Posts Tagged ‘corporate profits’

Billion Dollar Business Idea

Thursday, May 28th, 2015

Dear Friends,

It seems to me, a smart business idea that could net someone millions, and perhaps billions, is a website that reads and posts a simple to read synopsis of every shareholder’s report, briefly describing any changes the board wants to make, the likely consequences to the company and profits short and long term of those changes, an easy to read and understand report on any election to the board of trustees regarding their background, philosophy of corporate governance and work history, those synopsis and reports would be written for every firm with over one hundred million in gross revenue, and for a nominal fee that synopsis could be read by any shareholder of those companies. Companies that are ethical would offer to pay for the service for their shareholders. To get that done, such a company needs to become well known, create simple to read, correct and understandable reports and synopsis, as well as the intellectual capital to make it work. The potential earnings of such a company are staggering.

If there was such a company it could be a paradigm shift in the principle agent relationship. Today the agents have all the power. They send shareholders a several hundred page document that we are supposed to read and understand, that is in arcane language, redundant and actually says nothing of any import pertaining to the question they want us to vote on. That paradigm has created a lop sided power relationship between the principles and agents. That lop sided power in the relationship has allowed many companies to be run against the shareholder’s interests and have enabled senior management to get an out sized portion of the profits. I mean really, what employee is worth tens of millions of dollars, while running a company into the ground?

Empowering the principles to over see the agents can only lead to protecting the principle’s interest and limit the power of the agents to abuse their position. The power differential in the principle agent relationship has been used for over a century to enrich the senior management at cost to the shareholders and customers. Examples abound where shareholder profits and wealth have been undermined by management. One famous case was when J D Rockefeller bought an iron company, converted it into a publicly traded company, sold the shares for double what he paid, and remained as the CEO, reaping even more profit at the expense of the shareholder chumps.

Such a rebalancing of the principle agent relationship would create better run companies that would have a better relationship with their customers. Everyone is self interested, which is to say we all seek to maximize our returns on our investments. Economists call human beings rational maximizers. Clearly, since we are all self interested, if given actionable knowledge, we would seek to increase the longevity of our assets, seek long term profits instead of short term gain, provide excellent quality service and products to our customers while ensuring the company’s business model is consistent with the times. In short, instead of our agents working under pernicious incentives, we could return the entrepreneurial ethos to businesses.

If the principle’s interests are protected and the companies themselves are better run, the macro economy will improve, by potentially starting a new wave of Schumptarian economic expansion. Schumpeter coined the term, “Creative Destruction,” to explain the macro business cycle. In it, he posited… a new idea that improves efficiency in management, production or product, starts the business cycle. In the creative part of the cycle, as the new idea is implemented, the macro economy grows at a rapid pace. Once the idea is mostly implemented and the gains have been mined out, the old firms that have become outdated go belly up, ushering in the destruction portion of the business cycle, (recession). The recession destroys inefficient firms, freeing up capital, space and equipment for the next entrepreneur to begin the cycle again.

When a new firm is started, the more disruption it creates the more profit there is to be had, especially in the financial services sphere, where the sector is awash with other people’s money. As in any innovative idea that is disruptive, starting a business that reads and produces synopsis of every firm’s shareholder reports, board of trustee elections and board of trustee requests, would be a sea change in the way shareholders get information about the firms they own, by leveling the information landscape. In and of itself such a firm would start the creative cycle. Such a firm would need a great deal of startup capital to hire the necessary lawyers, MBAs and knowledge base to make such reports, and do it inside the regulatory framework that has been set up by the agents to protect their interests, or to change the regulatory environment if needed. The initial cost would be high, but the profit over the long term, the benefit to shareholders and the economy at large, would be tremendous.

Sincerely,

John Pepin

Obama’s Depression

Monday, January 7th, 2013

Dear Friends,

It seems to me, a magician directs the audience’s gaze away from the real action, as does a scam artist, to allow something to happen they want to keep hidden. The story the unbiased media and the political class have been telling us, about the poor performance of our economy, is an example of this. It is a red herring. The reality is, that while the fiscal cliff negotiations have some bearing on economic consideration that businesses must make, there are far more important government policies that have a much larger and more direct impact. The tax question is now settled and the new spending ceiling is now being debated. They both are important for the economy to function properly, but their effect is muted, compared to the impacts of Obama care. These are important considerations. Since everyone has a stake in the economy, even those who don’t work or own businesses, are poorly served when the debate about the state of our economy is filled with political rhetoric, misinformation and outright lies.

