Thinking Differently About Our Investments in 2014

Let's make 2014 the year investors demand more from managements.

Jan 3, 2014 at 9:00AM

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 Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.


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Alyce Lomax has no position in any stocks mentioned. The Motley Fool owns shares of JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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