5 ms·

How do you maintain "Principle 1" while being a publicly traded company? The way the stock market is designed (and the fact that stockholders often get to appo

How do you maintain "Principle 1" while being a publicly traded company? The way the stock market is designed (and the fact that stockholders often get to appoint the board who gets to appoint the CEO) means they're going to put short term profits over long term viability. Many companies have been ruined and continue to be ruined by this short-term-ism chase for quarterly and yearly profits. For example look at the field of Customer Retentions. It used to be focused on satisfaction & delight which are both long term success strategies (both to grow and to retain), but in the last twenty years Customer Switching (i.e. making it harder/more costly/more time consuming/more stressful/etc to switch) has become the norm, this is a short term strategy since it improves short term retention metrics at the cost of long term returning customers and poor word of mouth (i.e. nobody returns or joins after they leave, if you made the switching process hellish). It is a great way to keep your quarterly and yearly churn low, but a poor way to run a business. It used to only be businesses with artificial monopolies that would do this (e.g. Verizon, Comcast, etc). But recently we've seen companies in fairly competitive spaces adopted a similar short term "suicide strategy" like LogMeIn (Remote Support Software), The New York Times (News Publication), SiriusXM (streaming audio), etc. All of which are likely chasing quarterly performance metrics tied to executive compensation.

