This week, I was at the ASI Tech Expo 2014. It was a vile little event filled with companies pushing their products and their brands. While this is true of all conferences, most have other things that make it all worth while. This one did not. In fact, the “keynote” speech was by some guy at Lenovo who gave what was basically a shareholders speech. I really didn’t care about what was going on with their market share, and I didn’t appreciate some obvious “lying with statistics.” But there was one interesting thing at the conference: AMD had its talk canceled. Apparently, the company is going through layoffs, and the guy who was supposed to give the talk was laid off. Great PR guys!
Now I understand: AMD has been struggling. It recently announced a “restructuring” to make itself more “competitive.” This is business-speak for, “We’re going to fire a bunch of people who actually work for us; the stock market will reward us with an increased valuation because nothing gets them as excited as firing people; then the bonuses of our top managers will be much higher!” But regardless of what a company needs, what management always does is the same thing. The health of the company doesn’t matter; what matters is just how much money the CEO is making.
Michael Hiltzik wrote about this issue on the very day I was at the conference, Wall Street Talks, Companies Respond — by Axing Thousands of Jobs. He provided two recent examples of companies doing long-term harm to themselves in the name of impressing (or simply appeasing) the stock market. The first is the Amgen. The biotech company has been doing really well, but it isn’t good enough. “[H]hedge fund magnate Danel Loeb wants Amgen to engage in the kind of financial engineering that throws off cash to investors such as himself — a company breakup, stock buybacks, cost cutting.” But this short-term thinking is only good for the people on the stock market. It is potentially catastrophic for the company, “If the pipeline begins to go dry in a few years because the Seattle R&D staff is no more, Loeb and his fellow hedgers probably won’t care; they will have moved on.”
The second example is Time Warner, “There, the cost cutting appears to reflect an effort by CEO Jeff Bewkes to show he made the right decision in fending off an $80-billion takeover bid by Rupert Murdoch.” So people get fired to goose the stock so that Bewkes can claim victory. This is not responsible management:
The Time Warner layoffs include about 1,475 employees at Turner Broadcasting, which includes CNN. The company said the layoffs were designed to “prioritize investment in programming, monetization and innovation as near- and long-term drivers of growth,” whatever all that means.
But as far as CNN is concerned, it reflects a systematic hollowing out of what was once a vigorous news-gathering operation. Raise your hand if you think CNN does as creditable a job today as it did, say, 10 years ago. Anyone? About 1,000 positions will be gone, too, at Time Warner’s Burbank-based Warner Bros.
There, too, no one even pretends that the job cuts — or as Warner Bros. Entertainment CEO Kevin Tsujihara put it in a memo last month, “this situation” — are aimed at enhancing creativity or keeping the place from disappearing beneath the waves.
What this all strikes me as is these companies eating their seed corn. But the term doesn’t fully capture the insanity of the situation. First, people normally eat their seed corn because they are starving and wouldn’t live to the next harvest if they don’t eat their seed corn. This situation might apply to AMD, but it doesn’t apply to either Amgen or Time Warner. They are both just trying to take money out of the companies in the short-term with no thought to what it means to the companies in the long-term.
The bigger issue is that the companies are not deciding to put short-term profits above the long-term health of themselves. The issue is that the CEOs are a poor analogy for the companies they run. They are doing what is in their own best short- and long-term interests. This is the same thing that went on during the housing bubble of the aughts. The fed has not been willing to prosecute the people who ran the banks because the sub-prime mortgages weren’t in their interests. Why would they do it? Very simple: those running the banks had different interests than the banks themselves. It is like I’ve written about before: the rich show no impulse control. They want to be rewarded now now now! And they don’t care about the long-term, because they know they are set to life.
This is how a great economy is destroyed in just a couple of generations.