5 ms·

It works because of the short term nature of modern corporate goals. A lot of stockholders are institutional investors looking to buy low and sell high, rather

by hliyan 11y ago

It works because of the short term nature of modern corporate goals. A lot of stockholders are institutional investors looking to buy low and sell high, rather than long term stakeholders in the company. Neither they, the board and there for the CEO has any reason to see beyond a 1-2 year horizon unless the company is in really good shape.

billforsternz 11y ago
I think there is quite a lot of related irrationality outside the corporate world. You see it in environments like a committee of volunteers running a club for hobbyists. "Subscription income is down therefore we must raise our subscription fees" seems to be obvious and common sense to many, maybe most people. Pointing out that this is most likely to have the deadly unintended consequence of driving current members away and further reducing income often seems to be fighting against the tide.
- duncanawoods 11y ago
  The tide you are fighting probably isn't irrationality but limited resources. If you have zero resources to ramp up marketing yet have fixed costs that must be met then its basically raise fees or close the club. Companies can take on debt\sell equity but that door is not open to everyone and doesn't stay open forever. If you have a way out of downward spirals caused by lack of resources please share!
- altoz 11y ago
  "Tax revenue is down so we must raise taxes" Yep, definitely happens a lot outside the corporate world.
  - ptaipale 11y ago
    It also works as "Tax revenue is up, so this is proof that taxes are not too high, so we must raise taxes".
    - gjm11 11y ago
      You get the reverse too. Tax revenue is down, so we must help the economy grow by reducing taxes. Tax revenue is up, so clearly we are taxing more than we need to and we can reduce taxes. Taxation doesn't quite fit the pattern we're talking about here, anyway. If a TV channel increases its ads, the obvious failure mode is that viewers go elsewhere instead (and hence advertisers spend less and revenue falls). But inter-country mobility is small enough that even quite large changes in tax rates aren't likely to make a lot of taxpayers go elsewhere. You occasionally hear rich famous people threatening that if some potentially tax-raising party comes into power they'll leave the country, but they don't generally actually do it. (That may be different for corporate as opposed to individual taxes. Large multinational companies may be willing and able to move their operations around to minimize the taxes they pay.)
      - darkmighty 11y ago
        I believe he was thinking of runway economic effects -- e.g. tax revenue is down so 'Let's increase taxes!', while doing so could lead to further economic slowdown and less taxes; this effect is less obvious and doesn't necessarily happen imo.
freyr 11y ago
Yes. Perhaps it also works when you decide to cater to the x% of consumers who are quality-insensitive. Many people will endure years of bad service, complaining the entire time while taking no action. I imagine someone there has figured out the inflection point where they can reduce the quality of their service without losing a significant number of customers. But perhaps that's giving them to much credit.
- pixl97 11y ago
  >consumers who are quality-insensitive That is one benefit of the modern internet. As a customer that is quality-sensitive about many products, I can 'evangelize' to insensitive customers and attempt to bring them into the fold and start demanding better quality products, thereby increasing the quality I receive from the product myself.
WalterBright 11y ago
In order to sell high after wrecking the long term future of a company, you've got to fool a lot of sophisticated investors. This seems implausible to me.
- dragonwriter 11y ago
  > In order to sell high after wrecking the long term future of a company, you've got to fool a lot of sophisticated investors. This seems implausible to me. When you put it that way, it does sound implausible. But it demonstrably happens, so lets consider how that explanation may be wrong. You don't necessarily have to fool a lot of sophisticated investors, you have to fool people/firms with sufficient funds available to invest, who can be talked into the belief that they are taking advantage of opportunity the rest of the market is missing, perhaps one which is uniquely available to them because of synergies. Often this can be one person or firm rather than a lot of investors (sophisticated or not) -- its not as if acquisitions where the acquirer pays above market price and ends up a few years later taking a huge charge when its expectations fail to pan out are unheard of. And this makes sense. If firms can make foolish decisions in running their business which negatively impact the future of the company, one form this can take is buying some other business at an unjustified price where someone else had already made a foolish decisions that negatively impacted the future value of that business.
  - WalterBright 11y ago
    I'm sure it happens here and there. But generally? No. The people who make the bulk of the trades (i.e. move the markets) have every incentive to not buy at a high price a company that has eaten their seed corn. They employ analysts whose sole job is to investigate those companies. If you know of specific companies that have destroyed their future for a short term stock gain, you stand to make a fortune by short selling the stock.
tsotha 11y ago
That doesn't really add up, though. The expected future performance of a company is baked into the stock price. When companies do short-term things often the price of their stock falls even as profits rise. Investors aren't stupid.
- gshubert17 11y ago
  I'll stipulate efficient market theory and all that. But doesn't that depend on a significant fraction of investors being rational and having pretty good information? And on markets not being "rigged"? And I wonder whether the price of current stock market transactions adequately reflects the knowledge of all investors, including the long-term ones.
  - tsotha 11y ago
    I considered editing the post to include the caveat "Where that strategy could make sense for an executive is when he's able to hide (or at least obfuscate) what he's doing." >And I wonder whether the price of current stock market transactions adequately reflects the knowledge of all investors, including the long-term ones. That's sort of an odd way to put it. By definition the market transactions reflect the knowledge of all investors, unless you're postulating they don't apply knowledge when they trade. Do you mean the stock price is influence by people without knowledge other people do have? That's true. But professional and institutional investors have the most influence, and they've got a pretty good idea when managers are eating the seed corn. It's an obvious strategy for executives, so professional investors are always on the lookout. Do some executives get away with padding their bonuses through short term strategies? Sure. But I think it's rare.
mixmax 11y ago
Which is probably why companies such as Ikea, Maersk and Google are doing so well; They have a founder, or descendant that is in control of the company and can thus make long term decisions.
- hliyan 11y ago
  This is true. Some founders seem to have planned their company well beyond their lifetimes. When they retire, MBAs move in.
  - tired_man 11y ago
    And that is when the evil begins.
- justwannasing 11y ago
  I always said that, in the small businesses I've been involved with, "shit runs downhill". The nicest places to work with have good guy owners. The worst ones have bad guy owners.
uhwhat 11y ago
Obsessive compulsive behavior on a societal level.
oxalo 11y ago
Beware the Local Maxima: http://www.iafrikan.com/2014/07/07/beware-the-local-maxima-power-of-patience/ http://www.iafrikan.com/2014/07/07/beware-the-local-maxima-p...
ConceptJunkie 11y ago
It also works because, in the words of noted historian Robert Conquest (RIP) "The simplest way to explain the behavior of any bureaucratic organization is to assume that it is controlled by a cabal of its enemies."

