in an industry that spawned dozens of billionaires. William D. Cohan has an article in the Washington Post that has a most interesting conclusion. I won’t spoil the ending.
In a recent post, I examined what went wrong with Mergers & Acquisitions, along with its pal Private Equity. I said in that post that the absolutely horrendous thing that they did to American (and all other countries for that matter) corporations was to instill a culture that quarterly profits would be the benchmark for success or failure. By this I meant that three-month profit projections would be extracted from public corporations and that they would be held to meeting that goal during the next reporting cycle. M&A and Private Equity wasn’t about making America stronger, they were about making their investors wealthier. If jobs were created in the course of the acquisition, it was merely coincidental to their only purpose: make them richer.
I based my conclusions on my thirty year career as a senior investment banker in many major investment banks around the world. By senior, I mean I was a managing director at more than five banks. (Yes I had a life before trying to write novels and drawing cartoons)
The focus on quarterly profit forecasts and its ties to corporate executive compensation is the absolutely wrong focus. Just as in your everyday existence, you know that three months is hardly the horizon that enables you to turn your own life around. Try doing that to a massive multi-billion dollar corporation with tens of thousands employees worldwide. By focusing on whether your quarterly revenues will be up a penny (per share) or down a penny, corporations will often do things that will further injure the corporate weal than help it. You might forgo vital corporate development, lay off employees, skip preventive maintenance, or cut operations; all in the name of getting that extra penny into your quarterly profit report. This is like a perverse real-life version of “Little Shop of Horrors.” Cut to a scene where Seymour as the CEO of a major corporation feeds his employees one-by-one to Audrey, the corporate raider.
Now comes a study by researchers at Emory and Duke universities that says “about 20% of firms manage earnings to misrepresent their economic performance” in response to this pressure. You can read the news report here.
In my earlier report, I said that a few notable companies “cooked their books,” I apparently underestimated.
We need to get away from this culture of quarterly earnings analysis if we are ever going to recover from the financial debacles of the last decade.