Thinking Differently About Our Investments in 2014

Many investors looked at their portfolios and concluded 2013 with a warm and fuzzy glow. It was hard to go wrong with stocks in general, whether or not the underlying companies were fundamentally sound. Last week's headlines emphasized full-year increases of 25.7% and 29.1%, respectively, for the Dow and S&P 500, which clocked their best annual performance in decades. The Dow's fall yesterday is a minor blip compared to that big picture.

Still, investors' assessment of qualitative factors and long-term thinking have been lacking for a long while, through bull markets and bear markets alike. If only most investors realized that well-managed public companies offer solid stocks that outperform in good times and bad, despite the market's vagaries -- if only they thought differently about what "well-managed" really means.

In a nutshell, here are some ways to think differently about what certain decisions really mean:

  • Beware deep cost-cutting: Shoddy managements might cut companies' muscle, not their fat. Mass layoffs should be the last resort.
  • Too many unproductive mergers and acquisitions, serial job cutting, short-term profit-driven decisions, and so forth should be considered potentially major management failures, rather than sound decision-making or unavoidable outcomes.
  • CEOs shouldn't be paid handsomely for poor performance and negative outcomes. Solid corporate governance and checks and balances are the foundation of healthy public companies.

Coming out in the wash
There are many examples of short-term strategies at public companies that not only fail to add value over time but can be downright dangerous to future profitability. A reliance on mass layoffs and other profit-cutting strategies can make companies weaker, not stronger.

Hewlett-Packard (NYSE: HPQ  ) has been a poster child for making mistakes like those cited above. Just last week, the company announced that it will cut another 5,000 jobs on top of the already hair-raising 29,000 planned layoffs. It cited "continued market and business pressures."

Mergers and acquisitions are viewed as a way to boost growth when organic growth starts to flag. Although smart M&A activity can be a great boon to businesses, many of these moves never really help companies over the long haul. In some cases, the money spent, the debt added, and the ultimate lack of usefulness can harm their foundations badly.

We can think about Hewlett-Packard again in this light: It has acquired a dizzying number of companies over the years, many with huge price tags and little or no value added.

Hewlett-Packard's acquisition of Autonomy is one of the most egregious examples. HP bought the British company for $10 billion, and last year it took a mind-blowing $8.8 billion accounting charge. It turns out that Autonomy had grave internal accounting issues, such as "serious accounting improprieties" and "outright misrepresentations," according to HP.

Adding corporate governance into investment analysis
Ever since the financial crisis, we've seen how bad decision-making can make the complex organisms that are public companies unhealthy and even lethally contagious. Too few in corporate America or the investing world take CEO "pay for failure" as a serious problem, and they often continue to idolize corporate leaders who have shown leadership weaknesses.

One of the highest-profile problems in corporate America has been outsized CEO pay, rubber-stamped by incestuous boards of directors -- these are CEOs and directors at other public companies, creating a major conflict of interest when it comes to looking after shareholder interests. Shareholders should be much more outraged than they usually are when pay isn't linked to real performance.

Shareholders do have proxy votes -- nonbinding though they may be -- to voice their concerns. The more they raise their voices, the more they will be heard. There have been some high-profile shareholder votes on "say on pay" -- i.e., giving shareholders a voice on executive salaries -- and other corporate-governance issues in recent years, including a few in 2013.

Abercrombie & Fitch's (NYSE: ANF  ) board finally seems to feel at least some degree of embarrassment about CEO Mike Jeffries' astronomical pay, even though it dragged its feet after two consecutive years of losing its say-on-pay vote.

The company has retooled its employment agreement with Jeffries, ostensibly to align his performance and compensation. Although it can be viewed as a token and minor move, at least there's finally some kind of response.

JPMorgan Chase  (NYSE: JPM  ) CEO and chairman Jamie Dimon is a great example of the "cult of personality." He still enjoyed shareholder hero worship in 2013 despite the wide range of evidence that quite a few things have gone wrong on his watch. My colleagues recently unearthed a disturbing Bernie Madoff connection to the financial giant.

Last year, some shareholders pushed for a simple and hardly onerous way to reduce Dimon's concentrated power: to simply strip him of the chairman title while he remained CEO. That was too much to ask of the shareholder faithful; the majority voted in favor of retaining both titles.

Thinking future-focused and long term in 2014
The idea of "maximizing shareholder value" has been presented as business and investing gospel for decades. The problem is that the term has become a tired excuse for shoddy, short-term management and quarter-by-quarter decisions, rather than long-term vision.

It's time to stop blindly trusting myopic managements and boards that can, and often do, destroy overall value -- for shareholders and other stakeholders, as well as the broader economy. In 2014, let's all demand better.

Check back at for more of Alyce Lomax's columns on environmental, social, and governance issues.