by hliyan 11y ago

billforsternz 11y ago

I think there is quite a lot of related irrationality outside the corporate world. You see it in environments like a committee of volunteers running a club for hobbyists. "Subscription income is down therefore we must raise our subscription fees" seems to be obvious and common sense to many, maybe most people. Pointing out that this is most likely to have the deadly unintended consequence of driving current members away and further reducing income often seems to be fighting against the tide.

duncanawoods 11y ago
The tide you are fighting probably isn't irrationality but limited resources. If you have zero resources to ramp up marketing yet have fixed costs that must be met then its basically raise fees or close the club. Companies can take on debt\sell equity but that door is not open to everyone and doesn't stay open forever. If you have a way out of downward spirals caused by lack of resources please share!
altoz 11y ago
"Tax revenue is down so we must raise taxes" Yep, definitely happens a lot outside the corporate world.
- ptaipale 11y ago
  It also works as "Tax revenue is up, so this is proof that taxes are not too high, so we must raise taxes".
  - gjm11 11y ago
    You get the reverse too. Tax revenue is down, so we must help the economy grow by reducing taxes. Tax revenue is up, so clearly we are taxing more than we need to and we can reduce taxes. Taxation doesn't quite fit the pattern we're talking about here, anyway. If a TV channel increases its ads, the obvious failure mode is that viewers go elsewhere instead (and hence advertisers spend less and revenue falls). But inter-country mobility is small enough that even quite large changes in tax rates aren't likely to make a lot of taxpayers go elsewhere. You occasionally hear rich famous people threatening that if some potentially tax-raising party comes into power they'll leave the country, but they don't generally actually do it. (That may be different for corporate as opposed to individual taxes. Large multinational companies may be willing and able to move their operations around to minimize the taxes they pay.)
    - darkmighty 11y ago
      I believe he was thinking of runway economic effects -- e.g. tax revenue is down so 'Let's increase taxes!', while doing so could lead to further economic slowdown and less taxes; this effect is less obvious and doesn't necessarily happen imo.

