Bad Times Could Be Good for Shareholders

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The National Bureau of Economic Research (NBER) recently released some highly qualified "good news." Apparently, the U.S. recession ended in June 2009. That's poor consolation to the many people who are still unemployed and can't find jobs, or the folks struggling to hang on to the jobs they already have. The recession may have been technically over for more than a year, but the hard times are nowhere near over for Americans.

Even Warren Buffett has said, "This recession ain't over." And of course, the statistical situation the NBER has described doesn't guarantee that we won't experience what's termed a "double-dip recession."

Still, these bad times could come with a big silver lining -- at least for shareholders.

Worst of times
Unemployment hit 10.1% in October 2009 -- its highest level in 26 years. The recession has led our economy to bleed 8.4 million jobs, the nastiest employment picture since before World War II.

Despite the NBER's call, layoffs haven't let up since June 2009, and job cuts stretch from corporate America all the way into the public sector. State and city workers are being laid off, too, including important public servants like police officers.

Meanwhile, the layoffs aren't even over yet. Just last week, rumors rumbled that even powerful Wall Street firms like Morgan Stanley (NYSE: MS  ) and Bank of America (NYSE: BAC  ) could lay off huge numbers of workers. Northrop Grumman, Genzyme (Nasdaq: GENZ  ) , and FedEx (NYSE: FDX  ) are among the companies that have announced new rounds of layoffs in recent weeks.

Best of times?
All these difficulties could nonetheless help spur investors to become better shareholders -- to start acting like owners, and paying attention to what our companies are doing out there. After all, given the nasty economic situation, there's good reason to lift an eyebrow at the fact that in some corners of corporate America, deeper job cuts are directly correlated with higher pay for the CEOs who make them.

A recent report from the Institute for Policy Studies examined CEO compensation during the "Great Recession," discovering a disturbing tendency for the best-paid CEOs to most aggressively whack jobs from the payroll. CEOs listed in the organizations dubious "top 10" list for "highest-paid CEO layoff leaders" included Walt Disney (NYSE: DIS  ) , Wal-Mart (NYSE: WMT  ) , and Ford (NYSE: F  ) .

Questioning the appropriateness of such behavior would be a step in the right direction for all of us. CEOs who don't sacrifice for the sake of their employees and companies are probably not willing to sacrifice for the sake of their shareholders, either. Investors who cheer mass layoffs are responding more like short-term, speculative traders than true long-term shareholders.

Thinking for the long haul
Given the ugly economic situation, we will all have to remember that patience is a virtue. Now is a perfect time to remember that fundamentally strong companies and economies take time and patience to build. The bubble days made speculation far too easy (and far too popular), and too many people stopped investing with an eye on the quality of companies and their managers.

All this economic pain, the result of a big, nasty bubble, could be good for the long haul if more folks take a slow, patient, ownership view of our marketplace. For example, if more shareholders push for strong corporate governance policies, including scrutiny of lofty executive pay that doesn't match performance, it would be a strong start for a future of long-term shareholding.

Check back at on Wednesday, Oct. 13 for Alyce Lomax's next column on corporate governance.

Walt Disney and Wal-Mart are Motley Fool Inside Valueselections. Walt Disney, Ford Motor, and FedEx are Motley Fool Stock Advisor recommendations. The Fool owns shares of FedEx and Wal-Mart. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (25)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 06, 2010, at 11:43 AM, Damntough wrote:

    Alyce, very good article. I would say that Alan Mulally of Ford probably does listen carefully for one class of shareholder; the Ford family. Hopefully what is good for them is good for the rest of us.

  • Report this Comment On October 06, 2010, at 8:22 PM, xetn wrote:

    The issue is if you don't like the way a company acts, just don't invest. Nobody is twisting your arm to buy these company's shares. Just vote with your dollars, yen ...

    Instead of wasting you time trying to change a company's governance, just seek out companies whose governance you agree with. If you can't find any, don't invest.

  • Report this Comment On October 07, 2010, at 3:43 AM, longtermgrowth09 wrote:

    How can i really push for strong corporate governance policies in a company like Abercrombie? it seems a joke.

  • Report this Comment On October 10, 2010, at 10:38 AM, aleax wrote:

    @xetn, your advice may be monetarily sound for us small investors.

    But for an activist fund with enough money under management, or a large active investor, buying a lot of shares in company X (at a market valuation that's justified by poor governance, but well below what would be fair value for the same company with good governance) and then striving to fix the company's governance, is a perfectly valid "active- turnaround / hidden-asset play", no less than any of the other classics (where the company's value gets maximized by spinning out a division, completely changing management personnel, selling off other undervalued and underused assets, &c).

    As a small investor, if you don't mind risky plays, are personally familiar with what makes the company's assets/value "hidden" (including but not limited to bad governance), and what it would take to fix that, you can always try to play along once you spot the activist fund or investor building a position -- just like you can for other analogous "special situations" as shown e.g. in Greenblatt's "How to be a Stockmarket Genius" book. Not my ball of wax, personally, but a perfectly legitimate strategy for those with the right tastes, skill and knowledge!

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