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Incompetent Executives...or...?

David Hickerson wrote this in the "Selection and the current market" topic, talking about what's been happening to the software industry:

>>Additionally, I think the industry was infected with the Enron Disease. Top Execs that are just out for themselves at the company's expense or just plain incompetent.<<

I would offer a different opinion:  Execs that are out for the company *at the company's expense*.

Executives are usually rated based on changes in the company's stock price.  Moreover, their personal compensation is often composed largely of company stock.

As a result, executives have tended to focus almost exclusively on raising the price of the company's stock *at any cost*.  This has resulted in many unfortunate practices, like firing vital employees to cut costs and hushing up important matters (because if word got out, it might affect the stock price).  This has weakened many companies so much that they eventually crash and burn.

But this is not because the executives were acting illogically or (completely) selfishly.  They were responding to the incentives provided by the company.  Sure, there's a lot of selfishness here, and a lot of short-sightedness, and that must be remembered and accounted for.  But ultimately, I think this is a matter of skewed perspectives.

We need to stop worrying about the company's value in the stock market, and start worrying about the company itself.  Is the company humane?  Profitable?  In line with reality?  Making quality products or providing quality services?  These are some of the important questions, not whether the company's stock price will go up half a point next quarter.

Brent P. Newhall
Wednesday, December 18, 2002

In PeopleWare, by DeMarco/Lister, the authors point out how terrible the short-term mentality is.

Let's say your company has $100 Million in cash.

Want to make your numbers look really good?

Loan that money to some 3rd world developing nation at 20% interest.

For the first year, the numbers look really good.  Outer Zimbolia has a big pile of cash, makes prompt payments, and your company racks up $20 million in paper profits.

Of course, Zimbolia stops making payments somewhere around year 2.5, and then you're screwed.

That gives you about 18 months between when you get your bonus check and when reality hits to find another job ...

This goes back to the Cringley article that points out that 'professional management' is killing many growing companies.

So, yeah, DeMarco said that like, 20 years ago ... :-)

Matt H.
Wednesday, December 18, 2002

Another thing is that there is tremendous pressure from pension fund managers to increase dividends and stock price.

Plenty of fund managers were reluctant to buy in to the dotcom bubble, but found that they would be sacked if they didn't.

And in the UK the bubble was actually mandated by law. Pension funds were obliged to have a certain proportion of their stock in the FTSE top 50, so when got into the top fifty, and TopQualityWidgets.PLC dropped out they had sell the  safe stock to buy more of the dotcom, thus putting the price up further and increasing the pressure.

Stephen Jones
Wednesday, December 18, 2002

I read an article in the 12/16/2002 Wall Street journal that said that Coca-Cola is going to discontinue the practice of providing quarterly earnings reports.

They cited a desire to get away from short-term thinking and allow themselves to make the moves they need to in order to make Coke a stronger company in the long run.

Haven't checked their stock to see if there was a reaction, but that sounds like a company that is trying to do the right thing and is on the right track.

Wednesday, December 18, 2002

Here's a link to the Cringely article:

Incidentally, have you ever seen his documentary specials on PBS?  They suck -- just puff pieces that are all sizzle, and no steak.  I'm surprised that his columns are actually pretty good.  Maybe it's the producer's fault.

J. D. Trollinger
Wednesday, December 18, 2002

Most folks are employed by relatively small businesses, most run by the owner.  I think there is a message there, I'm not quite sure what it is.

I used to be more hyterical about Cringely's topic.  Now I think "the market" generally wins out over professional or non-professional mangers.

Wednesday, December 18, 2002

Interesting topic. I think many companies are governed by short termism, often driven by the need to raise share price. Although it's no coincidence that many of today's most successful companies, who how outperformed the stock market for many years, are those with a longer term focus on building a great company.

It is down to the individual. Those that are money driven will (nearly) always act in a shorter term, selfish way which ultimately can (and does) cause problems for a company. More mature people, who perhaps recognise money is not really that important, and are more focused on doing something meaningful with their life won't get caught up in these stupid games. Their focus is not on their next bonus, or lying and cheating to make themselves look better/make money, but building something great, something they can be produ of.

Unfortunately I don't think there is many of these people running companies these days. People like us have a chance, no, an obligation, to change this and build great companies that do great stuff, are great places to work and have a positive impact on society.

Profits are like food. No more, no less.

Thursday, December 19, 2002

This question of short-term vs. long-term forcus reminds me of the Stanford marshmallow study.  A psychological experiment showed that pre-school children who favored instant gratification eventually grew up to be unhappy, dysfunctional adults.

Alex Chernavsky
Thursday, December 19, 2002

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