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  • Report this Comment On January 03, 2014, at 10:00 AM, segreto wrote:

    Abercrombie still has to deal with the facts that their stores are empty, teens no longer like the brand, and their asset valuation is $3.38 a share. Watch for news of their dividend being suspended indefinitely.

  • Report this Comment On January 03, 2014, at 10:34 AM, TMFLomax wrote:

    segreto, agreed that there are a lot of things dogging that stock/company, and it's not one I'd invest in for many reasons -- again though, why I'm not a fan of Jeffries' huge pay (and that's been going on for years). It could be another article in itself about the company's choppy results over years and years' time.


  • Report this Comment On January 03, 2014, at 1:05 PM, SkepikI wrote:

    Alyce- considering JPM long standing participation in questionable activities and customer unfriendly behavior, your article above is way too kind. Furthermore, considering MF and some of its analysts Pollyanna like opinions on JPM and BAC despite their long term bad behavior you have a LOT of missionary work to do inside your own house.

    So, is it Alyce in Wonderland or Alyce the serious?

  • Report this Comment On January 03, 2014, at 1:57 PM, TMFLomax wrote:

    Skepikl, did this article sound like I'm a fan of JPM? That wasn't the intention. That company's business and Dimon's leadership could be the topic of many articles, but for the current purpose, this is just one example of disappointing moments in corporate governance last year, and this one was dealt by shareholders themselves -- it blows my mind that the majority of shareholders didn't vote to separate the CEO and chairman roles at the company after all that has transpired on his watch.

    Since we all have different opinions on investing and stocks here at the Fool, I respect my colleagues' opinions on stocks like JPM and BAC, whether we agree or not. That's why we're motley.

    However, I hope you clicked through to my colleagues' piece, "Why the Bernie Madoff Case is so Dangerous to JPM" -- I wouldn't call that piece Pollyannaish. It's very well researched and eye-opening.


  • Report this Comment On January 03, 2014, at 3:45 PM, SkepikI wrote:

    Alyce- The article you cite is one of the few critical of JPM articles I've seen at MF. as is yours. I have no doubt that as the evidence accumulates, there will be more....BUT if you honestly look back at your archives over the last year or two, MF in all its variety has been noticeably kind to JPM and BAC, IMHO to the detriment of its subscribers.

    I do not accuse you of being a friend to JPM after the above, but I do admonish you for being way to kind and ummm vague. AND what about BAC?

    There was a recent AP article posted without comment by MF that detailed the lawsuit filed by JPM against FDIC (read bank customers and taxpayers) for the "indemnities" FDIC supposedly gave to JPM (verbally? ha!) for the acquisition of Washington Mutual and their very bad loan portfolio. This is the behavior of a very bad set of leaders and customer unfriendly bankers expecting someone else to bail them out - us the taxpayers....again.

    That item and a serious analysis of how JPM appears to be running is business as a result of such lawsuits, would be a welcome and interesting addition to your article. OR worthy of a separate article on its own.

    BTW, I was an early reader of the piece you cite and very interested in the commentary and invective it produced. You might want to read the whole of the commentary yourself.....

  • Report this Comment On January 03, 2014, at 4:15 PM, gskinner75006 wrote:

    Nice article! Hopefully one day it will be in vogue to punish a stock for mass layoff's and gross mismanagement rather than applauding them (yes, HP, I'm looking at you).

    Hoping your and yours have a happy and prosperous New year.

  • Report this Comment On January 03, 2014, at 5:29 PM, TMFLomax wrote:

    Skepikl, a couple of my old "busting on the big banks" pieces. ;)

    Here's one from last May:

    And one from a year ago:

    Anyway, speaking of archives, those are just from my own personal archives. ;)

    Totally agreed, gskinner75006 (the applause for this stuff drives me nuts!), and happy and prosperous New Year to you and yours as well!


  • Report this Comment On January 03, 2014, at 6:35 PM, SkepikI wrote:

    ^ Ok Alyce, missed them at the time, read them now. Way too kind.

    Here's a bullet point you may want to add to your list and use as a lead to an article on JPM lawsuit against FDIC:

    - Lawyers dominate corporate governance and cause other leadership to forget their reason for existence is customers and shareholders.

    If you do a deep archive check, you will find numerous articles by your MF colleagues friendly to JPM and BAC. Many more than your way too kind "cautions"

    Their share prices are up. They are rolling in cash, may raise dividends. Short term attractive.

    No doubt I am very wrong, just like when Enron broke $40/sh while strong arming Arthur Anderson to give them clean audits and approve of their novel accounting treatments. Just like when BAC broke $60/sh a few years back just before buying Countrywide and Merrill Lynch.

    Vague and oblique critiques of management on a bad track, particularly when it involves their approach to customers and shareholders does not work.

