01 Apr 2002  What Do YOU Think?

Is This the Decade of the Investor?

Summing Up

Responses to the question, "Is this the decade of the investor?" offer little hope that the investor will get any relief soon, compared to the rewards realized by managers and customers. Nor do they hold out much promise that the investor's supposed friend, the director, will come to the rescue. However, before we jump to conclusions, we are cautioned to assemble more information.

Dr. B. V. Krishnamurthy pointed out that "odds are heavily stacked against (investors)," because "it is difficult to believe that board members will do anything to protect the interests of small investors." He also suggests that investors have little ability to judge whether compensation for managers is fair, particularly in an information economy in which it is difficult to assess justification for "benefits and perquisites."

If directors will not or cannot carry out their responsibility to represent the best interests of investors, who will?—James Heskett

But Dr. Leslie Levy suggests that before we jump to conclusions, perhaps more information is needed. In particular, we should isolate the returns to various types of employees and investors in order to assess the fairness of the division of returns. And before making assumptions about the future, "we still need to get a firm handle on just how much productivity increased before we take actions based upon assumptions of increased productivity."

If directors will not or cannot carry out their responsibility to represent the best interests of investors, who will? Will dynamics that determine flows of funds and foreign investment levels in the U.S. ultimately pose the threat of fewer funds—foreign or otherwise—to finance U.S. technology and other development, thereby forcing higher returns? Or must we suffer more severe adjustments that will ultimately reduce the pie for managers, employees, customers, and investors alike? What do you think?

Original Article

The current highly charged atmosphere of allegedly greedy managers and deceived employees and investors suggests the need to take a longer view. One such view is provided by a recent Business Week analysis of Bureau of Labor Statistics and other data. ("Restating the '90s," by Michael J. Mandel, Business Week, April 1, 2002, pp. 51-58.) It concludes, surprisingly, that nearly all of the benefits of the unusually high U.S. productivity gains of the past six years accrued to managers, employees and customers rather than investors.

The analysis concludes that more than 97 percent of the gains from increased productivity during the 1990s—much of it achieved in the five years beginning in 1996—went to employees and less than 3 percent to investors. Compared with the preceding decade of the 80s, customers enjoyed the benefits of low inflation while corporations suffered lower rates of increase in profits and investors received lower inflation-adjusted rates of return. To the extent that a huge net influx of foreign capital helped finance investments in new technology, one might also conclude that U.S. employees and consumers benefited to a significant degree at the expense of foreign investors. This is particularly true for money invested in new Internet ventures and the telecommunications industries, from which customers appear to have been the major beneficiaries.

I do not think the situation will change for the better for investors. It will not change because the odds are heavily stacked against them.
— Dr. B. V. Krishnamurthy, M. P. Birla Institute of Management

Assuming that the analysis is substantially valid, it raises some interesting questions about productivity, growth, and investment in the information economy.

The first, of course, is whether unusually high rates of productivity increases can be sustained to meet increasingly high expectations of managers and employees for continued real wage gains. Some would argue that such expectations, especially for those at the top of organizations, are getting out of hand. After all, substantially higher gains in compensation, much of it in the form of stock option mega-grants, have gone to the top tier of managers than to managers and employees as a whole. Rather than provide the intended incentives, some argue, mega-grants do little more than offer a means of keeping score among peers.

Can managers and employees continue to harvest such a large proportion of productivity gains without serious consequences for future investment in technology and related resources? Or are capital inputs in relation to those of labor somewhat less important in boosting productivity in an information economy?

Will the U.S. continue to offer such a relatively attractive opportunity to investors, particularly those from abroad, that they will continue to put up with lower rates of return while financing our growth? Or will this be the decade in which investors, aided by their board representatives, obtain an increasing share of the fruits of productivity increases? What do you think?

Comments

    • Dr. B. V. Krishnamurthy
    • Professor, M. P. Birla Institute of Management

    The new findings should not come as any surprise. An earlier landmark study had clearly shown how, during the decade 1991-2000, the 100 largest corporations managed to dissipate, rather than create value, in terms of EVA.

    In a classical sense, we claim that the purpose of business is to create wealth for investors. However, when we look at the information economy, it is easy to see how this concept can be hijacked.

    The intangible nature of the information economy makes it difficult for anyone not directly connected with day-to-day operations to figure out whether the various benefits and perquisites that executives and managers receive are indeed justified.

    I do not think the situation will change for the better for investors. It will not change because the odds are heavily stacked against them. How does an ordinary investor understand whether a $10 million salary and a $100 million stock option given to an executive are "reasonable" or not? In India, we have the case of a well-known company in the information economy paying $25,000 as a "sitting fee" to a non-executive director who also happens to be a Senator in the USA. This amount, in Indian Rupee terms, compares well with the salary of the CEO of the company! Under these circumstances, it is difficult to believe that board members will do anything to protect the interests of small investors.

    While no one should begrudge managers getting their due share, it is probably time that we debated how much is enough. In other words, is it possible to draw a line where "need" ends and "greed" starts? This inevitably draws us to the doctrine of humanism—the greatest good for the largest number of people. Are we prepared to accept this? I am afraid not.

    Hence, sadly, we have to live with the reality of opportunism—the greatest good for a small section of people—the managerial class

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    • Dr. Leslie Levy
    • President, Directors Data, Inc.

    We need a responsible survey conducted to discover exactly what kinds of returns go to what kinds of investors, as well as what kinds of employees. (Many people feel differently about returns to individual investors, public pension funds, mutual funds, hedge funds, takeover artists, etc.)

    Second, we still need to get a firm handle on just how much productivity increased before we take actions based upon assumptions of increased productivity. This question is still unresolved.

     
     
     
    • Charles Cullinane, VP, GM
    • Everbrite

    Greed and ego seem to have driven the valuation of investments and who benefited from the profits. Managers, investors, and even union pension funds would tolerate sky-high salaries and even 'golden parachutes' for failure if the manager made money or had a plan to make money. It caught up with us, and neither the 'manager' nor the 'investor' will get great returns for a long time.

     
     
     
    • Anonymous

    I think it would be important to know exactly to what type of employees these benefits go. At the same time, it is necessary for companies wishing to remain attractive to investors to not neglect these and maybe this means cutting some of the stock option mega-grants.