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I like this bit: If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastro

I like this bit: If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. Makes me think of all the CEOs who are firing and slowing down market acquisition atm just because of "market conditions", even though they should presumably know their company better than the market does. Either they all think their companies are scams or they don't know their companies enough to say and convince their investors otherwise.

disgruntledphd2 3y ago
If you bonus CXO's mostly on equity prices, then this is rational (but stupid) behaviour.
- sokoloff 3y ago
  If you were a shareholder, you're probably pretty interested in having the CEO's pay aligned to your investment value. Trying to fix this in a way that has shareholders working against their own interest is difficult from an incentive perspective.
  - btbuildem 3y ago
    What is this "shareholder" creature? Does hollowing out a company for a temporary bump in valuation one quarter count as against or for shareholder interests?
  - smallmancontrov 3y ago
    There are MANY institutional shareholders who buy/sell based on quarterly financial results and never extrapolate except by fitting lines and exponentials to past quarterly results. The C-Suite knows that this bottomless pool of money is available for pump & dump, so they do. If you can see what they are doing, you can ride along too.
  - disgruntledphd2 3y ago
    I mean, as a shareholder, I think you'd be more concerned with the long term value of the company rather than short term results. As an example, if the CEO has an earnings per share target which is only met using all spare capital for buybacks then that may be rational for the CEO, but I think that a lot of investors would prefer less buybacks if it supports longer (10+ years growth). But most CEO's will be gone by then, and their comp methods predispose them to take the short-term bump rather than invest for longer term gains. Like, I agree that this is a difficult problem to solve, but we are definitely not near a local or global maximum so its probably worth trying radically different approaches.
    - sokoloff 3y ago
      A buyback and a dividend are closer in effect than many people think. Both are returns to shareholders, while the second allows shareholders more control over the timing of their tax exposure. Yet people seem to complain loudly about buybacks while treating dividends as "yeah, of course companies have to provide financial returns to shareholders... Otherwise, there would be no shareholders." Long-term shareholders would prefer to optimize for, well, the long-term. Short-term shareholders flip that. Most companies have a mix of both.
      - disgruntledphd2 3y ago
        > Yet people seem to complain loudly about buybacks while treating dividends as "yeah, of course companies have to provide financial returns to shareholders... Otherwise, there would be no shareholders." I'm one of those people! Fundamentally, to me the difference is quite large. If I believe in a company, I don't want to sell my shares, rather I'd like a steady stream of income from their operations. Granted, it ends up being more tax efficient to use buybacks, but I think that's a flaw in our current model rather than a reason to prefer buybacks.
        sokoloff 3y ago
        I understand that viewpoint (and agree with it way more than not). My governing beliefs are similar to "I'd like to invest in companies with strong leadership. Strong leadership tends to be rational. All else being equal, rational leadership tends to do things that are optimal under the taxation scheme in place. Therefore, strong leadership is somewhat more likely to be using share buybacks rather than dividends. Therefore, I'm happy/willing to invest in companies doing buybacks." If you want to allow something like 1031 exchange for dividends or let investors decide when to withdraw dividends from their investment account and only tax them on withdrawal, you can fix the tax difference, at which point rational leadership would be more likely to pay dividends, which I think would be more transparent for all and better [at least no worse] for long-term investors.
FredPret 3y ago
It could be that they all respond to the same signal. It’s also plausible that they are colluding to get better rates on employees. Another explanation is that the behaviour of other CEOs is in itself a signal.
steveBK123 3y ago
Labor hoarding when money was cheap and returns expectations were low. Now money costs money, returns expectations are higher, and labor hoarding is less advantageous.
Aromasin 3y ago
We recently had a new CEO come on board, and within 60 days they cut 3 product lines and all the people associated with them. We were making a profit, albeit less than usual due to "market conditions", but not anything that wasn't predicted to turn around in the foreseeable future. These were leading-edge products in our market, fulfilling a niche that our competitors weren't looking at in any meaningful way, and of great importance and interest to our biggest customers - and somehow this one person could predict the future and adapt to that better than legions of decision-makers in the organisation? Maybe it's just me, but I don't think someone can reasonably come in and in such a short time make such sweeping decisions in an informed manner. I simply think it's impossible to do more than guesswork in that time frame. They're gambling with people's lives to make themselves look impactful, nothing more. These products were maybe 2 or 3 years in development too. I honestly feel like most CEOs spend a couple of days looking at a balance sheet for the next quarter, and make it all up from there. It's insane.
- davedx 3y ago
  Sounds like the Hertz CEO and his Tesla fleet. I'm an EV proponent but that was a huge strategic shift and in a short time it became obvious it wasn't well thought through or prepared for at all.
  - theGnuMe 3y ago
    Hertz's mistake was not offering free charging for all rentals.
    - IncreasePosts 3y ago
      EVs just don't seem a good fit for short term rentals. Maybe ultra short term, less than a day, where there is no expectation that the renter will need to charge it. My EV(model Y) is the only car I ever had where I need to give a tutorial to someone who wants to borrow it. Hell, most passengers need a lesson on how to open and close the doors.
      - 3y ago

disgruntledphd2 3y ago

If you bonus CXO's mostly on equity prices, then this is rational (but stupid) behaviour.

