In the Arena

Why Bain Matters Cont.

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Joe Nocera has an important column in the Times today about the cult of “shareholder value” and its impact  on American  capitalism over the past 30 years. Starting with T. Boone Pickens, and accelerating with privaty equity firms like Bain Capital, a simple idea took hold of corporate America: the most important function of a company was to produce as many profits as possible for its shareholders. What could be more simple than that?

But what happened was that the necessity for long-term stewardship and planning quickly fell by the wayside. Executive salaries–especially in the form of stock options–exploded. Research and Development departments withered (no short term profits there). Now, Nocera writes, there’s the beginning of an academic backlash. It’s about time, but I wonder what impact it will have on our gone-amok culture of quick-draw profit-taking.

Which is where Romney comes in: I’m far more interested in whether he thinks the culture of shareholder value has gone overboard than I am in the layoffs that accompanied Bain takeovers. I’d like to hear him talk about corporate stewardship, about long-term planning–because the enterprise he’s angling to run, the United States of America, needs long-term planning far more than it needs a short-term fix. If we’re going to have a the “serious” discussion of issues he claims to want, but has never provided, the cult of shareholder value has to be on the table.

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wagedronenumber9
wagedronenumber9

the most important function of a company was to produce as many profits as possible for its shareholders.

Y0u have missed the second part if this belief; that this is achieved by "producing goods at the cheapest price possible."

This becomes the rational for outsourcing jobs because it means the American consumer in the end "benefits" because prices are lower and they have more freed income to spend on other goods and this is in the long run is a good thing for society.

I don't think you can think of the above with thinking of the latter. It doesn't take much to understand that taking paychecks out of the country and depositing them into a third world country is a huge minus in terms of having money circulation in the US economy and is more detrimental than any gain of lower prices  (if indeed outsourcing actually does lead to lower prices.)

All of this theory is from the Austrian Economists and the von Mises Institute has a lot of free stuff on its website.

Benevolent Lawyer
Benevolent Lawyer

Instead of using the word GREED, the word Romney and others of his ilk use as cover for their brutalizing the common man in order to enrich their pockets, is capitalism.

Corporations should at least have some basic moral codes even though they are primarily for profit. For e.g. could you leave the jobs here and get a little less in your revenue. And yes, we know labor is far cheaper in some other countries. But you are American companies, right? Should that not matter, even a little?   

http://blackrepublicanandmywor...

Johnmag54
Johnmag54

I am not an economist or BS wiz, so someone please explain to me how we can keep on taking over businesses which have Ramp;D and production facilities and then shipping the production overseas. In this process laying off workers and adding to our society's obligation for helping those who lost those jobs with unemployment compensation, health care, food stamps and other benifits. It makes no sense to rip someones job out from underneath them, so stockholders can make bigger profits. In the end it costs this society more when stockholders make these unearned profits, than when we make money the old fashion way of working for it. This country won't survive running as a "service" economy. After a time, who in their right mind would basically pay for nothing. Why would someone pay a valued added premium for a product that was run through the hands of a stockholder. Nothing is what this "service" economy would produce and recieve.

JayAckroyd
JayAckroyd

It's worth noting that corporations are chartered by the state to advance the public interest. The idea that their sole purpose is to maximize shareholder value, or maximize short term profit flies in the face of the public purpose in creating their existence as distinct entities. Among other attributes, they are intended to be multi generational--to be "persons" that are potentially immortal.

Paul Dirks
Paul Dirks

Whether we like it or not, we're going to move away from manufacturing towards a service based economy

There's the problem in a nutshell. Whenever we think of any activity that earns money, we have to ask ourselves, "How does this add value?" Measured in terms of fulfilling actual human needs as opposed to simply drawing attention and cash, the only activities that actually add value are farming, manufacturing and transportation. Everything else is a matter of trading cash for vapor. 

Thinking that the American economy can make do without actually producing anything is the number one fundamental problem with out current economy. It's also the number one topic that everyone refuses to talk about.

NicHautamaki
NicHautamaki

Hate to say it but I'm gonna have to take umbrage here. I disagree that service jobs by definition do not add value while by definition manufacturing, farming, and transportation does. What you are doing is equating the consumption of finite resources with creating value. If some finite resource is not consumed, by definition no value is created. This is a destructive and unsustainable paradigm. To use a specific counterexample, what benefits society more? Teachers, nurses, and doctors in the service economy? Or tobacco farmers and cigarette manufacturers?

I'm sure you see my point, and perhaps feel I'm reading too much unnecessarily into your post but it's just because I want to push back against the idea that only the consumption of resources actually creates value. I fully believe that a small nation could succeed with an economy more based on services, like education, r and d, healthcare, and financial services if it attracted an international market for those services, and would just as productive as any other nation.