We see the reality of this in the December 2012 job numbers. More to the point, buried in the job numbers, the BLS put out. In it we see that there was essentially no small business hiring. They have been on a hiring freeze since the 2008 recession and following economic depression. Obama’s depression. Small businesses play a fundamental role in the job economy and especially economic recoveries.

Small businesses generally provide the bulk of new jobs. This is an economic truism. Small businesses not only provide the lion’s share of job creation; those jobs are often introductory. They are filled by people with less job experience, training and education. These jobs, that small businesses create, are the entry level positions that allow teenagers and under served minorities an opportunity to start engaging in the workforce. Larger firms pay better and as a result require more skilled workers. Workers that small businesses have trained to engage in the working economy. This was shown in the job numbers by the extremely high unemployment rate among minorities and young people.

Small businesses are the drivers of economic recoveries. Creative destruction is the term coined by Joseph Schumpeter. It is a theory to explain the growth cycle of economies that use the Capitalist mode of production. In it, a new process, way of organizing, or innovation, increase the efficiency of the economy. These new ways make the older ways less competitive and the outmoded go into bankruptcy. The new means open up better paid jobs that are less strenuous, because they are more efficient in some way. The creation is the new way of doing business and the destruction is the bankruptcy of the old firms using the old ways. Entrepreneurs are the creators of innovation, and so, are the drivers of economic growth. Therefore they are the source of recoveries. Large firms are like an old growth forest, they are mature and so don’t expand, therefore hiring is primarily a means to replace retiring employees. Small businesses are all about expansion; unless government policies get in the way.

Obama care has led to Obama’s depression by creating a universe of negative incentives to small businesses. Many of the provisions don’t kick in unless a firm reaches 50 employees, therefore, small firms have a strong regulatory incentive, to stay under 50 employees. If they are rapping against that ceiling, they do everything they can to stay under it, and if they are just above, they will lay off just enough employees to get back under it. Obama care also creates unknowables in the cost structure of a small business. Uncertainty is a killer of jobs because firms cannot, with any certainty, know what profit they will make from a new hire, or even if the regulations will cause them to loose money, if they employ that new worker. This is magnified, by the annual tranches of Obama care regulation, that will be implemented until it is fully functional in 2016, further increasing uncertainty. Under these conditions, no smart small businessperson would hire new employees, or expand… and they aren’t.

Large firms have the ability to absorb more regulatory costs than a small firm. Large firms have the financial wherewithal to hire lawyers, to get them through a regulatory maze, but small businesses, with their smaller profit margins and dramatically smaller staffs, must use scarce revenues and time to muddle through regulation. Often with disastrous results. Large businesses usually have the ear of several politicians, who will pave the way for them, but small businessmen have no such political favor. This results in larger firms being less impacted by regulation than small firms. This is exemplified in the carve outs that many large firms got under Obama care… like McDonalds. Since McDonalds got an exemption, how can a start up expand and compete, with the large corporation that has a lower cost per employee, due to political favor?

The upshot of all this is, entrepreneurs, the drivers of economic recovery, are being squeezed out of the economy. Every business must get more efficient, to control costs, in the face of the Leviathan of regulation that is steaming down on them, but those very regulations undermine the process. The creation part of creative destruction is hampered, and the destruction is accelerated, by the new costs of Obama care regulation. Regulation that lowers small businesses profits and raises their costs. Because of this, every business person is hunkered down, trying mightily to simply keep his or her business afloat. Smaller businesses more than larger ones. The fiscal cliff negotiations have far less impact on small business, than the tsunamis of Obama care regulation, that will wash the shores of every firm in the economy, for several years to come. The fact that the unbiased media are all abuzz with, the debt ceiling, a balanced approach to the deficit (that is all tax increase and no spending cuts), and political finger pointing, is a sure sign that they are diversions, to keep us focused on the lure, and not the real source of our economic troubles; the democrat’s and Obama’s penchant for regulating, taxing and deficit spending… which is the source of that fishy smell.

Sincerely,

John Pepin