bluGill 7y ago
While that is a common statement, it isn't really true. Most stock holders have figured out that long term profits are important as well. Companies that only focus short term go out of business quickly and so are worth less than companies who will be around longer. Most shareholders (37%) are retirement accounts which have long term goals.
- radcon 7y ago
  > While that is a common statement, it isn't really true. "Companies exist to maximize shareholder value" is the myth that just won't die.
- TeMPOraL 7y ago
  > Most stock holders have figured out that long term profits are important as well. Companies that only focus short term go out of business quickly and so are worth less than companies who will be around longer. Doesn't matter if the stock holders who pushed for the decisions managed to flip their stocks when they were still rising in value. Aren't most stock holders playing this game to flip stocks, without caring much about the particular company they're making money off?
  - icxa 7y ago
    Aren't most stocks are held in index funds and ETFs?
    - TeMPOraL 7y ago
      I don't know. Could someone who knows this for sure chime in here?
      - nradov 7y ago
        Yahoo Finance will show you the top holders for any publicly traded company. https://finance.yahoo.com/quote/TM/holders?p=TM https://finance.yahoo.com/quote/TM/holders?p=TM
    - mrep 7y ago
      Yep, they recently crossed the 50% mark [0]. Discussion [1] [0]: https://qz.com/1623418/index-funds-now-account-for-half-the-us-stock-market/ https://qz.com/1623418/index-funds-now-account-for-half-the-... [1]: https://news.ycombinator.com/item?id=20020997 https://news.ycombinator.com/item?id=20020997
magduf 7y ago
>How do you maintain "Principle 1" while being a publicly traded company? >The way the stock market is designed... means they're going to put short term profits over long term viability. It's simple: be Japanese and not American. Japanese companies don't have this kind of problem, precisely because they aren't American and their society doesn't value enriching executives over all else, and instead values a stable and harmonious society.
- davidrm 7y ago
  https://en.wikipedia.org/wiki/List_of_public_corporations_by_market_capitalization#2019 https://en.wikipedia.org/wiki/List_of_public_corporations_by... Not a single Japanese company, while the lists are dominated by the US ones. What you're saying is nothing other than the ancient TV trope about the difference between Japanese and the Americans (east vs west). disclaimer: I have 0 ties whatsoever to the US.
supergauntlet 7y ago
Perhaps it's a culture thing? IIRC, you don't actually legally have to bring more value to shareholders every quarter at the cost of everything else. Maybe Toyota's execs and shareholders have some sort of "gentlemen's agreement" where they just agree to not prioritize the short term at all costs? Maybe that's naive and they're just saying one thing and doing another.
- zebrafish 7y ago
  All publicly trade companies have a fiduciary responsibility to shareholders. That means different things to different companies and is not a hard and fast rule. Amazon did not prioritize short term profits for a long long time and Bezos famously told investors they were too shortsighted. Many large manufacturing companies adopt the Toyota principles here in the US as well. Principle 1 is up to interpretation about what brings the most long-term value to the company. No company ever tries to go out of business, ergo they optimize to exist forever or get acquired. Whether the board & management understands how best to achieve that long-term sustainability is another matter and one that shareholders get to vote on.
  - supergauntlet 7y ago
    Sure, I just meant the fiduciary responsibility doesn't necessarily always mean "short term profits at all costs." Why does it seem to always be that way, though? Most every company I see appears very shortsighted with no thought to the long game.
    - bumby 7y ago
      My current personal theory is that it's related to a cognitive bias. People tend to be biased towards the short-term. I.e. the short-term pain on my doorstep seems much worse than the (potentially larger) pain on the horizon.
    - rmah 7y ago
      It doesn't always appear that way -- it's really a glass half full/half empty thing. If I may be so bold, you are see what you want to see. Generally speaking, public companies do not prioritize the next quarter above all else. Why not? Because they are, generally speaking, not run by idiots. Of course, some do in certain situations. Because it makes sense in those situations. Owners (shareholders) and boards are not full of idiots either. They realize the temptation of short term pumps. Thus, executive compensation is typically shaped to encourage longer-term thinking (e.g. stock that does not fully vest for years, bonuses based on future company performance years out, etc). And if they do reward short-term metrics, it's for a specific reason. That said, japanese companies tend to have longer time horizons than american companies (decades vs years) and perhaps that's better. But then again, the further out you go, the less your planning will work out. So who knows for sure?
EvanWinget 7y ago
There's definitely a big problem with short termism and focus on quarterly performance over long-term value. Luckily there are a variety of solutions to this. One is to have dual class share structures where minority owners have majority of the voting shares (e.g. Facebook, Google). Another is to create a new type of stock exchange that incentivizes long-term ownership (e.g. LTSE long-term stock exchange).
radcon 7y ago
> How do you maintain "Principle 1" while being a publicly traded company? > The way the stock market is designed (and the fact that stockholders often get to appoint the board who gets to appoint the CEO) means they're going to put short term profits over long term viability. Easy: Don't do that. Either 1.) Don't be a publicly traded company, or 2.) Don't let short-sighted shareholders dictate your management decisions.
nabla9 7y ago
Good ownership structure and corporate governance. Toyota group is keiretsu where Toyouta Motor Corp. has owners like Toyota Indutries, Denso and some big Japanese banks and insurance companies.
rectang 7y ago
> Many companies have been ruined and continue to be ruined You say "ruined", I say "fulfilled their ultimate purpose as disposable wealth-extraction machines enriching executives". I totally agree that the stock market's design encourages short-termism. But this is entirely appropriate in service of the idea that heroic individuals are chiefly responsible for company outcomes.
- tim333 7y ago
  Though of course in traditional theory the company should be run for the shareholders rather than the executives. It's a bit of a flaw in the system if they can extract large bonuses while tanking the stock. Maybe the government could write some laws that bonuses have to be held in escrow for a while to check the company survives. (And in more modern views maybe you should worry about the other stakeholders too.)