LIDVT
LIDVT

Plenty of services add value, as you note.  But what about the financial services industry?  You still have to make something before the services actually translate into value.

If you spend 4 years educating a technician and then the technician goes to work selling donuts, how much value have we created?

ifthethunderdontgetya™³²®©
ifthethunderdontgetya™³²®©

What do you mean, Paul D!

We can't have an economy based on ripping each other off? 

You'll never make it as a pundit, like Joe Klein.

~

HudsonValleyTim
HudsonValleyTim

As a person who was displaced by this culture (by Pfizer, who bought Wyeth, then gutted it), I can attest to the lunacy of it all.  Before Pfizer and I parted ways, I was privy to some of the ways that they were legally gaming the system to move their profits off-shore (to Ireland, where the corporate tax rates are cheaper).  In the end, Pfizer took nearly the entire manufacturing capacity for the most profitable vaccine in history and moved it abroad (because manufacturing in NY is too expensive).

It's perfectly understandable from the shareholder's perspective as to why this happened, but the generations of workers displaced because of this short-sighted profiteering held a different kind equity in the plant, and the town where it is now being shuttered. 

I don't know how it is that we can stop this looting of the American manufacturing, base.  But I like the recent ideas being floated where the tax on financial transactions (such as derivatives trades, etc) that got our economy so twisted-up should be raised, and the taxes on corporations that actually MAKE SOMETHING in the US should be slashed.  Give incentive to the areas of the economy that bring long-term benefit, and discourage those that only enrich the plutocrats.

Paul Dirks
Paul Dirks

I OTOH and a victim of '"Sherwin Williams bought Pratt and Lambert/United Coatings and gutted it"

It seems to be a fairly common experience.

wagedronenumber9
wagedronenumber9

constant churn of creative destruction

The Pfizer buyout of Wyeth is a good example of how a lot of this "creative destruction" argument is a a bunch of malarkey now a days. The reason why Pfizer bought Wyeth was to shore up the coming problems with drugs patents ending and that its Ramp;D wasn't coming up with any new replacements. Wyeth hadn't fallen behind economically, Pfizer had the cash and assets to pull off the deal at the time when investment banks weren't lending at all. In essence, Pfizer was too big to fail to  "market forces" (i.e.) the bad decision it made in 2006 to sell its consumer products and concentrate on the drug business. So it bought Wyeth and added all the products it had Ramp; Ded to its own portfolio and by doing so gutted the stronger rival.

http://blogs.wsj.com/health/20...

HudsonValleyTim
HudsonValleyTim

That is exactly true...Wyeth had a superior pipeline (which is the lifeblood of a pharma), had a bunch of cash on hand, and strong products on the market with a long-time before patent expiration.  Pfizer had a load of cash and its big producer (Lipitor) going off-patent.  If Pfizer didn't make a deal, its stock was going to be toast.  Rather than be engaged in a hostile takeover battle, Wyeth rolled-over and the board members all got rich.  There was no reason whatsoever that Wyeth needed to be acquired, or that the manufacturing of Wyeth products needed to be relocated.  The prevailing argument was that the overhead in the US was too high.  I say "B.S."...when a vaccine is making billions of dollars a year in profits, you can make it in Time Square and still turn a profit.  It all comes down to the question of "how much is enough?".

BTW, Nice catch on the Pfizer-Wyeth link. Were you a Pfizer Drone?

wagedronenumber9
wagedronenumber9

You have to wonder how much money Wyeth could get together to fight against Pfizer because credit was tight after 2007. It would be interesting to see the principles involved on the bankrolling of Pfizer, what Wyeth tried to do against Pfizer, etc.... because this one has the smell of crony capitalism all over it.

Megatron_Rises
Megatron_Rises

I often read the commentary just to hear the grumbling of my fellow liberals. But I think deriding Joe Klein is a bad move. You may disagree with him, but he's an honest guy who's earned his stature through decades of reporting.

I think it's sad that the left often doesn't have perspective when it comes to concepts like creative destruction, and the need for corporate reinvention. Whether we like it or not, we're going to move away from manufacturing towards a service based economy. That's a good thing. It may be painful, but the result will most likely be a stronger America with greater output and value-added, securing our place at the head of the world.

Joe has a valid point - at this point, the layoffs are far less important than what Romney thinks about the trajectory of corporate America. Those views are going to inform his actions as President more than the fact that he laid off people 15 years ago.

Diecash1
Diecash1

we're going to move away from manufacturing towards a service based economy. That's a good thing.

