As the era where "it's nobody's business but my own" unwinds, the price that is being paid is a melt
down in the equity markets. Well, it is about time! Is there any serious person that is surprised with this outcome? It's
long overdue and the cries for reform will only give cover to more crazed regulation. The lesson is really a simple one. You
don't reform a system that has evolved into a contradiction of free enterprise. The practices of many corporate executives
have more in common with snake oil barkers than inventive innovators.
The game changed from one of conducting serious business to one of touting deceptions based upon frauds and
artificial financial reporting. There is an entire corporate culture of avarice and duplicity, that passes for successful
management. We all know that criminals will always be with us, but now we have discovered that institutional crimes extend
to the very nature of the corporate method for business transactions.
Let's understand exactly what happened! Remuneration for the executive insiders was scaled to mirror the stock
prices for their companies. Stock options became the reason to visit the office. Best friends were courted among the bean
counters. The infamous conference call to analysis, became the realm of high art. Image was everything! The commercial said
so . . .
Well, now even the most fool hardy knows that financial gravity still rules the markets.
For those who have a memory longer than the last few quarters, remember the concept of dividends? The solution
to the current implosion, is as simple as a return to fundamental business practices. A company has value because it makes
a profit. Let me repeat this axiom of commerce. A COMPANY HAS VALUE BECAUSE IT MAKES A PROFIT.
When did any of the dotcoms ever earn any money? Obviously most equity shareholders can grasp the reason that
the high tech bubble exploded. But why were they so blind to the practices of the blue chip stalwarts? The answer is found
in the gratification of the momentum psyche that rising prices is a trend that cannot be stopped. When you are making money,
don't knock it! Well, let's get this one right, once and for all.
There is a huge difference in the price hike spiral from an expanded balloon, as it is fed more air; from
the tangible profits earned from real margins in a conventional business transaction. Back in the by gone days, a dividend
was paid to the shareholders of the company based upon positive profits earned from real business.
If executives were paid based upon true performance, that equation would be gauged by profits that the company
would earn, reflected back in discernible dividends. If the manager doesn't own shares in the firm by which he is employed,
let him BUY some stock. We have often stated that the owners of a company have relinquished their control over their own property
with the ascendance of management - the hired help.
When a compensation committee designs and approves company stock options for selected executives, you have
a formula for inevitable abuse and insidious greed. The notion that all the crooks need to spend hard time in jail, misses
the essential resolution. At the end of the day, the corporate structure as the mold for business is the problem. Owners must
take control of their enterprise, and treat the manager as an employee.
When mergers and acquisitions become the ticket to wealth, as opposed to the creation of functional organizations
that produce meaningful goods and services - the economy risks serious peril. Think about the scam that passes for good business.
A company creates more shares and dilutes the pool of ownership, while it rewards their executives with stock options. The
officers of the company benefit by fudging the financial books. The directors of the corporation give a wink and a nod, as
they collect cash and enjoy their perks. The auditors of the firm sell consulting services to teach the CEO the ropes of how
to avoid the reporting pitfalls. Then they send in their accounting division to certify that all is in proper financial order.
Wall Street hypes the stock and charges their fees for plugging that the sky is the only limit. Then the management team
pumps and dumps their stock, just before 'chicken little' starts to fall down.
And all the politicians accept and cash the campaign donations and allows the lobbyists for their new found
corporate best friends to write new legislation for the recovery and reform package that will inevitably follow. Of course,
all at tax payers expense.
No doubt the corporate culture needs to discover and secure ethics. But it desperately needs a reinvention
of it core organizational structure, even more. Many will condemn business and the capitalist for the collapse of the markets.
While any competition will result in unequal rewards, one need not deny the reality of the nature of business, to seek real
answer for reforms that are meaningful.
More government involvement and bureaucratic regulation is analogous of putting the commissars in charge of
the means of production. Why not restore the active roll of the company owners to their rightful place of proprietorship.
Why should we fear titans of business if they are the financiers of their own ventures? By abandoning the role of raising
capital to a rigid process of distortion and illusion, we allow elites to control the entire operation. Bonds can be sold
that will raise required funds for business expansion. That is legitimate and has a proven record. But by encouraging a system
of excess that showers money to appropriate, consolidate and eliminate real competition, we perpetrate a fraud upon all
investors and consumers.
The rules for conducting honest business needs to be clear, certain and credible. Government can and never
should be the omnipotent regulator of commerce. Reversing unearned incentives for unchecked executives and diminishing special
and favorable environments for dominate corporations, will help restore balance into the economy. It is time to seek prudent
clarity and focus to allow profits to be made the old fashioned way - you need to earn them.
SARTRE - July 11, 2002