  - rectang 7y ago
    I disagree that it's a "flaw". It is the natural consequence of an ideology, where we ascribe proportionate value to the contributions of executives and marginal value to the contributions of everyone else. Since we believe that executives are the ones creating the wealth, it is just that the wealth flows out of the company and towards them. Executives giveth and executives taketh away.
    - tim333 7y ago
      >Since we believe that executives are the ones creating the wealth I wonder how many people actually believe that.
  - nradov 7y ago
    Shareholders are free to impose deferred compensation schemes on executives. In fact many companies have done so. No new laws are needed.
    - mcguire 7y ago
peterwwillis 7y ago
It's just a different kind of business. Car companies have multi-year release cycles, deal with complex logistics chains, and sell expensive products, so they have to plan for the long term. If your company lives and dies on the release of your next car, you're screwed.
TeMPOraL 7y ago
After reading countless stories about companies big and small, I came to conclusion that if you want to build a company that has a mission and/or a moral compass, under no circumstances you should ever give any degree of control to people who are not in on the mission or do not share the same moral direction. From this follow at least two rules: 1) Never ever go public. 2) Never ever accept VC money. Problem is, you'll likely get outcompeted by companies that do either or both of these things.
- tim333 7y ago
  There are public companies that are run for the long term. Berkshire Hathaway springs to mind and I'm sure there are many others. It's down to the CEO whether they do that or try to game the quarterly earnings.
rb808 7y ago
> The way the stock market is designed (and the fact that stockholders often get to appoint the board who gets to appoint the CEO) means they're going to put short term profits over long term viability. Many companies have been ruined and continue to be ruined by this short-term-ism chase for quarterly and yearly profits. That's a myth. Yes CNBC loves short term stuff as it makes good TV. In the real world see Black Rock (biggest asset manager) CEO public urging long term focus https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter https://www.blackrock.com/corporate/investor-relations/larry... . See also Amazon and all the other profitless companies just listed as good examples that long term has value.
- Someone1234 7y ago
  You call it a "myth" then use one example, that disproves the point (why urge to act against a "myth") and another that's a single data point, while ignoring the rest of the market. That's a pretty poorly explored position.
  - rb808 7y ago
    I would have though that the CEO of the world's largest investment company would count more than "one single data point". I know there are a few examples of short term investors ruining a company - but have you any examples of companies punished for choosing long term over short term?
    - Someone1234 7y ago
      > I would have though that the CEO of the world's largest investment company would count more than "one single data point". I said that CEO undercuts your point. You claimed short-term-ism was a "myth," then quoted a CEO saying that a lot of people focus on short term investing, rather than long term investing. Therefore making it not a myth, according to your own source.
      - rb808 7y ago
        Maybe you should actually read it. He said companies might be tempted by maximizing short-term returns because we are late in the economic cycle.
deleted 7y ago
[deleted]
gnode 7y ago
I don't think the fundamental problem is being publicly traded, it's a question of how distributed the control of a company is. Some publicly traded companies are controlled by few people. When ownership is concentrated, decisions can be made based on long-term ideology. When ownership is highly distributed, and especially when indirect via indices, decisions are made in favour of widely accepted and broadly applicable metrics of performance, which tend to have only short term confidence.
eries 7y ago
This is literally the thought process that led to the creation of the LTSE. I was actually reading The Toyota Way while writing the draft manuscript for The Lean Startup
rhino369 7y ago
>The way the stock market is designed (and the fact that stockholders often get to appoint the board who gets to appoint the CEO) means they're going to put short term profits over long term viability. Many companies have been ruined and continue to be ruined by this short-term-ism chase for quarterly and yearly profits. Short term stock prices aren't entirely controlled by short term results. Just look at PE ratios for growth companies. Short term results often change the price a lot because its an indicator for future results. Stuff like one time write offs don't really affect the price.
opencl 7y ago
Japanese corporate governance does not work quite like in the US, either legally or culturally. Shareholders actually generally have more decision making power than in the US but tend not to exercise it very often and basically trust the existing leadership. Toyota has been publicly traded for 70 years and their shareholders (which are primarily other large Japanese conglomerates) have never even tried to make these kinds of short-term-over-long-term pushes and keep electing Toyoda family members into the top leadership positions.
- Ambele 7y ago
  Finally someone that understands the difference.
Ambele 7y ago
It's hard to say how Toyota is governed unless you know more about how the Tokyo Stock Exchange functions. Toyota shares are only available here in the form of ADRs (American Depository Receipts). Each ADR share represents two shares of common stock on the Tokyo Stock Exchange. Toyota might not have chase short term profits like many American companies choose to do. After two hours of googling it (and reading english web pages only, not japanese webpages), the only notable thing I discovered was that Toyota pays out 30% of its profits in the form of dividends and spends 20% of its profits on share buybacks for a total shareholder return of roughly 50% of earnings each year. This indicates that Toyota is shareholder friendly but it's not clear if this is an obligation or a choice. Instead of chasing short-term profits, I've observed that Toyota spends fair budget on advertising and showboating futuristic looking hype technology that is never intended to be released or used. Some investors primarily look at the daily news and are satisfied with this strategy. The technology Toyota intends on using isn't hyped up; it's kept a secret until it's actually released to drivers. Finally 90% of Toyota Corporate Employees in the Plano, TX US Headquarters are contractors from other companies. Those ones sure as hell aren't getting any quarterly performance bonuses or any executive compensation. At best, the executives bonuses are getting to keep your air-conditioned job for another 3 years.