Perhaps you can explain precisely how that's a good thing?  I fail to see how it is a step forward for the country.

Beyond that, I agree with irish379:  If you're one of those who's job is "creatively destroyed," you may be inclined to disagree with JK.

Pnnto
Pnnto

"Joe has a valid point - at this point, the layoffs are far less important than what Romney thinks about the trajectory of corporate America"

Isn't your question answered within your question? Willard's history is wealth creation not job creation. That's what JK chooses not to see. He's untouched by job loss so JK is fiddle-dee-dee about others.

After all, to paraphrase him, "There will be poor always". It's cynical, it's cruel, and above all it's a defeatism that borders on un-American. 

irish379
irish379

It's easy to take that view unless you are a 50+year old who loses their job. Then you become what JK considers myopic in your "worldview ".

tdinct
tdinct

The reason the lay-offs, which accompanied Bain's take-overs, are important has to do with Gov. Romney's claim of being a job creator and, more importantly, his reliance upon his work at Bain to support that claim.  The truth, of course,  is that Bain was concerned about profits for shareholders, not job creation.  If hiring people created profit then Bain would "create jobs."  However, if people needed to go in order to create those profits then Bain fired people by the boat-load.  To expect that Gov. Romney believes or would implement policies which run contrary to his philosophy of profits above all is foolish.  He helped create that philosophy.  Lets not forget, Corporations are people too my friends.

f_galton
f_galton

How is long term planning supposed to work when rapid advances in technology can change entire industries overnight?

f_galton
f_galton

"what happened was that the necessity for long-term stewardship and planning quickly fell by the wayside....Research and Development departments withered (no short term profits there)."

Wrong.

 http://www.nsf.gov/statistics/... 

 

Ivy_B
Ivy_B

Thank you for responding to comments, Joe.

From Nocera's column --

“Look at almost any company that has lasted,” he continued. “It is inevitably because executives see themselves as trying to move the organization forward, and not because they are incented by their pay package to maximize the share price.”

Lorsch, for his part, says that he believes that “the function of business in a society is not just a return to investors, but to provide goods and services, provide employment, pay taxes, and so on.”

One of the commenters makes the point (and a good one, I think) that it is institutional investors - including large funds - that have helped to pervert this. They frequently also have their own bonuses based on short term stock gains.

Nocera winds up his column with the thought that some of the current practices may be changing. Baby steps. I don't expect to see the outrageous executive compensation packages changed in my lifetime, but I always vote against them on my proxys.

ChowT
ChowT

Bain matters because of the pain it caused to so many workers.

Bain matters because of the gain by Mitt Romney at the expense of workers.

Joe Klein
Joe Klein

Note: this is a reply to Paul Dirks below

Paul--The world didn't begin today. If you've read me in the past--indeed, as recently as yesterday--you know that I've been pretty vehement about the need for more, and bigger, stimulus, especially infrastructure development. (In my print column this week, I wrote about the inclusion of short-term stimulus in the Simpson-Bowles plan--something deficit hawks rarely acknowledge). If you want me to engage in a conversation with you commenters, please don't oversimplify or ignore my very strong and long-held positions.

Diecash1
Diecash1

While I don't agree with your comments,Joe, I do appreciate that you've waded into the comments. Thanks for that.

pollardty
pollardty

Paul Krugman didn't begin writing on economics today. Why is your opinion on economics more informed or wiser than his?   

 

I think part of the problem IS your long held views that don't seem to evolve when new information is presented.

ifthethunderdontgetya™³²®©
ifthethunderdontgetya™³²®©

I don't think any of us are ignoring your strong and long-held positions.

We just have no respect for them.

The big picture:  in the last three decades, large corporations (and the plutocrats who control them) have completely captured our government. 

We've had (more) wars for their benefit, tax cuts for their benefit, deregulation for their benefit, and bailouts after the bust that resulted from said deregulation for their benefit.

And now cutting Social Security and other parts of the safety net is bipartisan in order to pay for it all.  Romney has had to adopt an extreme right-wing position merely to achieve brand separation from Obama's.

If being a pundit was merit-based (rather than a position earned and maintained based on one's service to the wealthy),  you'd be unemployed, Joe Klein.

~

bobell
bobell

 I hate to look like a moderate, but I see much truth on all sides of this argument.  (There are more than two sides.)

Regardless, and in SZ's absence, thanks for responding, Joe.  I can see that you enjoy the rough and tumble, and I hope we'll see more of you here where the comments hit the swamp.

Stuart Zechman
Stuart Zechman

Thanks for acknowledging Joe's response to commentary in the appropriate manner, bobell.

