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I wanted to "sound off" on a trend I've noticed in the business and financial media today. A lot of what I'm reading and hearing seems to position investors as victims: of management and auditors and the SEC and politicians and everyone else they can point a finger at. While I'm not disputing the specifics of any of those accusations, we investors seem to forget that many (and probably most) of us were asleep--or at least distracted--at the wheel and we share responsibility for the wreck. We can't close our eyes in gleeful greed during the good times only to cry foul when it's time to pay the piper at the end of the binge. Obviously, shareholders can't know about illegal activities taking place. But they can pay a lot more attention to the business context, take responsibility for the business practices they are rewarding, and make sure their money is being managed by people who are insisting businesses make sound decisions for the long-term (or at least not just the moment).
From the posts I've seen on this board, there seems to be breach of trust between shareholders and company management. The underlying message seems to be that management can't be trusted, that its impulse is to cheat shareholders and take away from shareholders what's rightfully theirs. Certainly there have been abuses, there is a lot of room for accounting and reporting improvements (especially regarding ESOs), and shareholders need to pay attention to their investments in ever-widening circles (like we're learning about the importance of ESOs now). However, I don't see us as victims.
To me, a business is a triangle with 3 core constituents at the points: shareholders, employees, and customers. The board of directors and the executive management team are in the center of that triangle. I strongly disagree with the idea that shareholders should decide on ESO grants or any other specific business policy--just as I would strongly disagree with having employees or customers decide it--because none of these constituents is looking at the big picture. The only people with the big picture are the folks in the middle: the board of directors and the executive team. We're relying on their expertise for a reason: chances are extremely good that we don't have the business, management, and industry skills needed to make sound strategic and tactical business decisions for a Fortune 1000 (or possibly Wilshire 5000) company.
So it comes down to a fundamental investing rule: If you don't endorse the management team, don't buy the stock (and if you feel strongly enough, let the board of directors and the investor relations department know why). If you do trust the management team, let them do their job of managing and running the business while continuing to monitor their ongoing performance (because teams change and stuff happens). If you don't like what they're doing, let them know directly and at least as often as letting these boards know. If they abuse their responsibility, work hard to get them out of their jobs (it will only take a few cases of shareholder overthrow to bring the vast majority of them back in line).
A successful business is a balancing act between the competing interests of shareholders, employees, and customers. Shareholders want the highest possible returns, employees want the highest possible compensation, and customers want the lowest possible costs. Without a decent return, there aren't enough investors. Without decent compensation, there aren't enough high quality people to make high quality products and provide high quality services. Without high-enough quality and low-enough prices, there aren't enough customers. Each point of the triangle depends on the others for its success. Any single point can take a company down (loss of investor confidence, employee flight, or customer flight), yet if a company goes down, every point of the triangle loses: shareholders lose their investment, employees lose their livelihoods, and customers lose their suppliers (and possibly their business and livelihoods and shareholder investments...) Again, only the folks in the center are in a position to balance these interests effectively.
I guess this is a long-winded way of saying I don't agree with the idea that shareholders are victims of the market or some sort of management contempt. Shareholders loved the creative accounting when they were making money hand over fist--isn't that one of the reasons the former SEC chairman couldn't get any of the reforms he proposed then (and being resurrected now) through during the Clinton administration? I believe he was told over and over again not to tamper with what was working. And shareholders are fickle about short-term earnings: most don't want to hear about long-term business strategies and growing the business in a sustainable way if it's going to take away from this quarter's earnings. And goodness only knows they don't want to hear about the needs of employees and customers or the requirements of good business practices, because those aren't the shareholders' problems. Shareholders want returns on their investments. And shareholders don't mind turning a blind eye to obscenely high stock values--whatever the cause--even when it doesn't make the slightest business sense.
I'm sure there are a lot of very constructive things we can do to decrease the likelihood that the current level of investor carnage won't happen again, but it's likely to curtail the upside potential as well as the downside risk (creative, and perfectly legal, accounting was handsomely rewarded during the 90s). Some of the things that come immediately to mind:
* We have at our disposal two tools that provide ultimate control: our dollars and our voices. We reward a business every time we spend or invest a dollar, and every time we use or silence our voices. Without us shareholders playing with our dollars and our voices, there is no game.
* We can take our shareholder responsibilities seriously. Don't rubberstamp the annual shareholder ballot or ignore it entirely--do your homework and research what they're proposing and who they want to hire (or give your proxy to someone you trust).
* Contact Investor Relations and let them know your positions and opinions as a shareholder. Write letters or send email to the Board and the executives.
* Take the time to understand relevant pending legislation and let your representatives know how you feel as a voter and a shareholder.
I think the worst thing we can do as investors is to limit our actions to fretting and complaining and hoping that "they" (whoever "they" are: I guess the likes of politicians, the SEC, and lawyers) take care of our best interest. I'm not suggesting we all become legislative analysts and shareholder activists, but I'm guessing there are groups out there who are doing the analysis and activism that we can learn from (just like we're learning what to look for in individual stocks from each other on this board).
Whether we want to play the game or not, if we're investing we're in the game. Everyone else in the game is playing full out with their eyes wide open, and I think we (as individual investors) have to do the same thing. I see portraying us as victims as a way to keep us on the sidelines (passive): things are happening to us, beyond our control and there's nothing we can do. So few people actually participate, I believe we have a lot more influence than we realize (even as individuals).
(Listening to Pink)
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