Let's imagine a capital market in which investors valued quality, reputation, employee development and social accountability when evaluating a company's worth. I know it's been a while since any of us have encountered such a market -- if ever -- but it or something closer to it than we have now has existed in U.S. economic history. I'm thinking of the days before mutual funds and NASDAQ when fewer companies were publicly traded and a much smaller percentage of Americans invested in the stock market.
It's true that back then fewer people had access to the most valued assets of our economy, but at the same time, those who were not invited to the Wall Street shindig had a more secure employment environment and retirement outlook than today's workforce. This is a time of record participation in stock markets for both corporations and investors, but ironically, there is still a relatively a small group of people controlling the worth of these assets. And those who are in control (fund managers, stock analysts and investment advisors), for a variety of reasons, are so focused on earnings and profits (ergo, "Can't you cut your costs even more to make the numbers!!!) that many other valuable attributes that keep U.S. companies and indeed the U.S. economy running are not just undervalued but considered detrimental.
The dot.com bubble of the late 1990s is a perfect example. Certainly individual investors poured money into companies with no earnings, vaporous products and nascent leadership but so did many managers of mutual funds, retirement funds and other octopus-like investment vehicles with one all-knowing head and many trusting-but-clueless tentacles. The result was a thrilling period of growth followed by a deafening crash. And I ask, are we better off for it? The money, or at least the prospect of money, looked good at the time, but the outcome was a market crash so great that we all have felt it painfully, whether or not we know the difference between Ethernet and Aquanet.
This rush to invest in companies solely based on profits or earnings potential did not ultimately benefit U.S. citizens nor further our economic growth. In fact, it resulted in millions of lost jobs and plant closings, a drastic decline in GDP and a stock market that retreated faster than a dog who was just found with its master's steak in its mouth.
So why does it continue? The most ironic part of this is that many investment managers and CEOs suffered from the dot.com crash. Yet, they continue to look at valuable investments such as training and worker development, capital expenditures and properly funded R&D as detrimental because they actually cost something and, therefore, are taking money and resources away from earnings and profits.
I realize these two short-term returns are indeed the ultimate goal of the corporate model. My point is that they basically are the sugar in the corporate structure. They're what you get after you eat your dinner. Just like a body that feeds solely on sweets, a company that focuses solely on short-term gain will eventually burn out. Starved for nutrients and protein, it won't be able to sustain itself. (Could you please pass more Enron?) And if indeed the corporations can't sustain themselves, can our economy?
I'm not being histrionic here. I look around and see fewer and fewer people benefiting the way they used to from working in manufacturing and companies finding it more and more difficult to operate in the United States. Indeed, manufacturers tell me that one of their biggest problems today is finding skilled workers. One company I talked to moved production overseas not because it wanted to reduce labor costs but because it couldn't find enough skilled workers in the United States.
Young people aren't interested in manufacturing because it's unstable. Why is it unstable? Because of this dangerous emphasis on short-term performance our stock market has. If individual and professional investors took a more balanced, long-term view of corporate health, manufacturing would be more stable, and we as an economy would be better off. Instead of making the markets work for us, with all of society benefiting, we have made the markets work against us by devaluing education, compensation and research.
We had better get our sweet tooth under control while we still have a few teeth left.
Tonya Vinas is IndustryWeek's managing editor. She is based in Cleveland.
