Free enterprise itself is under threat

December 28, 2011 7 Comments
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Good stuff:

The “real market,” Martin explains, is the world in which factories are built, products are designed and produced, real products and services are bought and sold, revenues are earned, expenses are paid, and real dollars of profit show up on the bottom line. That is the world that executives control—at least to some extent.

The expectations market is the world in which shares in companies are traded between investors—in other words, the stock market. In this market, investors assess the real market activities of a company today and, on the basis of that assessment, form expectations as to how the company is likely to perform in the future. The consensus view of all investors and potential investors as to expectations of future performance shapes the stock price of the company.

Indeed.

In this world, the best managers are those who meet expectations …

In such a world, it is therefore hardly surprising, says Martin, that the corporate world is plagued by continuing scandals, such as the accounting scandals in 2001-2002 with Enron, WorldCom, Tyco International, Global Crossing, and Adelphia, the options backdating scandals of 2005-2006, and the subprime meltdown of 2007-2008. The recent demise of MF Global Holdings and the related ongoing criminal investigation are further reminders that we have not put these matters behind us.

“It isn’t just about the money for shareholders,” writes Martin, “or even the dubious CEO behavior that our theories encourage. It’s much bigger than that. Our theories of shareholder value maximization and stock-based compensation have the ability to destroy our economy and rot out the core of American capitalism. These theories underpin regulatory fixes instituted after each market bubble and crash. Because the fixes begin from the wrong premise, they will be ineffectual; until we change the theories, future crashes are inevitable.”

The question is how to reverse this corrosive enemy to real growth? In fact, looking at it politically, unless this is addressed, along with all the graft at boardroom level plus the banker bonuses et al, we are in grave danger of succumbing to the global socialist who wishes to run the corruption centrally, with him in charge and us as slaves – not even wage slaves.

To save free enterprise as a whole, this must be urgently addressed now but who’s to address it – the corrupt themselves? Big Brother?

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7 Responses to Free enterprise itself is under threat

  1. Sackerson
    December 28, 2011 at 8:14 am

    Oh please, Pussy, said the mice, will you put on this bell?

  2. john in cheshire
    December 28, 2011 at 10:50 am

    And the first thing the company boards should do is to stop giving their executives vast amounts of shares as part of their remuneration package. Every paid employee in a company, from the top to the bottom should be paid a salary/wage and that’s it. If you perform well, then perhaps you get a wage increase; if you perform badly then you get the sack. If you are competent you are promoted, if not, then you stay where you are.
    I could be wrong but weren’t bonuses introduced during one of our previous disastrous periods of socialist misrule, when there were wage freezes? Bonuses are the other part of this story that cause more problems than they were intended to solve.

    • December 28, 2011 at 2:39 pm

      There’s nothing intrinsically wrong with performance based bonuses, providing they are just that; performance based.

      As for share schemes, I’m ambivalent. Personally, I would rather have the moolah and spend it as I choose than have to have it locked up in shares.

      • Mudplugger
        December 28, 2011 at 3:42 pm

        I’ve worked under both bonus and share-option schemes – the former makes you work harder, the latter makes you work smarter. There’s room for both.

        The problem has been that the ‘bonus element’ has recently lost touch with reality and with the base salary in many areas – much of this at the companies’ behest to isolate it from company pension qualification.

        Although generally opposed to excessive regulation, I could be pursuaded that a limit should be applied to total incentives – maybe they should never be more than 100% of base salary, so at most you could double your guaranteed earnings.

  3. Voice of Reason
    December 28, 2011 at 6:44 pm

    A very concise exposition on some of my thoughts over the years. To my mind, the big problem is that we have divorced money from instrinsic value (and I’m not talking about the gold standard). Those who manipulate the money – bankers, stockbrokers and the like, produce absolutely nothing, but believe that they have the expertise to own and run everything.

  4. Abel
    December 29, 2011 at 8:25 am

    I’m not sure I have a problem with either bonus or share-option schemes, the issue I have is still with the manipulation of the playing field. Do well (make more gizmos than your competitor or invest shrewdly), you get your bonus from the profits, do poorly (make gizmos nobody wants or invest dangerously) and… you get your bonus because the government takes more money of the tax-payers to pay for your mistakes.

    Criticize capitalism, the industrialists, the stock-market, etc. all you want (not you personally :-) ) but if they make decisions, they take the consequences, whatever they are. The issue of “theories of shareholder value maximization and stock-based compensation” are irrelevant – buying shares is gambling, the problems have arisen because the losers get away without paying the cost of that gamble.

    Preaching to the choir here I know but I think this issue is nothing more than a distraction from the real problem.

  5. Rossa
    December 30, 2011 at 8:40 am

    “…the problems have arisen because the losers get away without paying the cost of that gamble.”

    Too true. Privatising the profits and socialising the losses as has happened with the banks has skewed the system badly. It isn’t the system that is corrupt. It is the people who are running the system who are. And when the regulators turn a blind eye and deliberately undermine the system as in the MF Global bankruptcy, where clients’ monies were used (stolen) to pay JP Morgan back, then only a complete reboot will do.

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