  • Report this Comment On January 03, 2014, at 7:05 PM, cmalek wrote:


    "it blows my mind that the majority of shareholders didn't vote to separate the CEO and chairman roles"

    Maybe the majority of shareholders did not vote at all. Either way. In which case their votes will be counted as favoring the company's proposal.

  • Report this Comment On January 04, 2014, at 11:11 AM, gskinner75006 wrote:


    It is sad that we the people will spend more time voting for American Idol then for our Government, Companies we are shareholders of, etc... I really don't get it. Maybe when it reaches the point there is some app on a phone for it voting, we will vote more.

  • Report this Comment On January 04, 2014, at 7:11 PM, HoosierRube wrote:

    Easiest job in the world is pointing out others mistakes.

    I'd be much more interested in a discussion on stock holders rights and why the government has not and will not move on that.

  • Report this Comment On January 05, 2014, at 4:41 PM, SkepikI wrote:

    After hanging back to see if you might mention this Alyce, I concluded that neither you nor your readers have paid attention to the high level of institutional and "Fund" ownership of JPM. While I am wary of "quick stats" particularly when I don't dig deep into HOW they are collected, my quick stat looks says JPM hovers near 72% institutional ownership.

    If any of you think, your or individual shareholder votes will prevail against whatever Chairman and CEO Dimon wants, I question your pragmatism. Maybe even your sanity.

    This would lead right into a short quote from Alice in Wonderland, but I will resist.

  • Report this Comment On January 06, 2014, at 9:15 AM, TMFLomax wrote:


    When you say that individual investors' votes don't matter, that does a disservice to what being a part owner in a publicly traded company is.

    Of course institutional shareholders are most of the votes these days, but they are starting to vote less passively. Remember the Citigroup vote against Vikram Pandit's pay?

    I don't actually think that it's productive to say that what individuals think doesn't matter. Each vote does matter -- what you're saying is like saying you won't vote for president because already know who is going to win. You still vote your conscience instead of throwing your hands up and saying that it doesn't matter. Apathy isn't ever good, and widespread apathy whether it's investing or anywhere else is a negative, not a positive.

    Plus, when individual investors read their proxy statements and then cast their votes, it means they also have a good idea of what's going on with their companies.


  • Report this Comment On January 06, 2014, at 12:05 PM, SkepikI wrote:

    Alyce: OR, you could encourage your readers to invest in enterprises WITHOUT 72% institutional ownership -of which there is an abundance, instead of spitting into the wind and wondering why the shareholders? (institutions) did not un-elect Dimon when the cash looks good even if the enterprise is unhealthy.

    I also note, which you did not remark on that rating services rate JPM as VERY AGGRESSIVE in corporate accounting and governance risk.

    So now I cannot resist. Alice in Wonderland was penned by a mathematician and logician who used Lewis Carrol as a pen name. On the surface it is a children's book, but contains many educational bits in logic, one of which is the scene when the Cheshire Cat and Alice meet at a fork in the road: "Can you tell me please, which way to go? said Alice" "That depends entirely on where you want to get to said the Cat" "It doesn't matter much where...." "Then, it doesn't matter which road you take said the Cat"

    When I see weak strategy, casting about for which road to take I think of Alyce, I mean Alice.

  • Report this Comment On January 08, 2014, at 8:07 PM, HoosierRube wrote:

    Can we include The Container Store in the 'Greedy Management' group now?

  • Report this Comment On January 09, 2014, at 12:14 PM, TMFLomax wrote:


    Can you let me know exactly what you're referring to with Container Store? I'm not sure what you're aiming at.


  • Report this Comment On January 12, 2014, at 10:49 AM, Samskiman wrote:

    "cult of personality..." Ummmmm.... any other examples, say in Washington DC for example, you could think of??

    Those in Washington were also backed by a majority, in most cases far less than the majority that backed Mr. Dimon of course. Are the majority of voters in presidential elections somehow wiser and less deserving of your rebuke for their recent gaffs than the shareholders of JPM? If you enjoy writing about the true wrongs inflicted on our society, you're covering the drop in the bucket, the full bucket is the damage cause by poor public policy. By comparison Washington's harmful practices make Mr. Dimon look like a saint.

  • Report this Comment On January 13, 2014, at 11:35 AM, crofton100 wrote:

    No one in a company should make so much more than it's lowest paid employee. There should be a limit to this equation. I'm very worried about the safety of people, if this gap in pay is not corrected. The economy would flourish if the world would bring in such a law world wide.

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Alyce Lomax

Alyce Lomax is a columnist for specializing in environmental, social, and governance (ESG) issues and an analyst for Motley Fool One. From October 2010 through June 2015, she managed the real-money Prosocial Portfolio, which integrated socially responsible investing factors into stock analysis.

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