bluGill 7y ago

While that is a common statement, it isn't really true. Most stock holders have figured out that long term profits are important as well. Companies that only focus short term go out of business quickly and so are worth less than companies who will be around longer. Most shareholders (37%) are retirement accounts which have long term goals.

radcon 7y ago
> While that is a common statement, it isn't really true. "Companies exist to maximize shareholder value" is the myth that just won't die.
TeMPOraL 7y ago
> Most stock holders have figured out that long term profits are important as well. Companies that only focus short term go out of business quickly and so are worth less than companies who will be around longer. Doesn't matter if the stock holders who pushed for the decisions managed to flip their stocks when they were still rising in value. Aren't most stock holders playing this game to flip stocks, without caring much about the particular company they're making money off?
- icxa 7y ago
  Aren't most stocks are held in index funds and ETFs?
  - TeMPOraL 7y ago
    I don't know. Could someone who knows this for sure chime in here?
    - nradov 7y ago
      Yahoo Finance will show you the top holders for any publicly traded company. https://finance.yahoo.com/quote/TM/holders?p=TM https://finance.yahoo.com/quote/TM/holders?p=TM
  - mrep 7y ago
    Yep, they recently crossed the 50% mark [0]. Discussion [1] [0]: https://qz.com/1623418/index-funds-now-account-for-half-the-us-stock-market/ https://qz.com/1623418/index-funds-now-account-for-half-the-... [1]: https://news.ycombinator.com/item?id=20020997 https://news.ycombinator.com/item?id=20020997

magduf 7y ago

>How do you maintain "Principle 1" while being a publicly traded company? >The way the stock market is designed... means they're going to put short term profits over long term viability. It's simple: be Japanese and not American. Japanese companies don't have this kind of problem, precisely because they aren't American and their society doesn't value enriching executives over all else, and instead values a stable and harmonious society.

davidrm 7y ago
https://en.wikipedia.org/wiki/List_of_public_corporations_by_market_capitalization#2019 https://en.wikipedia.org/wiki/List_of_public_corporations_by... Not a single Japanese company, while the lists are dominated by the US ones. What you're saying is nothing other than the ancient TV trope about the difference between Japanese and the Americans (east vs west). disclaimer: I have 0 ties whatsoever to the US.

supergauntlet 7y ago

Perhaps it's a culture thing? IIRC, you don't actually legally have to bring more value to shareholders every quarter at the cost of everything else. Maybe Toyota's execs and shareholders have some sort of "gentlemen's agreement" where they just agree to not prioritize the short term at all costs? Maybe that's naive and they're just saying one thing and doing another.