freyr 11y ago

Yes. Perhaps it also works when you decide to cater to the x% of consumers who are quality-insensitive. Many people will endure years of bad service, complaining the entire time while taking no action. I imagine someone there has figured out the inflection point where they can reduce the quality of their service without losing a significant number of customers. But perhaps that's giving them to much credit.

pixl97 11y ago
>consumers who are quality-insensitive That is one benefit of the modern internet. As a customer that is quality-sensitive about many products, I can 'evangelize' to insensitive customers and attempt to bring them into the fold and start demanding better quality products, thereby increasing the quality I receive from the product myself.

WalterBright 11y ago

In order to sell high after wrecking the long term future of a company, you've got to fool a lot of sophisticated investors. This seems implausible to me.

dragonwriter 11y ago
> In order to sell high after wrecking the long term future of a company, you've got to fool a lot of sophisticated investors. This seems implausible to me. When you put it that way, it does sound implausible. But it demonstrably happens, so lets consider how that explanation may be wrong. You don't necessarily have to fool a lot of sophisticated investors, you have to fool people/firms with sufficient funds available to invest, who can be talked into the belief that they are taking advantage of opportunity the rest of the market is missing, perhaps one which is uniquely available to them because of synergies. Often this can be one person or firm rather than a lot of investors (sophisticated or not) -- its not as if acquisitions where the acquirer pays above market price and ends up a few years later taking a huge charge when its expectations fail to pan out are unheard of. And this makes sense. If firms can make foolish decisions in running their business which negatively impact the future of the company, one form this can take is buying some other business at an unjustified price where someone else had already made a foolish decisions that negatively impacted the future value of that business.
- WalterBright 11y ago
  I'm sure it happens here and there. But generally? No. The people who make the bulk of the trades (i.e. move the markets) have every incentive to not buy at a high price a company that has eaten their seed corn. They employ analysts whose sole job is to investigate those companies. If you know of specific companies that have destroyed their future for a short term stock gain, you stand to make a fortune by short selling the stock.

tsotha 11y ago

That doesn't really add up, though. The expected future performance of a company is baked into the stock price. When companies do short-term things often the price of their stock falls even as profits rise. Investors aren't stupid.

gshubert17 11y ago
I'll stipulate efficient market theory and all that. But doesn't that depend on a significant fraction of investors being rational and having pretty good information? And on markets not being "rigged"? And I wonder whether the price of current stock market transactions adequately reflects the knowledge of all investors, including the long-term ones.
- tsotha 11y ago
  I considered editing the post to include the caveat "Where that strategy could make sense for an executive is when he's able to hide (or at least obfuscate) what he's doing." >And I wonder whether the price of current stock market transactions adequately reflects the knowledge of all investors, including the long-term ones. That's sort of an odd way to put it. By definition the market transactions reflect the knowledge of all investors, unless you're postulating they don't apply knowledge when they trade. Do you mean the stock price is influence by people without knowledge other people do have? That's true. But professional and institutional investors have the most influence, and they've got a pretty good idea when managers are eating the seed corn. It's an obvious strategy for executives, so professional investors are always on the lookout. Do some executives get away with padding their bonuses through short term strategies? Sure. But I think it's rare.

mixmax 11y ago

Which is probably why companies such as Ikea, Maersk and Google are doing so well; They have a founder, or descendant that is in control of the company and can thus make long term decisions.

hliyan 11y ago
This is true. Some founders seem to have planned their company well beyond their lifetimes. When they retire, MBAs move in.
- tired_man 11y ago
  And that is when the evil begins.
justwannasing 11y ago
I always said that, in the small businesses I've been involved with, "shit runs downhill". The nicest places to work with have good guy owners. The worst ones have bad guy owners.

uhwhat 11y ago

Obsessive compulsive behavior on a societal level.

oxalo 11y ago

Beware the Local Maxima: http://www.iafrikan.com/2014/07/07/beware-the-local-maxima-power-of-patience/ http://www.iafrikan.com/2014/07/07/beware-the-local-maxima-p...

ConceptJunkie 11y ago

It also works because, in the words of noted historian Robert Conquest (RIP) "The simplest way to explain the behavior of any bureaucratic organization is to assume that it is controlled by a cabal of its enemies."