Source: Facebook

NOTES ON CORP OWNERSHIP REFORM

Legal Perspective

True: “The purpose of the corporation is to do anything lawful.” And “Corporations are real, shareholders are a fiction.” In other words, shareholders are not owners. Companies do not work to maximize shareholder value. That is a fiction to sell investors.

A management team balances brand awareness, market share, customers, employees, bankers, investors, and vendors, each of which is competing to maximize their take of the profits if their are any.

Thoughts: (a) Owners ‘invest’ to obtain income and appreciation but lack liquidity.

(b) Shareholders function as lenders who purchase liquidity and opportunity for dividends and appreciation – they are not owners, that is the myth.

(c) From the company’s perspective, dividends and appreciation are the cost of maintaining borrowing capacity in capital markets so that opportunities can be seized by rapid appeal to capital markets.

(d) Boards of other than owners are a wast of time money and energy – a kabuki theater – and instead, companies should be, and are, insured to act in the interest of their contract with the shareholders. The very best you can say about boards is (i) you can pay people for relationships, assistance, and information. (ii) when you are unsure and want to bounce ideas off peers rather than employees but be sure it won’t leak, they’re useful. (iii) preparing for board meetings makes sure that you and your team are on the same page and understand your own business. (iv) I use my boards exclusively to test my ideas and rarely do anything if I can’t convince them unanimously. This tempers my too-high risk tolerance. It gives me political cover with the staff and others if I make a mistake.

(e) It’s not even clear that financial reports other than to auditors and insurers are of any value other than in selling to lenders (shareholders). Randomly select financial reports from your favorite companies. You will learn far more from analyst calls.

(f) Trying to maintain or improve shareholder value, is a terrible practice because investment cycles (capital requirements necessary for returns) have been increasing, and the division of production distribution and trade fragmenting, but lifespan of companies are decreasing – for this very reason. Innovators dilemmas everywhere. No one tries to maximize shareholder value. That’s nonsense. You try to preserve it. the objective of nearly every business is to preserve it’s existence as a going concern for all those involved: customers, employees, owners, vendors, investors. It is very hard to build a business that produces a durable income stream because the customer vendor employee network is the most difficult organization to produce.

(g) There is no reason whatsoever that companies should direct resources to ‘charities’ or ‘movements’, instead of requiring such donations come from individuals. Social responsibly is a code word for rent-seeking because the government is incapable of providing results. The current condition is that companies are frequently blackmailed if they don’t contribute to certain causes. That’s an injustice. That one shall do no harm is the best an organization can do and is the best therefore we can ask them to do.

Lastly unless you’ve run a company of at least say, 50M, and preferably over 100M you have no idea just how difficult it is to produce a profit. (i) My primary complaint is that companies do not themselves maintain accounting for operations (cash: profit and loss from operations), management (ops plus overhead), owners (ops, overhead, assets, and yes, market share ), lenders (EBITDA), and the state (taxes, amortization, and depreciation).

Most executives I’ve consulted, companies I’ve acquired, or accounting departments I’ve fought with, have too poor a grasp of operations and obscure it by conflating accounting data so to obscure normal volatility and variation in risk from investors and lenders, and to minimize taxes.

Drive employee quality, operations, marketshare, and leave everything else to finance and accounting. Money is just another resource provided by vendors.