Published 2013.10.24 CommPRO.biz

Shareholders Come Last!

Corporate America, particularly the Monster Too-Big-To-Fail Banks, have it all backwards. A crazy concept, Shareholder Value, conceived as a business strategy in the late 1980s by college professor Dr. Alfred Rappaport, continues to ravage our economy even though it has been thoroughly discredited. One of its early advocates, Jack Welch, sang its praises back then when he was CEO of General Electric. He touted shareholder value for all to hear. Twenty years later in 2009 Welch turned around and said in a newspaper interview, “Shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy; your main constituencies are your employees, your customers and your products".

Welch isn’t the only one to see the light. Jim Collins of Good to Great fame has been pointing to what makes great companies and the importance of long-term strategies rather than the quarter-to-quarter madness obsessing our corporate world today. It is especially dangerous in the case of the Monster Too-Big-To-Fail banks. Striving for short term goals, empowered by immunity from gambling laws, FDIC protected depositors, seemingly unlimited interest-free money from the FED, and the knowledge that there’s a taxpayer bailout waiting if they go too far, leads them to take wildly reckless chances. And the Monster Banks are doing just that, they are going too far.

Back in the real world where corporations are coming to the new Jack Welch, Jim Collins view, they understand that sky-high executive compensation encourages greed, not leadership. Measure after measure shows a different parameter on the road to success. Perhaps most dramatic is the work of two Professors Rajendra Sisodia and Jagdish Sheth. They set out looking for companies that met a list of standards that at first glance seem out of reach, companies that focused on their customers, their employees, their vendors, their communities, the environment and finally last in line, their shareholders; companies striving to serve all their stakeholders. They call them “Firms of Endearment.”

The professors partnered with writer David Wolfe who suggested that before they got too excited when they actually found more than two dozen such companies, that they had better check to see if any of these companies made any money. You know, the “result” where Jack Welch pointed out that shareholder value comes into play. To everyone’s surprise the public companies that made the Firms of Endearment list returned eight times the S&P average over the ten years prior to the list compilation.

Clearly this shows beyond any doubt that all things being equal, the Firms of Endearment high road is far superior even to the taxpayer supported route the Monster Banks inflict on our society. The whole idea that if you take care of the basic stakeholders, your bottom line will take care of itself is lost on these folks. David Wolfe wrote a great book, Firms of Endearment, that details the high road research and results. If you are holding your breath waiting for the Monster Bank CEOs to read it, forget it.

The Clock is Ticking

If ever there was a moment illustrative of the need to restore Glass-Steagall, enforce the Volcker Rule, and repeal the foolish gambling exemption Congress gave Wall Street, it is now. JPM Chase CEO Jamie Dimon’s culture of Wild West saloon gambling was outed when the loss side of the bank’s bets was exposed by a huge bet gone bad in their London trading office (AKA gambling hall). The $2 billion loss is quickly ramping up and will likely be double that or more.

Fast forward to the JPM Chase annual meeting last week (05.15.12) where we find a visibly irritated and agitated Dimon facing questions on the multi-billion dollar losses and a shareholders’ challenge to his dual role as both Board Chair and CEO. He managed to hold on to his grip at the top with 60% of the shares voting to defeat the move to unseat and replace him as Chairman. While that sounds good, you must keep in mind that prior to corporate meetings companies routinely include as part of the meeting notice a request to hand over the voting rights to the management if you do not plan to attend and vote in person. Most shareholders comply and so you can figure that Dimon walked into the meeting with the votes in his pocket. You can bet he was shaken by the margin; to have 40% opposed is too close for comfort in that game.

Turning to the “snake eyes” that is piling up billions in losses, Dimon, according to the New York Times, came up with this gem: “We are going to manage it to maximize economic value for shareholders.” That has to be one of the wildest -let’s flip the conversation to my favorite subject- “Shareholder Value” moves in history. We’d guess that Dimon’s point is that shareholders benefit from the JP Morgan Chase gambling hall because they win more often than lose, and besides in the unlikely event that we drive off the cliff we are “too big to fail” and so the suckers (that’s us, taxpayers) will bail us out again. There’s no way we can lose.

Shareholder Value -as former GE CEO Jack Welch pointed out- is an outcome; as a strategy Welch famously dubbed it, ”the dumbest idea in the world." Dimon and his ilk love it as a strategy; it enables them to parlay their gambling culture into monster bonuses, with the ultimate backup, taxpayer bucks. Shareholder Value is a meaningless term the way Jamie Dimon and others use it these days. And it will come around to bite the taxpayers unless we force the too-big-to-fail banks back into their corners. We need to get them out of high stakes gambling. We need to make them choose: either create capital as an investment bank, or take deposits and make loans as a commercial bank. Anything less leaves all of us outside the game at their mercy. It’s time for Congress to act, restore Glass-Steagall, enforce the Volcker Rule and repeal the foolish gambling exemption Congress gave them.