Paul Dirks
Paul Dirks

But you left that phrase just sitting there.....;-)

I think we both agree that the proper time to get our budgets on a sustainable path was during the beginning of the Bush years when he decided instead to slash taxes. I know we disagree on how SS reform should have played out.

Paul Dirks
Paul Dirks

needs long-term planning far more than it needs a short-term fix.

Earth to Joe. What we are currently experiencing is an employment crisis. Pivoting to long term planning (deficit reduction) before we successfully solved the short term crisis (unemployment) is EXACTLY why we're in such deep sh!^ at the moment.

You couldn't be more wrong.

JayAckroyd
JayAckroyd

In fact, getting a long term higher growth path, with full factor utilization is the way to address the long term problem as well. And we can do it by taking the free money the world wants to give us and build infrastructure. Pull fiber to every post office. Fix every bridge. Put a 21st century science lab in every high school.  Taking people and machines that are deteriorating in idleness and putting them to work building physical capital with the free financial capital available is obviously good public policy, but it's not on the table. It's apparently not on the table because the elite centrists who run the country have an ideological commitment to gutting the New Deal, no matter what the cost.

Pnnto
Pnnto

"I’m far more interested in whether he thinks the culture of shareholder value has gone overboard than I am in the layoffs that accompanied Bain takeovers."

You write as if they aren't related. But your blissful disregard for others pain is noted. Again.

forgottenlord
forgottenlord

Different question: is it possible to have layoffs without the poisonous culture of "short-term profits for all"?  If the answer is yes, then the problem is not with layoffs, the problem is with the culture - the layoffs are a consequence of that culture, not a proof of evil. Looking at layoffs alone doesn't tell you whether you have a problem - looking deeper at all aspects tells you far more.

Pnnto
Pnnto

What do you believe Bain's strategy was? 

If depleting the labor costs-not just layoffs but out sourcing-was the goal to maximize shareholder value then what do we conclude?

Not being snarky just not sure of your point. 

I'm off to watch the not last place Twins but will check back later. 

forgottenlord
forgottenlord

Ok.  For me, the attitude is the cut costs today with no regard for how this hurts us in the future while the methodology is "layoffs, set up off short, etc".  Each of those parts of the methodology can be done within the scope of far better attitudes and can be done within reason.  So I feel focusing on the methodology doesn't indicate problems.  Now, we can analyze the methodology to determine the attitude, but at the end of the day, our criticism is still the attitude so that's where I feel our attacks should be levied.

Otherwise, it sounds like we're saying "layoffs are always an evil act done by evil men" which far more undermines our own position than it does our opponents.

Pnnto
Pnnto

Thanks for the considered response. 

We may be running into semantics- "the methodology of getting there is not nearly as problematic to me as the attitude behind it." the end result is the same. The attitude is the methodology. Human beings as pawns to be knocked off with a shrug, if that.

I work for a private 4th generation family business. We have had layoffs (5 cycles in my 18 years) and investments too. I work in accounting so I'm not naive to the realities of p/l in 2012.The company is extremely long viewed, 108 years will do that, so perhaps that informs my thinking. 

Willard's success, as defined by dollars, was accomplished by destruction. For JK to be so "that's the way it goes" about it disgusts me. 

forgottenlord
forgottenlord

I admit: I don't know.  I haven't read up on Bain enough to say exactly where the flaw in the logic is.  However, there seems to be a general feel that Bain was focused on short term profits rather than long term profits.  That nearly always destroys in the long term while rich people make a killing in the short term and then leave someone else holding the bag.  That's the kind of garbage that offends me - the methodology of getting there is not nearly as problematic to me as the attitude behind it.

I'll give you a different example: my current company was bought by a venture capitalist group.  Now, this group is financially backed by a single investor who actually understands what it means to invest long term.  Have there been layoffs?  Yes.  Have they sent some jobs to India?  Yes.  But they don't make every decision based solely upon the bottom line today.  Several projects that are losing money are being given significant investment.  Why?  Because they are about positioning our company for the next generation of our field.  This company plans for the long run.

Bain Capital, from what little I've read, does not seem to.  And Mitt Romney, from his actions the last few weeks, seems to follow in that tradition.  He'll gladly burn the bridge for tomorrow to patch the problem of today.  And therein is the real problem.  It's not that the layoffs happened, it's that the layoffs happened while not considering the future well being of the company but just getting the buck saved from laying off the people today.

Joe Klein
Joe Klein

They are barely related. The constant churn of creative destruction will always create layoffs--there isn't the need for blacksmiths that there used to be. But unless the free market operates with some vision, emphasizing research and development--and practical education--there will be few new jobs that will replace the ones that become obsolete.