sokoloff 3y ago
If you were a shareholder, you're probably pretty interested in having the CEO's pay aligned to your investment value. Trying to fix this in a way that has shareholders working against their own interest is difficult from an incentive perspective.
- btbuildem 3y ago
  What is this "shareholder" creature? Does hollowing out a company for a temporary bump in valuation one quarter count as against or for shareholder interests?
- smallmancontrov 3y ago
  There are MANY institutional shareholders who buy/sell based on quarterly financial results and never extrapolate except by fitting lines and exponentials to past quarterly results. The C-Suite knows that this bottomless pool of money is available for pump & dump, so they do. If you can see what they are doing, you can ride along too.
- disgruntledphd2 3y ago
  I mean, as a shareholder, I think you'd be more concerned with the long term value of the company rather than short term results. As an example, if the CEO has an earnings per share target which is only met using all spare capital for buybacks then that may be rational for the CEO, but I think that a lot of investors would prefer less buybacks if it supports longer (10+ years growth). But most CEO's will be gone by then, and their comp methods predispose them to take the short-term bump rather than invest for longer term gains. Like, I agree that this is a difficult problem to solve, but we are definitely not near a local or global maximum so its probably worth trying radically different approaches.
  - sokoloff 3y ago
    A buyback and a dividend are closer in effect than many people think. Both are returns to shareholders, while the second allows shareholders more control over the timing of their tax exposure. Yet people seem to complain loudly about buybacks while treating dividends as "yeah, of course companies have to provide financial returns to shareholders... Otherwise, there would be no shareholders." Long-term shareholders would prefer to optimize for, well, the long-term. Short-term shareholders flip that. Most companies have a mix of both.
    - disgruntledphd2 3y ago
      > Yet people seem to complain loudly about buybacks while treating dividends as "yeah, of course companies have to provide financial returns to shareholders... Otherwise, there would be no shareholders." I'm one of those people! Fundamentally, to me the difference is quite large. If I believe in a company, I don't want to sell my shares, rather I'd like a steady stream of income from their operations. Granted, it ends up being more tax efficient to use buybacks, but I think that's a flaw in our current model rather than a reason to prefer buybacks.
      - sokoloff 3y ago
        I understand that viewpoint (and agree with it way more than not). My governing beliefs are similar to "I'd like to invest in companies with strong leadership. Strong leadership tends to be rational. All else being equal, rational leadership tends to do things that are optimal under the taxation scheme in place. Therefore, strong leadership is somewhat more likely to be using share buybacks rather than dividends. Therefore, I'm happy/willing to invest in companies doing buybacks." If you want to allow something like 1031 exchange for dividends or let investors decide when to withdraw dividends from their investment account and only tax them on withdrawal, you can fix the tax difference, at which point rational leadership would be more likely to pay dividends, which I think would be more transparent for all and better [at least no worse] for long-term investors.

FredPret 3y ago

It could be that they all respond to the same signal. It’s also plausible that they are colluding to get better rates on employees. Another explanation is that the behaviour of other CEOs is in itself a signal.

steveBK123 3y ago

Labor hoarding when money was cheap and returns expectations were low. Now money costs money, returns expectations are higher, and labor hoarding is less advantageous.

Aromasin 3y ago

We recently had a new CEO come on board, and within 60 days they cut 3 product lines and all the people associated with them. We were making a profit, albeit less than usual due to "market conditions", but not anything that wasn't predicted to turn around in the foreseeable future. These were leading-edge products in our market, fulfilling a niche that our competitors weren't looking at in any meaningful way, and of great importance and interest to our biggest customers - and somehow this one person could predict the future and adapt to that better than legions of decision-makers in the organisation? Maybe it's just me, but I don't think someone can reasonably come in and in such a short time make such sweeping decisions in an informed manner. I simply think it's impossible to do more than guesswork in that time frame. They're gambling with people's lives to make themselves look impactful, nothing more. These products were maybe 2 or 3 years in development too. I honestly feel like most CEOs spend a couple of days looking at a balance sheet for the next quarter, and make it all up from there. It's insane.

davedx 3y ago
Sounds like the Hertz CEO and his Tesla fleet. I'm an EV proponent but that was a huge strategic shift and in a short time it became obvious it wasn't well thought through or prepared for at all.
- theGnuMe 3y ago
  Hertz's mistake was not offering free charging for all rentals.
  - IncreasePosts 3y ago
    EVs just don't seem a good fit for short term rentals. Maybe ultra short term, less than a day, where there is no expectation that the renter will need to charge it. My EV(model Y) is the only car I ever had where I need to give a tutorial to someone who wants to borrow it. Hell, most passengers need a lesson on how to open and close the doors.
    - 3y ago