zebrafish 7y ago
All publicly trade companies have a fiduciary responsibility to shareholders. That means different things to different companies and is not a hard and fast rule. Amazon did not prioritize short term profits for a long long time and Bezos famously told investors they were too shortsighted. Many large manufacturing companies adopt the Toyota principles here in the US as well. Principle 1 is up to interpretation about what brings the most long-term value to the company. No company ever tries to go out of business, ergo they optimize to exist forever or get acquired. Whether the board & management understands how best to achieve that long-term sustainability is another matter and one that shareholders get to vote on.
- supergauntlet 7y ago
  Sure, I just meant the fiduciary responsibility doesn't necessarily always mean "short term profits at all costs." Why does it seem to always be that way, though? Most every company I see appears very shortsighted with no thought to the long game.
  - bumby 7y ago
    My current personal theory is that it's related to a cognitive bias. People tend to be biased towards the short-term. I.e. the short-term pain on my doorstep seems much worse than the (potentially larger) pain on the horizon.
  - rmah 7y ago
    It doesn't always appear that way -- it's really a glass half full/half empty thing. If I may be so bold, you are see what you want to see. Generally speaking, public companies do not prioritize the next quarter above all else. Why not? Because they are, generally speaking, not run by idiots. Of course, some do in certain situations. Because it makes sense in those situations. Owners (shareholders) and boards are not full of idiots either. They realize the temptation of short term pumps. Thus, executive compensation is typically shaped to encourage longer-term thinking (e.g. stock that does not fully vest for years, bonuses based on future company performance years out, etc). And if they do reward short-term metrics, it's for a specific reason. That said, japanese companies tend to have longer time horizons than american companies (decades vs years) and perhaps that's better. But then again, the further out you go, the less your planning will work out. So who knows for sure?

EvanWinget 7y ago

There's definitely a big problem with short termism and focus on quarterly performance over long-term value. Luckily there are a variety of solutions to this. One is to have dual class share structures where minority owners have majority of the voting shares (e.g. Facebook, Google). Another is to create a new type of stock exchange that incentivizes long-term ownership (e.g. LTSE long-term stock exchange).

radcon 7y ago

> How do you maintain "Principle 1" while being a publicly traded company? > The way the stock market is designed (and the fact that stockholders often get to appoint the board who gets to appoint the CEO) means they're going to put short term profits over long term viability. Easy: Don't do that. Either 1.) Don't be a publicly traded company, or 2.) Don't let short-sighted shareholders dictate your management decisions.

nabla9 7y ago

Good ownership structure and corporate governance. Toyota group is keiretsu where Toyouta Motor Corp. has owners like Toyota Indutries, Denso and some big Japanese banks and insurance companies.

rectang 7y ago

> Many companies have been ruined and continue to be ruined You say "ruined", I say "fulfilled their ultimate purpose as disposable wealth-extraction machines enriching executives". I totally agree that the stock market's design encourages short-termism. But this is entirely appropriate in service of the idea that heroic individuals are chiefly responsible for company outcomes.

tim333 7y ago
Though of course in traditional theory the company should be run for the shareholders rather than the executives. It's a bit of a flaw in the system if they can extract large bonuses while tanking the stock. Maybe the government could write some laws that bonuses have to be held in escrow for a while to check the company survives. (And in more modern views maybe you should worry about the other stakeholders too.)
- rectang 7y ago
  I disagree that it's a "flaw". It is the natural consequence of an ideology, where we ascribe proportionate value to the contributions of executives and marginal value to the contributions of everyone else. Since we believe that executives are the ones creating the wealth, it is just that the wealth flows out of the company and towards them. Executives giveth and executives taketh away.
  - tim333 7y ago
    >Since we believe that executives are the ones creating the wealth I wonder how many people actually believe that.
- nradov 7y ago
  Shareholders are free to impose deferred compensation schemes on executives. In fact many companies have done so. No new laws are needed.
  - mcguire 7y ago

peterwwillis 7y ago

It's just a different kind of business. Car companies have multi-year release cycles, deal with complex logistics chains, and sell expensive products, so they have to plan for the long term. If your company lives and dies on the release of your next car, you're screwed.

TeMPOraL 7y ago

After reading countless stories about companies big and small, I came to conclusion that if you want to build a company that has a mission and/or a moral compass, under no circumstances you should ever give any degree of control to people who are not in on the mission or do not share the same moral direction. From this follow at least two rules: 1) Never ever go public. 2) Never ever accept VC money. Problem is, you'll likely get outcompeted by companies that do either or both of these things.

tim333 7y ago
There are public companies that are run for the long term. Berkshire Hathaway springs to mind and I'm sure there are many others. It's down to the CEO whether they do that or try to game the quarterly earnings.

rb808 7y ago

> The way the stock market is designed (and the fact that stockholders often get to appoint the board who gets to appoint the CEO) means they're going to put short term profits over long term viability. Many companies have been ruined and continue to be ruined by this short-term-ism chase for quarterly and yearly profits. That's a myth. Yes CNBC loves short term stuff as it makes good TV. In the real world see Black Rock (biggest asset manager) CEO public urging long term focus https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter https://www.blackrock.com/corporate/investor-relations/larry... . See also Amazon and all the other profitless companies just listed as good examples that long term has value.