Your usual blissful disregard for the big picture is duly noted. 

allthingsinaname
allthingsinaname

Of course, shareholder value is increased by bigger profit margins...but enterprise is ALWAYS going to move toward bigger profit margins.

Layoffs will ALWAYS be with us. American manufacturing was going to take

a hit from the global economy, no matter what. The question is whether

that hit is leavened by new product lines that create new jobs...and

those come as a result of long-term stewardship, the absence of which

has been the greatest change in American capitalism over the past 30

years.

What you say is true Joe, and what Pnnto is alluding to is the same.

What you call lack of long term stewardship is what Pnnto calls pain for the little guy. He believes it is short term gain for the wealthy resulting in long term pain.

Mitt and his type will continue the short term gain for their long term ease at the cost of long term pain for the rest of us. He and his ilk are true to their beliefs that they can make moneyunder any government, but they sure want to stack it in their favor.

American hero Romney does not make. He is short sighted and greedy.

theoldkathy
theoldkathy

 What hints do you have that he thinks the culture of shareholder value has gone "overboard?"  He ran Bain as if shareholder value (his) was what primarily mattered, and he's made clear he's proud of that.

ChowT
ChowT

what is creative destruction?

bobell
bobell

Try googling it (or Schumpeter).  It's in common use in discussions of the free market.

pollardty
pollardty

The "big picture" for the rich and powerful is different than the "big picture" for the rest of us. For the selfish wealthy, others pain is not a factor at all. Think Ayn Rand  and her disciples (Paul Ryan).

ChowT
ChowT

The rich are different from 'you people'.

Pnnto
Pnnto

How is shareholder value not improved by reducing and offshoring labor?

Your "big picture" is Beltway driven narrative. Small wonder you see a guy like Ryan as a big thinker.  

But thanks for the paraphrasing, shows you are paying attention.

JayAckroyd
JayAckroyd

Joe Klein says:

"You are truly myopic. Of course, shareholder value is increased by bigger profit margins...but enterprise is ALWAYS going to move toward bigger profit margins."

Right. Powerful private interests are going to do everything they can to increase their market shares, dictate prices of their products and dictate wages.  One of the most powerful tools they have is merger and market concentration.  They use these tools to lower wages while increasing productivity.  

The role of government in a capitalist society is to prevent these forces from coming together to distort markets and create monopoly and monopsony. See The Wealth of Nations.  A good portion of that book consists of Adam Smith decrying the monopolist distortions that prevent the Invisible Hand from operating.

"American manufacturing was going to take a hit from the global economy, no matter what."

That's empirically false. German manufacturing faces the same global economy and has not taken a hit.  However, it is the central tenet in the centrist ideology--that globalization means the US has to lower wages in order to compete globally.

This flies in the face of international trade theory, by the way.  Trade is a positive sum game when allowed to be free, and comparative advantage (as with Germany's in high tech energy products and in manufacturing tools that make manufacturing tols) makes it possible for everyone to be better off. But we are not in a free trade environment, so these "markets make this happen" stuff is horse puckey.  

Just as the idea that there are free markets in the bulk of the US domestic economy is deeply flawed, but widely held by centrists. The monopolies that dominate pharma, health "insurance," telecommunications (cable, cellular and earthbound), finance, agriculture, et alia mean that this jabbering about "free markets" is either ideological blindness or blatant dishonesty.

pollardty
pollardty

Entrenched media elites have failed our country as watchdogs. 

Joe is an example. They speak with unearned authority on any topic with no penalty for being wrong. They dismiss those that disagree as being shrill while ignoring their points all the while making a very comfortable living. It is not that I resent success, it is that I resent unearned success.

  

Nice "work" if you can get it.

Pnnto
Pnnto

It sure doesn't look to me that you and Krugman agree.

http://www.nytimes.com/2012/07...

"Beltway" may irritate you, how about tired conventional wisdom among the media elite?  Or perhaps it's just coincidence how often you all agree.

But what do I know? I myopic and stupid. 

Joe Klein
Joe Klein

You are truly myopic. Of course, shareholder value is increased by bigger profit margins...but enterprise is ALWAYS going to move toward bigger profit margins. Layoffs will ALWAYS be with us. American manufacturing was going to take a hit from the global economy, no matter what. The question is whether that hit is leavened by new product lines that create new jobs...and those come as a result of long-term stewardship, the absence of which has been the greatest change in American capitalism over the past 30 years.

And your stupid "Beltway" meme doesn't increase the likelihood that I'll respond in the future. You can ask Stieglitz or Krugman if my big picture is any different from theirs. Hint:  it isn't.