Saturday, August 30, 2014

The Capitalist's Dilemma

The Harvard Business Review published this study on how corporations make investment decisions.  It shows that corporate investments are primarily directed towards cost reduction.  Presumably, it is easier to satisfy investors by meeting quarterly financial targets such as return on assets, discounted cash flow etc., than it is to sell them on investments that will have a longer term payout.  Its also job insurance for the CEO, and less job security for those on corporate payrolls.  Economists use all kinds of aggregate data in efforts to explain high levels of unemployment and stagnant growth in median household wages.  The basic decisions that effect these measures are made at the institution level by corporate executives.  It is important to understand how these decisions are made.

Some CEO's take a longer term perspective when they make investment decisions.  This article, published in the McKinsey Quarterly, was written by the CEO of Unilever.  He explains what Unilever did to shift its focus to a 10 year plan that was designed to build a more sustainable and profitable enterprise.  Part of the solution was to target shareholders who have a longer term investment horizon.  This was not easy because 75% of the capital on US stock exchanges is held by pension funds.  The mangers of these funds are measured on quarterly performance.  Unilever sought out longer term investors just like they target customer groups in their consumer marketing.  These investors want proof of progress against the 10 year plan, but the progress is not measured simply by standard accounting metrics.

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