Someone1234 7y ago
You call it a "myth" then use one example, that disproves the point (why urge to act against a "myth") and another that's a single data point, while ignoring the rest of the market. That's a pretty poorly explored position.
- rb808 7y ago
  I would have though that the CEO of the world's largest investment company would count more than "one single data point". I know there are a few examples of short term investors ruining a company - but have you any examples of companies punished for choosing long term over short term?
  - Someone1234 7y ago
    > I would have though that the CEO of the world's largest investment company would count more than "one single data point". I said that CEO undercuts your point. You claimed short-term-ism was a "myth," then quoted a CEO saying that a lot of people focus on short term investing, rather than long term investing. Therefore making it not a myth, according to your own source.
    - rb808 7y ago
      Maybe you should actually read it. He said companies might be tempted by maximizing short-term returns because we are late in the economic cycle.

deleted 7y ago

[deleted]

gnode 7y ago

I don't think the fundamental problem is being publicly traded, it's a question of how distributed the control of a company is. Some publicly traded companies are controlled by few people. When ownership is concentrated, decisions can be made based on long-term ideology. When ownership is highly distributed, and especially when indirect via indices, decisions are made in favour of widely accepted and broadly applicable metrics of performance, which tend to have only short term confidence.

eries 7y ago

This is literally the thought process that led to the creation of the LTSE. I was actually reading The Toyota Way while writing the draft manuscript for The Lean Startup

rhino369 7y ago

>The way the stock market is designed (and the fact that stockholders often get to appoint the board who gets to appoint the CEO) means they're going to put short term profits over long term viability. Many companies have been ruined and continue to be ruined by this short-term-ism chase for quarterly and yearly profits. Short term stock prices aren't entirely controlled by short term results. Just look at PE ratios for growth companies. Short term results often change the price a lot because its an indicator for future results. Stuff like one time write offs don't really affect the price.

opencl 7y ago

Japanese corporate governance does not work quite like in the US, either legally or culturally. Shareholders actually generally have more decision making power than in the US but tend not to exercise it very often and basically trust the existing leadership. Toyota has been publicly traded for 70 years and their shareholders (which are primarily other large Japanese conglomerates) have never even tried to make these kinds of short-term-over-long-term pushes and keep electing Toyoda family members into the top leadership positions.

Ambele 7y ago
Finally someone that understands the difference.

Ambele 7y ago

It's hard to say how Toyota is governed unless you know more about how the Tokyo Stock Exchange functions. Toyota shares are only available here in the form of ADRs (American Depository Receipts). Each ADR share represents two shares of common stock on the Tokyo Stock Exchange. Toyota might not have chase short term profits like many American companies choose to do. After two hours of googling it (and reading english web pages only, not japanese webpages), the only notable thing I discovered was that Toyota pays out 30% of its profits in the form of dividends and spends 20% of its profits on share buybacks for a total shareholder return of roughly 50% of earnings each year. This indicates that Toyota is shareholder friendly but it's not clear if this is an obligation or a choice. Instead of chasing short-term profits, I've observed that Toyota spends fair budget on advertising and showboating futuristic looking hype technology that is never intended to be released or used. Some investors primarily look at the daily news and are satisfied with this strategy. The technology Toyota intends on using isn't hyped up; it's kept a secret until it's actually released to drivers. Finally 90% of Toyota Corporate Employees in the Plano, TX US Headquarters are contractors from other companies. Those ones sure as hell aren't getting any quarterly performance bonuses or any executive compensation. At best, the executives bonuses are getting to keep your air-conditioned job for another 3 years.