A recent article in the Economist shared an interesting chart plotting the level of corporate investment with the level of cash outs by management in the forms of bonuses and the like. Needless to say, the chart spoke loudly:
Investment levels vs what management keeps for themselves is at extreme lows. Why so low? I would argue a possible theory – the national level of “trust” is low creating a “get while the gettin’s good” attitude among managers and leaders.
The Economist Magazine quotes a new book by economist Andrew Smithers, called The Road to Recovery: How and Why Economic Policy Must Change.” He blames the compensation structure of management and accounting issues for the discrepancy. Specifically, bonus compensation vs salary gives
management incentive to juice profit numbers to boost bonuses (often at the expense of long term investing, which can hurt profits in the short term) and stock option compensation which gives incentive for management to induce spikes in stock prices in the short term(i.e. volatility) in order to make the options – a limited duration investment – worth something before they expire. Smithers goes on to strikingly say that “American companies have been paying out in cash more than 100% of domestic profits to shareholders!” This is not sustainable!
Back to Trust Again
But why is management given such incentives? Maybe many of today’s corporate leaders don’t trust that they will still be at that job in a few years so they want to extract as much as possible before they go. And if this is the case, why do these “leaders” have such a negative outlook? Perhaps we can find blame in the short term nature of Wall Street – if a company misses earnings estimates, Wall Street analysts take down the stock harshly. And therefore only companies where founders/ management control a significant stake (e.g. google) do we have leaders not caring about quarter to quarter earnings reports and holding more long term views – in fact I believe such wording was in Google’s original stock offering memo (S-1).
And maybe today’s investors can’t handle the volatility brought by Wall Street’s short term fixation – or Wall Street is just reacting to an ever more jittery and short term focused investing public. We can blame greed, but wouldn’t long term compounding give more return to management than a short spike in price? Greed may be a factor but something is making them greedy NOW – to want to extract returns NOW. And we can’t blanket assume everyone is greedy. That chart above is not a niche industry, it’s the entire USA.
I again argue it’s trust. From my puny perspective, as a person who runs a small advisory firm, with one associate advisor and one assistant, I see many things that make me hesitant about investing in the future. Things that I am sure, make larger firms REALLY hesitate. For example:
The new healthcare law – I am getting info from people in other states that their rates are jumping sometimes over 100% for coverage that is worse than what they currently have. not sure if that will apply to me but when I’m already paying $8,400/year, I am not going to make any big investments if that might jump on me. It’s UNKNOWABLE at the moment.
Taxes – i don’t think that we settled everything in January. With our rate of spending on everything from billions on bombing brown people to all of the people faking disability just in Medford alone (my wife gets a kick out of the healthy looking fellow who walks by our place in the morning swinging his cane – handy to have by the way, if the the insurance inspector comes around snapping photos), this government will need more taxes. But as to when is UNKNOWABLE.
Debt – I am a student of history. Not the best one, but I try. And never in history has a country used printing money as a way to handle their debts in a successful manner. NEVER. So I am faced with the quandary that what the US is doing (borrowing a ton with the threat of higher borrowing costs held down by the Federal Reserve’s money printing) with the fact that these issues could take a hundred years to really hit (History of the Decline and Fall of the Roman Empire good book to read on speed of decline).
I do think eventually, with all of this debt, taxes will go higher and investment will be crimped. Or we print like crazy and the value of the dollar gets blasted. Either way, something bad happens. However, the timing is UNKNOWABLE.
Employment annoyances – hiring one person is annoying – I mean the paperwork process and requirements. Imagine managing 50, 100 or 1000 people? The expenses, rules and such make some companies decide to squeeze more out of current employees than bother with hiring another. And you can forget hiring teens and college students. With restrictions on unpaid internships and the costs, expect youth unemployment to stay high. Will the laws change to make it less burdensome to hire people? That answer is UNKNOWABLE.
Overall, we can kick these cans – like the debt – down the road, but big managers, who must look out 5-15 years on capital investment projects, may be taking these into account when deciding investment levels. Can I trust the US and its government not to do stupid things? They may ask. This question may be UNKNOWABLE so the answer for now in the minds of many companies’ management is NO – and therefore they choose NOT TO INVEST.
Will this change? That’s unknowable too. Things tend to cycle but that chart above shows a long term trend toward lower investment of available cash. Long term trends take a strong force or some kind of paradigm shift to change.
What do you think about trust levels in the USA, and do you think I’m right or off base on my assumption? Are you more closely aligned with Smithers and think we should suggest policy changes to ‘encourage” investment?