Heskett Column - Is This the Decade of the Investor? Readers Respond

Is This the Decade of the Investor? Readers Respond

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.

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.

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.

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.