can hired help truly be worth $1,000,000 million per year? (0r more?*) There is a big difference in situations when a person owns a company and has his own money at risk compared to one where the manger is an employee. If that is not obvious to you, let me illustrate with an example. When Sam Walton managed and owned WalMart, any mistakes he made came out of his pocket. When Jack Welch (former CEO and Chairman of the board at General Electric) made a mistake, shareholders paid. I do not mean to criticize Dr. Welch; I am just using him as an example. GE did well during his tenure as CEO, but then the economy as a whole did well. It is hard for me to tell whether it was due to his excellent management or if it was just a case of the rising tide lifting all boats?
In the Wall Street Journal dated March 6, 2003, Page A1, the events at Ahold’s US operations that led to the big restatement of earnings and consequent drop in stock price (from around $12 in mid February to around $4 on March 5) are detailed. Quoting from the article,
"The new strategy announced on the conference call last fall involved ordering huge quantities of food and paper goods from manufacturers such as Sara Lee Corp., Kraft Foods Inc., Georgia-Pacific Corp. and Nestle SA, the two U.S. Foodservice managers say. The manufacturers had agreed to pay the distributor hefty rebates ranging from 8.5% to 46%, which U.S. Foodservice may have booked immediately to try to boost 2002 earnings, one manager says."
It is my opinion that every manager involved in this scheme is guilty of violating fiduciary responsibilities to shareholders. In order to fatten up their own pay checks, they cooked up a scheme that, instead of fixing the problems at the company, took 2/3 rds of the value of the stock from the very people whose interests they were supposed to be protecting. Schemes like this, while different in detail but the same in effect, are what has brought all the bad press to companies such as Enron, Tyco, and countless others.
Well what about the analysts that watch companies? Don’t they keep an eye on things and let the public know when something is amiss? The only way you can think that is true is if you never read anything about business. Analysts are paid for their analyses and if one should happen to criticize a company he would likely find his sources cut off. Then to compound that, many work for organizations that also want the business of the companies being analyzed. It is likely that when an analyst issues a “strong buy” recommendation he does so for internal political reasons rather then a strong faith in the company’s future prospects. While I have not looked at all analysts’ recommendations on all stocks, I have yet to see a recommendation to “sell, the sooner the better.” If you think you can rely on analysts’ recommendations, then I need to talk to you about this bridge in Brooklyn that is for sale.
Again citing the Wall Street Journal, in an article updated February 12, 2003, reported: “The lone holdout in the $1.4 billion Wall Street stock-research-abuses settlement finally has struck a deal.” It goes on to say:
"People who worked at the company say a priority for the bankers was to make sure that companies that Weisel was pitching for underwriting business were matched with analysts who were willing to be optimistic about them."
Of course Mr. Weisel denies that analysts were “ever coerced into being bullish on companies they disliked.” He just picked analysts that liked the company to do the research on them.
And once again, I do not mean to pick on just one investment bank. This story was one that was easy to find in all the material available. Similar happenings occur on at others as well. My point is that we as outsiders and investors do not have access to the information we need to make intelligent investment decisions. So is buying stock really gambling? I think the answer is YES! Just like in Las Vegas, the rules are set so the house wins; and you and I are not the house.
The good old’ boys that manage public companies look out for themselves first and their buddies second. “Fiduciary duty” is something they once read about in a book somewhere, but not something with practical meaning. While Roger Smith was Chairman of the Board and CEO of General Motors, the companies market share fell from around 50% of the US market to around 35%. How was he punished? His retirement pay was doubled when he finally left.
You might excuse Roger Smith because of all the competition he faced. However, other companies managed to grow during that time period and they faced competition from foreign and domestic sources too. The fact is he was just one in a string of mis-managers who ran GM.
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*According to the Wall Street Journal, 3/4/2003, P. C1, James Cayne of Bear Stearns was paid $19.6 million in 2002.