What’s Good for Me is Good for You

There have been variations of this theme over the last hundred years or so with regard to corporations: “...What was good for our country was good for GM, and vice versa.” If you go further back, you get one of the French king’s statements regarding that what’s good for the king is good for the country—“L’etat c’est moi” (The state is me)—only to be recently echoed by Alan Dershowitz during President Trump’s impeachment trial in the Senate. Trickle-down economics is another form that what’s good for the upper class will be good for all classes: “a rising tide raises all boats”.

On a microeconomics level, we see this sentiment between executives, management and labor. Boards of directors have rationalized excess executive pay, bonuses, stock options, etc. If the executive team is encouraged to fight for their own benefit, they will also create financial success for the shareholders and create financial security for employees—or a booming economy that will be good for them to avoid layoffs. Friedman convinced many that the board’s and executive team’s sole responsibility was to drive up share prices. Federal (e.g. SEC) laws and corporate governance rules have been built on this theory. In the last twenty years, it’s been questioned as corporate social responsibility (CSR), B-Corporations legal/tax structures and investment firms (e.g. Blackstone and others) and large investment houses have promoted environmentalism, community welfare, etc.

It seems a lot of economic advice is based on unproven theory, anecdotes, personal preferences and very little data...until recently. We can forgive those from before the 20th century because the data wasn’t really available. Adam Smith, Karl Marx and others could only opine based on their own experience, personal or prevalent political philosophies and relatively few data points. Until the 20th century, the study of capital was called political economics until Alfred Marshall published the Principles of Economics in 1890 eliminating the word ‘political’ from the study. Into the 1970s, 1980s and 1990s, there were few databases in which to do rigorous analysis of fiscal policies and determine their effectiveness. Instead there was but a small group of data from which economists extrapolated all kinds of theories to explain causal relations. Keynes, Friedman, Stiglitz, Solow, Krugman, Shiller, and others had to manually calculate any algorithms, graphs. Based on a paucity of data and ability to determine if we’re confusing correlation with causality, it’s amazing that many of the theories have survived.

Many haven’t as newer economists—some of the Behavioral Economism branch—show that people as individuals, groups, nations often operate not as perfectly rational beings. National and corporate leaders, not to mention most of us on Main Street and Elm Street, can’t know all of the data and can’t analyze it all into effective information. Many assumptions form the foundation of our analyses. Even one quick example from the disciplined field of corporate valuation: the extensive methodology behind discounted cash flow assumes: 1) a level of growth; 2) a reasonable cost of equity. Vary those two factors even a small bit and the valuation of a company can radically change. If you want a larger example, you could review a range of expectations on the US government debt for the range of GDP forecasts and tax revenue forecasts. Again, it seems many have acknowledged the social connections of our world through the latest promotions of CSR, B-corps, etc.

A few economists recognize that there’s a tension between accepted theory and data and institutional knowledge/tradition. Data is supposed to be the most objective of the three but the selection of data is very subjective. Many, including the author of Weapons of Math Destruction, argue that even algorithms have the same biases as the creators of the algorithms. Testing those algorithms may tempt some to omit/disregard any adverse results and outliers. Think about the call for the hard sciences—biology, chemistry, physics—for publishing even the failed experiments i.e. the ones that cannot reject a hypothesis under review and therefore coming to a firm conclusion. Experiments might be repeatable and reproducible—1out of some number of times—but may not be reproducible and repeatable enough to be ‘truth’. Those sciences have realized that everyone would benefit from knowing a lot more results. Likewise, economics and corporate strategies might benefit from similar publishing of the failed experiments, failures. In business press, we only know about the few successes of any methodology and strategies; we don’t know about the hundreds of other companies that attempted the same and failed miserably.

With what are we left when we don’t have this perfect knowledge? Our own experience and our corporate traditions about how to operate and drive success. We are stuck with “What’s good for me is good for you.” Lately, we know that doesn’t sound totally correct. So let’s go looking for the better economic theories that have done a thorough analysis of all the data available in this Internet age.

FedEx Needs a New Strategy

This is similar to a long-ago post about Green Mountain’s K cups. What was once a niche is now a commodity. The same thing has happened to FedEx. What was once a unique proposition—“if it has to be there on time, absolutely, positively...”—has now been commoditized since Amazon made 1 or 2 day (hour?) delivery a standard feature of their service. Remember when businesses gladly spent megatons of money to expedite stuff because of poor planning systems, inevitable processing delays or mistakes. Now quick delivery is a given as much as emails, cell phone texts, instant messaging has eclipsed snail mail, interoffice memos and faxes (“facsimiles”). One analyst that predicted the delivery/freight companies would lose market value if/when Amazon got into the delivery business—and was right despite the overall stock/equity markets increasing over the past few years—now predicts FedEx will be absorbed by another or bankrupt in the next few years.

As pointed out, FedEx spent its tax cuts, like many other companies, on buying back stock so that the stock price remains elevated instead of investing in competitive products, services, corollary channels, disruptive market offerings, etc. This too was predicted by many, especially since there was an overall cash glut by the top corporations. If they don’t know what to do with their money, and they’re stuck with the same ROI, stock prices aren’t going to increase. The only way to keep stockholders happy and their bonuses staying in the millions: repurchase company stock. It’s a no-risk, easy win achieving those outcomes.

The ‘repurchase stock’ strategy does nothing to increase total market value (price x shares). The only way to win is to focus on basic fundamentals. Has FedEx—and others like it—gone the way of buggy-whip manufacturers where it will become smaller and more niche-y for boutique customers? How do you realize that what you’re doing is no longer needed and you need to be agile and adaptive before it’s too late? Some fuel companies realized this and long time ago and invested in renewable energy sources. Accordingly, there was a hesitance to adapt to new energy sources but at least one source shows that solar energy price/watt has decreased 99% in the past decade. Coal, oil and natural gas may now or soon be the most expensive sources of energy. How do you adapt and convert your decades- and centuries-long investment in obsolete strategies?

It’s one thing to stick with core competencies and it’s another to not pay attention to market trends and disruptions. Amazon is not bullet-proof—recession-proof, disruption-proof—either. It’ll be interesting to see how they adapt to changing trends. Though Amazon is 50% of online retail, it’s only 5% of total retail. How will they adapt? By opening physical stores—like acquiring Whole Foods or piloting cashier-less grocery stores and book stores?

Even though it seemed I had a bullet-proof business providing custom stainless steel fixtures for restaurants and commercial kitchens—how could this customization, fabrication service be replaced by off-shoring or...—I was always on the lookout for disruptive technologies that could ‘radicalize’ the competitive landscape. Same with another consulting client that seemed to be in an artisan-type business: what would happen if someone sold 3D-printer plans for people to ‘sculpt’ their own commemorative plaque, trophy, etc.?

If you’re only focused on stock price, you’re not focusing on a survival, thriving strategy. As investors realize many big companies are not reinvesting in growing their market value—adapting to new strategies, strengthening market growth, operating profits, etc—they’ll stop rewarding execs by buoying stock prices by rewarding, encouraging, enabling stock repurchase plans. Then the indices will drop as stock prices collapse and then maybe FedEx and other companies will wake up and look beyond the next quarter’s horizon and beyond their narrow country-lane-wide market segment.